LACERS to review credit allocation

LACERS adopted an opportunistic fixed income allocation last year.

The Los Angeles City Employees’ Retirement System will review its newly formed opportunistic credit portfolio at its meeting Tuesday, according to meeting materials available through the retirement system’s website.

LACERS adopted a new investment policy last year that included a 5 percent target allocation to credit opportunities, which it characterises as high yield, emerging markets debt and opportunistic fixed income. The opportunistic fixed income component – a 0.5 percent allocation overall – includes structured credit and leveraged loans.

Wilshire Associates, LACERS’ general fund consultant, compiled a general overview of the asset class, which LACERS will consider as an “educational presentation” at the meeting. A spokesperson for LACERS investment staff could not be reached for comment.

Citing data from Seer Capital, the report estimates the US’ opportunistic fixed income market to be approximately $3.9 million in size, the bulk of which is dedicated to structured credit securities such as residential mortgaged backed securities and commercial mortgaged backed securities.

“Opportunistic fixed income is a way to gain non-traditional fixed income exposure, potentially providing diversifying alpha sources and helping to protect against inflation,” the report said.

LACERS already has approximately $295 million dedicated to opportunistic debt strategies through its private equity and real estate portfolios, including commitments to Oaktree Capital Management, Ares Capital and Lone Star, according to the Wilshire report. The strategy mix within the existing portfolio ranges from distressed-for-control to mezzanine, as well as residential and commercial lending.  

Although that overlap could prove problematic in the long term in regards to over allocation to certain strategies, Wilshire reports that it can be managed by restricting credit opportunities investments to funds with certain liquidity thresholds: “For example, five year lock-up or shorter in the credit opportunities would exclude mezzanine corporate debt and distressed debt from credit opportunities.”

The San Diego City Employees’ Retirement System also added a credit component to its asset allocation recently. In May, SDCERS increased its target allocations to private equity to 10 percent. Around 24 percent of the private equity portfolio is dedicated to distressed funds. An additional 3 percent is committed to mezzanine strategies, according to documents.

LACERS’ investment portfolio was valued at approximately $10.6 billion at the end of the 2012 fiscal year. In addition to its allocation to credit opportunities, the retirement system also has a 5 percent allocation to private real estate and a 12 percent allocation to alternative investments.