Energy Plays into SBCERA’s Asset Allocation Proposal

By David G. Barry


Russia’s attack on the Ukraine has investors – large and small - thinking harder about energy resources and its impact on returns.
This issue, for instance, has the San Bernardino County Employees’ Retirement Association (SBCERA), giving serious thought to its asset allocation strategy - one that could lead it to invest more heavily in U.S. stocks.  

During a preliminary asset allocation review, SBCERA’s staff and its consultant, NEPC, recommended that the $14.4 billion California fund increase its policy target for investing in large cap domestic equities to 10% from 8% and reduce its investing in developed market equities to 4% from 6%.

NEPC Partner Samuel M. Austin III, who made the presentation, said that while his firm simply looked at the numbers – “not the investment rationale” – that might increase a risk-adjusted return, SBCERA’s staff, led by Chief Investment Officer Don Pierce, weighed in on market trends that the fund could take advantage of.

With rising inflation and the dislocation of global supply chains, SBCERA’s team zeroed in on those markets – like the U.S. – that are supplying resources and are “net exporters of energy,” Austin said. On the flip side, the staff looked to move away from those markets that are “not as blessed” in having as many natural resources internally, such as Europe and Japan.  

SBCERA’s conclusion is one that other investors are likely to reach – a sign that more money will go into U.S. stocks and away from international developed markets.

If SBCERA implemented the proposed changes, the fund’s domestic equities target would increase to 15% from 13%. International equities, however, would stay at 15% as the proposal would increase emerging market equity to 8% from 6%. As of December 31, the plan had 20% of its assets invested in international equities.

The increase in emerging market equities would be balanced by a cut in emerging market debt to 6% from 8%.

Austin said these moves would be made because of the difficulties experienced in investing successfully in emerging market debt. He said the feeling is that in investing in markets that are providers of natural resources, there will be “more upside” from emerging markets equity than debt.

Under the recommendations, private equity, absolute return, real assets and real estate would stay at their current 18%, 7%, 6% and 5% policy targets. It’s worth noting that as of December 31, the plan was significantly under allocated in absolute returns and real assets. It had 1.9% in absolute return and 3.7% in real assets.

SBCERA’s board will consider the recommendations further at its next meeting on June 9.
For the year ended June 30, 2021, investments provided the plan with a rate of return (net of fees) of 33.3%. The plan’s annualized rate of return (net of fees) over the five-year period ended June 30 was 10.7%.