Contra Costa County Employees' Retirement Association is currently evaluating proposals for an advisory role to help steer the firm toward an alternative investment approach adopted at the end of last year.
The role would involve guiding internal staff to implement private investments in what it calls a functionally focused portfolio (FFP) strategy, which segregates investments based on the ultimate function of the fund's proceeds.
The $6.96 billion pension released a request for proposals to work with staff in managing private equity, private debt, private real assets and private opportunistic investments. Applications were due 16 September.
In a white paper accompanying the RFP, CCCERA chief investment officer Timothy Price and investment analyst Jeffery Youngman argue that a decades-old pension fund allocation practice misses some key points. They argue that the established approach assumes maximised return is the ultimate goal and does not account for other investor priorities, such as liquidity or income.
This approach, according to Price and Youngman, encourages a single-minded focus on forecasts of expected return. Such a narrow focus can lead to excessive risk-taking and a dismissal of challenges arising from correlations between asset classes, they said.
“Staff and consultants present limited data, usually focused first on expected return, then standard deviation. The numbers are presented with one or two decimal points of false precision and any discussion of the range of outcomes is left for later exhibits. We think we have a better idea,” Price and Youngman wrote.
Instead, they advocate a FFP approach organised around distinct portfolio subsections for what they see as the main functions of the fund: a liquidity portfolio providing current retirees with benefits; a growth portfolio producing growth necessary for the benefits of current employees; and a diversification portfolio protecting assets from volatility that could threaten the provision of benefits to future hires.
Price and Youngman write that the liquidity portfolio should have the lowest credit exposure while high-quality credit investments are placed in the growth portfolio.
Under the FFP framework, pension staff present an annual plan laying out where within the fund the next 12 months of benefit payments will come from and only then move onto discussion of the balance between the growth and diversification portfolios that determine the conservative or aggressive orientation of the pension at any given time.
CCCERA adopted the FFP approach in December 2015 and currently allocates 24 percent of plan assets to the liquidity portfolio, 63 percent to the growth portfolio and 12 percent to the diversification portfolio.
“By basing portfolio construction decisions first on the provision of income and liquidity, then moving to the optimal mix between growth and diversifying assets, governing bodies can have a much more thoughtful approach to the asset allocation exercise and ultimately to the oversight of pension or any investment pool,” Price and Youngman wrote.
Price did not return requests for comment by press time.
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