Many public pensions make their asset allocations available; although not as timely or as transparent as some might wish.
We have been collecting these allocations over the past decade and over the next few months we will highlight some of these and make them available to our clients in our modeling tools.
Today, let’s talk about the Massachusetts State Pension Plan, also known as the Pension Reserves Investment Trust (PRIT). PRIT has been fairly proactive in providing information about their investment decisions and are mostly transparent in their allocation weights.
The source material for the current PRIT allocation can be found at the Mass State Pension website.
This $40B+ fund describes their core, long-term allocation, set in April, 2006 as:
- 27% Domestic Equity
- 20% International Equity
- 5% Emerging Markets
- 13% Core Fixed Income, TIPS & Commodities
- 6% Value-Added Fixed Income
- 9% Private Equity
- 11% Real Estate
- 4% Timber / Natural Resources
- 5% Hedge Funds
As the source document shows, these allocations change over time, due to investment gains and losses, suitable investments and shifts applied as managers are hired and terminated.
We can assign market proxies to the asset classes designated by the PRIT board to most of the asset classes defined. For example:
- 27% IWV – Domestic Equity
- 20% EFA – International Equity
- 5% EEM – Emerging Markets
- 13% AGG/TIP/GSG – Core Fixed Income, TIPS & Commodities
- 6% WIP/SPHIX – Value-Added Fixed Income
- 9% BX – Private Equity
- 11% ICF – Real Estate
- 4% WOOD – Timber / Natural Resources
- 5% Hedge Funds
A rough pass does miss the Hedge Fund investments. As well, the Core Fixed Income, TIPS & Commodities at 13% is not well defined; how much in TIPs? How much in Core Fixed Income?
One note about public pensions is the mix of Fixed Income and Commodities in the same asset class. All of our research indicates that these two assets, Fixed Income and Commodities, are poorly correlated. This classification is not unique to the PRIT and perhaps someone can comment on the reasoning behind it for public pensions.
Digging down deeper, we can identify the managers used by PRIT and use a greater level of detail in the asset classes. As well, we can use the actual, December 31, 2009 allocated weights in place of the target weights coming up with something like this:
- 26.0% Domestic Equity IWV
- 21.4% International Equity EFA
- 5.8% Emerging Markets EEM
- 12.2% Fixed Income, TIPS & Commodities
- 16% AGG
- 51% PTTRX
- 20% TIP
- 13% GSG
- 6.5% Value-Added Fixed Income
- 43% High Yield SPHIX
- 41% Emerging Market Debt GMCDX
- 15% Distressed
- 9.5% Alternative Investments BX
- 9.5% Real Estate
- 29% RRRAX
- 22% SLDAX
- 13% JPRCX
- 36% ICF
- 4.1% Timber WOOD
- 5.0% Hedge Funds
- 40% Equity L/S BRMIX
- 30% Relative Value CVSIX
- 20% Event Driven MERFX
- 10% Global Macro
We still have some missing public assets, so we will assume market exposure. As well, there are more than 50 Private equity investments listed in the source document, but we use just one, Blackstone (BX) as our proxy.
We then use the historic allocations for the PRIT to get a more accurate historic portfolio, instead of merely using the current allocations. This was accomplished the easy way, by using the wayback machine to query the historic web pages from PRIT.
All of the historic allocations have been loaded into our allocation tool. We do have some holes in our allocations and will fill these in as time and source documents become available.
Matching returns and historic allocation weights together allows us to perform a historic simulation of the PRIT. We compare the reported returns, listed below with our simulation and note the very good agreement.
This little exercise, which took about an hour to gather the source documents, load the historic allocations and use our tools to create a realistic backtest shows that we can have similar performance using just market instruments.