Tennessee Consolidated Retirement System

Michael Brakebill
Michael Brakebill

The Nashville, Tenn.-based Tennessee Consolidated Retirement System moved quickly to overhaul its portfolio into a more diverse structure after new laws, which were signed in May, authorized the $33 billion fund to raise its private equity cap and delve into non-investment grade credit. With the new flexibility afforded to it, the fund adopted a new strategic lending bucket that will look at high-yield bonds, bank loans and mezzanine debt investments in an effort to diversify and boost returns down the road. The fund, run by CIO Michael Brakebill, also created a new allocation for emerging market equities. It awarded 11 mandates across the strategies.

The moves paid off. The fund returned 11.5% as of Sept. 30, beating its peers, which on average returned 10.6%, according to the Independent Consultants Cooperative’s universe of funds larger than $1 billion.

“On the fixed-income side, they’ve performed really well,” said Pete Keliuotis, chief executive and managing director of Strategic Investment Solutions, the fund’s consulting firm. “Going into the year, they adopted a longer duration strategy, which has outperformed, relative to the benchmark.” The fund had a one-year return of 9.71% in fixed-income investments as of Sept. 30, beating its longer duration benchmark, the Citigroup Large Pension Fund Index, which returned 7.95% for the same time period, and its median peer group, which returned 8.93%.

“When interest rates fell, the longer duration benchmark did really well,” Brakebill explained to MMI. He noted that the fund is a bit different, using a strategic allocation that is typically less risky than most pensions in its peer group.

Indiana Public Retirement System

David Cooper
David Cooper

The $26 billion Indiana Public Retirement System went through a massive overhaul, combining the Indiana Public Employees’ Retirement Fund, which had $14.2 billion in assets, and the Indiana Teachers’ Retirement Fund, which had $8.5 billion in assets at the end of 2011. The fund also was the first in the country to reevaluate its actuarial return and reduce it to a more realistic 6.75%, lower than the 7% and 8% averages seen in its peer group. It expects to see a $300 million cost savings due to combining the two funds.

Saddled with volatile equities, the fund moved to limit its exposure and reallocated significantly to alternatives to bolster returns. The fund terminated six equities managers, plowing the money into risk parity, commodities and real estate. The terminated equities managers handled a combined total of over $2.1 billion. The fund awarded a staggering 19 asset management mandates to restructure the fund. The plan reallocated the equities assets into commodities, investing $500 million, and allocating another $1 billion to risk parity. The fund also made commitments to real estate of $300 million. Both the commodities and real estate investments are inflation hedges, according to David Cooper, cio of the fund. Cooper noted that risk parity’s performance exceeded the fund’s expectations. “It’s outperformed every benchmark you could put against it,” he said.

According to the fund’s consultant, Pete Keliuotis, chief executive and managing director of Strategic Investment Solutions, the fund’s investments in real estate and private equity helped bulk up performance to a 9.43% return. That’s slightly below the peer universe, which returned 10.6%, according to the Independent Consultants Cooperative’s universe of funds over $1 billion. “Risk parity helped performance this year, but it doesn’t show up in the numbers just yet because it got funded as public equities started to do poorly. It was a significant benefit.” As of Sept. 30, the real estate portfolio returned 10.63%, while private equity returned 10.35%.

Florida State Board Of Administration

Ash Williams
Ash Williams

The $127 billion Tallahassee, Fla.-based Florida State Board of Administration had a very active year, awarding a total of 28 mandates. The board made progress in an effort to lower its exposure to global equities down to 57.4% from more than 60%—high for a fund its size. The fund has instead worked on diversifying those assets, moving $2.1 billion into private equity, as well as real estate and real assets.

The revamp worked, helping SBA generate year-to-Sept. 30 returns of 11.4%. That return beat its peer group, which clocked 10.6% on average in that time period, according to the Independent Consultants Cooperative’s universe of funds larger than $1 billion.

“Happily, we’re benefiting from a lot of things right now,” Ash Williams, executive director, told MMI. “A number of opportunistic credit investments, as well as real estate investments, have paid off very nicely for us.” The fund also took advantage of the current investment climate by committing $250 million to distressed debt investments, with $150 million to the Wayzata Opportunities Fund III and $100 million to the Oaktree Opportunities Fund IX. The fund also pushed $600 million into real asset investments and $633 million into real estate.

Fund of hedge fund investments also saw interest this year, with the fund adding $250 million to absolute return and multi-strategy hedge funds. SBA made the most investments into private equity, adding $2.1 billion into PE investments while also taking a keen eye to global equities.

The fund also took bold steps and made an entity investment with asset manager Providence Equity Partners, purchasing 5% of the firm during the summer of this year. “That investment allows us not only to profit on our investments, but if the firm prospers, that adds to our return. It also reduces the cost for that manager too,” Williams said. The SBA has a total of $450 million committed with various Providence funds. It made a similar investment in the summer of 2010 with Lexington Partners, owning a little less than 10% of the firm.

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