The Public Employees Retirement Association of New Mexico, headed by chief investment officer Michael Shackelford, has added bank loans and long-term government bond strategies to its fixed income sleeve, alongside eliminating its EM Debt portfolio.
The $16.3 billion pension plan, as presented by consultant Meketa, allocates 6.5% to long term government bonds and 9.8% to its bank loans sleeve within its Fixed Income bucket, as per to the recent allocation changes.
New Mexico PERA has also increased allocation to its equity portfolio to align it more closely with peers, by equating the non-US and US equity instead of a 60% (non-US) - 40% (US) ratio. The non-US equity has been reduced to 40% of the equity component.
The increase in the equity sleeve has been funded by reducing the real assets sleeve from a range of 13% to 19%, to 10% to 14%.
The equity sleeve consists of US Equity, Non-US Equity and EM Equity.
The changes were made to its Defined Contribution (DC) plan and added these strategies specifically to its target date funds.
Bank loans
While a high yield portfolio is similar to bank loans, one of the biggest differences would be that bank loans are “higher up in the capital structure”. This means that they are slightly conservative, and their interest rates fluctuate with the market.
“When interest rates are rising, they tend to do better than other more traditional bonds,” said Paul F. Cowie, managing principal at Meketa, in the recent meeting.
Bank loans tend to carry less liquidity and that’s mitigated by the fact that the system would be investing daily, likely in “a mutual fund with several other investors.” While there is freedom to trade in and out of bank loans, the underlying securities are less liquid.
“In a bankruptcy situation it lies at the top. If it goes bankrupt, they'd be among the first predators to be paid out, whereas equity obviously there at the very far end, and then more traditional bonds are behind the bank loans, so they are more senior in the capital structure,” said Cowie.
Long-term government bonds
While Meketa refers to long-term government bonds as an insurance policy that “the system is actually getting paid to own,” these treasuries have a very long maturity date which provides extra volatility.
“When equity markets are going down, interest rates are typically being cut by the Fed, and in that type of environment, you see very you know, high returns, typically from this asset class, which can offset losses in the in the equity market, in a diversified portfolio,” added Cowie.
“This is a unique situation where interest rates are rising rapidly, and that's sort of the one negative environment for long term government bond.”
“However, in the current times the interest rates are at a much higher rate and the downside is much more limited for long term government bonds,” said Cowie, as he highlighted this to a good entry point for the new strategy.
This new strategy is meant to offset any equity risks.
Stable value, investment grade bonds, TIPS, high yield and EM Debt sit within the Fixed Income sleeve.
