By Lauren Bailey
The $37.8B Pennsylvania State Employees’ Retirement System (PennSERS) is deploying a “loaded-bases” strategy with commitments totaling $1.5B across three core fixed income vehicles in a bid to balance capital preservation with risk-adjusted returns.
PennSERS’ board approved allocations of $500M each to core fixed income funds by J.P. Morgan Investment Management; Loomis, Sayles & Co.; and NISA Investment Advisors. The allocations will leverage three separate strategies that complement each other.
During a recent board meeting, Jason Samansky, an investment consultant with PennSERS’ advisor RVK, noted that when it comes to asset allocations, institutional investors should think like general managers of sports teams. For instance, he said a baseball team wouldn’t want to have “eight position players that strike out three times and hit a home run once per game.”
“You need people that can get on base, and you need people who can field and people who can throw and people who can run. So, assembling a team is very similar to assembling a team in the world of asset class structure.”
He noted the managers’ past performance suggests they would work in tandem to help offset volatility.
The J.P. Morgan product is a core bond strategy fund with emphasis on different spread sectors, with corporates and securitized credit making up the bulk of the portfolio, particularly securitized credit, said Ed Zablan, a consultant in manager research with RVK who also spoke during the meeting. “This is their big differentiator in the world of residential mortgage-backed securities.”
The Loomis vehicle is a core fixed income product that has more than $300B in fixed income assets. The team integrates a macro strategy benchmark to the aggregate index, for which the hallmark of this strategy is security selection. “They keep the tracking error relative to the benchmark,” said Zablan, noting their bets are through the sectors and duration.
NISA’s vehicle is a core broad-market fixed income product with a team behind it that Zablan said is known for its “very low-cost risk control benchmark aware strategy.” As the strategy doesn’t make a lot of bets relative to durations and sectors, it generates a small return enhancement, he added, noting it is that risk-control aspect that also makes it an anchor for the overall strategy.
“When you put all these three combinations of managers together, their duration stays relatively neutral to the index, as well as their overweights and underweights relative to various sectors.”
As of Dec. 31, 2024, PennSERS had allocated 18.1% to its fixed income portfolio toward a 10-year strategic target of 19%. It also allocated 2.5% to Treasury inflation-protection securities (TIPS) against a 10-year target of 3.0%.
