By Muskan Arora
Carlton Chin, the chief investment officer of the $3.4B Municipal Fire and Police Retirement System of Iowa (MFPRSI) considers absolute return strategies as “a good source of liquidity,” since they mostly deal with future markets and collateral.
With diversification in mind, the plan employs a number of strategies to offset market volatility and drive returns, including through its absolute-return portfolio.
“The stock market remains the return driver of most portfolios,” said the CIO in an exclusive chat with Markets Group. “However, if stocks run into trouble, absolute-return [strategies] may capture profit opportunities by following trends. Normally, if you hop onto those trends in absolute return, you’ll earn some profits. Some people call it a ‘crisis alpha’ kind of approach.”
Chin pointed out that during the pandemic — when most asset classes were down — absolute-return strategies provided good diversification. While currencies and commodities played a big role, volatility helped the most, he added.
With the US dollar declining, Chin also sees opportunities in foreign currencies. Along with the good diversification provided by absolute-return strategies, “we also track and trade volatility and that gives us additional quantitative diversification versus the stock market. The dollar has been declining because as a reserve currency, the central banks are using the dollar less and they are using gold more. That’s one of the long-term fundamental reasons that’s driving all of this ‘dollar down, gold up’ activity.”
The plan allocates 2.5% to its absolute-return portfolio, which is managed internally.
An early player in private equity since 2003, MFPRSI has a private equity pacing plan of $100M to $130M annually. Chin is focused on small buyout and venture capital investments within the U.S. Additionally, the pension fund is eyeing opportunities within European private equity, especially non-cyclical and defensive sectors.
At a time when many allocators are struggling due to lower distributions and liquidity issues, Chin considers this a good time to buy in the secondary market if liquidity is manageable. Within private equity, he anticipates long-term growth in the secondary market. “The secondary market is now larger than the IPO market. I’m excited about that.”
Chin noted open communication with boards is an important focus, particularly when it comes to reporting on performance attribution for returns.
“Currently, we can say that whenever we’re different from our benchmark, which is 60/40 on public markets, roughly two-thirds of the spread between short-term performance and the actual benchmark can be explained by the private equity allocation,” he added.
The pension plan returned 7.4%, 4.9%, and 9.2% for its one-, three- and five-year time periods, as of April 30.
