Donald Pierce has been on the funding crew of the San Bernardino County Staff’ Retirement Affiliation since 2001, working straight with the board of administrators on the event of funding insurance policies and aims. Since taking up as CIO in 2010, Pierce has carried out funding methods together with worldwide personal fairness, rising market debt and options-based methods throughout the fund’s funding matrix.
The $13.4 billion pension fund has decrease fairness publicity than lots of its friends. Moreover, the pension fund has not too long ago been reallocated to extend publicity to US equities as much as 17% of the portfolio, whereas lowering publicity to rising market debt and worldwide developed market equities. “The end result of any explicit asset allocation is the results of assessments of market alternatives and the flexibility to implement these modifications“, Pierce mentioned throughout a Sept. 20 CIO webinar hosted by Editor-in-Chief Amy Resnick.
The dialog was the final within the CIO’s Allocator Insights collection. You possibly can entry a recording of your complete dialog right here.
SBCERA’s portfolio is diversified throughout completely different asset courses and funding autos. “Whereas diversification is fantastic,” Pierce mentioned, “it is one of many least compelling causes to make an funding.”
Pierce gave a basic overview of the fund’s asset allocation: “Collectively, public procurement accounts for 30% of the allocation. We’ve got a pretty big 18% place in personal fairness and an allocation to actual belongings, most of that are in commodities. However we even have infrastructure…largely concentrated in energy-related MLPs. Actual property is 5%, whereas our world fastened allocation is usually credit score and our worldwide base allocation is zero, which we alter for sentiment, and that is one of many methods we’re sustaining our low length. We’ve got 15% in US fastened bonds, primarily in credit score, with a 2% core allocation. We even have publicity to credit score hedge funds which we name absolute returns. »
Pierce additionally recognized prospects in commodities. “The bodily infrastructure of the commodity complicated has been underinvested for greater than 20 years,” he mentioned. “We have seen numerous funding in companies and finance, however little or no in smelting and different bodily commodity mechanisms.”
Not having a totally invested portfolio is a crucial characteristic of asset allocation, based on Pierce. “We’ve got an allocation to money, which is an space we regularly depend on and use so as to add positions opportunistically; we have a tendency to not be absolutely invested. We view money as having choice worth and we like to attend for costs to come back to us after which deploy our money,” he mentioned.
Pierce continued: “Money poor get no credit score as a result of till not too long ago they have been yielding near nothing, and no matter they purchased will get all of the credit score. Cash that facilitates a return is denigrated by the dearth of rates of interest. What we do not love to do is rely completely available on the market for liquidity. When instances get robust, even Treasuries could be discovered to be robust.
SBCERA is an income-driven plan, which emphasizes positioning within the fastened earnings credit score sector versus worth variation methods. “We’re constructive on CLOs and particularly BB and B belongings, so the issues that profit from a floating fee instrument actually curiosity us so as to add, and have been,” Pierce mentioned.
The pension fund has an assumed fee of return of seven.25% and the plan is simply over 81% funded. Its return in 2021 was 33%, which Pierce says is a efficiency they’ll battle to match on this yr’s more durable funding setting. Concerning the outlook for 2023, Pierce mentioned, “there’s going to come back a degree the place the inventory market is fairly good and enticing and you can also make some huge cash. Confronted with a tightening cycle with the Federal Reserve, I do not I am simply undecided now’s the precise time to do it.
Requested about his issues concerning the present financial and funding local weather, Pierce famous that it’s generally believed “that the Fed, by elevating rates of interest, will clear up the inflation drawback, and that may be a imaginative and prescient very demanding of the world. In an issue of an excessive amount of cash chasing too few items, the place the issue half is the half with too few items, rates of interest don’t appear to me to be a very applicable means of fixing the issue. So what worries me is that each one this tightening is for naught, and also you get provide constraints as a result of greater rates of interest make it much more costly for fastened value producers to supply their devices. It is regarding that this experiment we have launched into is not truly working.
Key phrases: Asset allocation, diversification, Donald Pierce, San Bernardino County Staff Retirement Affiliation
