Trustees approve new asset allocation
OPERS to increase alts investments, create new Private Credit strategy
By Michael Pramik, Ohio Public Employees Retirement System
Feb. 23, 2023 – The OPERS Board of Trustees recently voted to approve new asset allocations for the OPERS Defined Benefit Fund and the OPERS Health Care Fund, increasing alternative investments while reducing exposure to public fixed income, public equities and Risk Parity.
The trustees voted to make the changes based upon recommendations by OPERS Investments staff and Board consultant NEPC.
Defined Benefit Fund changes
The new allocation reflects a slight tilt to less-liquid assets, which are forecasted to generate returns above the target return rate of 6.9 percent.
This outlook is reflected in the portfolio changes, a 5 percent increase to Private Equity and Real Estate sourced from public equity, public fixed income and Risk Parity. The Defined Benefit Plan will also have new allocations to Private Credit and an internally managed Investment Grade Credit strategy.
Increased allocations to:
- Private Equity, from 12 percent to 15 percent
- Real Estate, from 10 percent to 12 percent
- U.S. Equity, from 21 percent to 22 percent
- High-Yield Debt, from 2 percent to 3 percent
- Commodities, from 1 percent to 2 percent
Decreased allocations to:
- Non-U.S. Equity, from 23 percent to 21 percent
- Core Bonds, from 11 percent to 9 percent
- Emerging Markets Debt, from 4 percent to 1 percent
- Opportunistic, from 3 percent to 2 percent
- Risk Parity, from 5 percent to 2 percent
New allocations to:
- Private Credit, 1 percent
- Investment Grade Credit, 2 percent
Health Care Fund changes
Based on recommendations from OPERS staff and NEPC, the Health Care Fund allocation is also changing. The key change involves funding a new internally managed Investment Grade Credit portfolio from existing Emerging Markets Debt and Core Bonds allocations.
Increased allocation to:
- U.S. Equity, from 21 percent to 22 percent
Decreased allocations to:
- Core Bonds, from 17 percent to 16 percent
- Emerging Markets Debt, from 2 percent to 1 percent
- Opportunistic, from 3 percent to 2 percent
New allocation to:
- Investment Grade Credit, 2 percent
The trustees also took action to approve the 2023 Annual Investment Plan, the principal document in which Investments staff details portfolio strategies, key initiatives and excess return targets for the year.
Michael Pramik
Michael Pramik is communication strategist for the Ohio Public Employees Retirement System and editor of the PERSpective blog. As an experienced business journalist, he clarifies complex pension policies and helps members make smart choices to secure their retirement.
It is somewhat unclear to me if this new investment strategy is more conservative, more aggressive, or neutral when compared to the existing strategy. If you were to create an equivalent portfolio to the investments available to the “regular folks” in the OHIO 457 Deferred Compensation program, what would this look like? Perhaps it would be easier for us to better understand this new investment strategy if illustrated in this manner.
Joe,
The new asset allocation is neutral when compared with the previous allocation. The new allocation is slightly more “volatile,” when referring to its standard deviation. But its expected return is slightly higher, so on a risk-adjusted basis, “neutral” would be a good way to describe the relationship between the two allocations.
The OPERS Defined Benefit Fund is more diversified than Ohio Deferred Compensation’s offerings, which are mainly mutual funds, target date funds and custom stock and bond funds.
This all looks good but does not answer my original question whether or not our investments are going to Biden’s ESG dictum that pension funds be put into this kind of financial instruments. If they are the returns are likely to be less than what the Board has projected.
Vilas,
You can view OPERS’ investment policies on this page of our website. OPERS does not have an ESG investment policy.