San Jose Police and Fire discusses substituting private debt

The pension plan’s $237m private debt portfolio was 4.3% underweight at the end of Q3.

The San Jose Police and Fire Retirement Plan is considering a move to replace part of its allocation dedicated to private debt with global equity and investment grade bonds, pension plan documents showed.

This proposal, drawn up by the pension plan’s general consultant Meketa Investment Group, is a reaction to its underweight private debt portfolio, according to documents presented to the pension plan’s investment committee meeting on Tuesday.

If adopted, the measure will swap 75 percent of its underweight private debt to global equity and 25 percent to investment grade bonds, the documents showed. The consultant firm expected the private debt proxy to produce returns within the portfolio’s return target of 7.1 percent.

Implementing the recommended proxy would not likely change the current private debt policy target ranges.

“With a board mandate to transition the actual allocation to the policy target, there is an implied assumption that the allocation will be maintained at the policy target,” the document read.

Private debt was the asset allocation in the portfolio that had the largest deviation for its policy target as of 30 September, which has triggered an investment policy mandate to rebalance the asset allocation mix when its actual allocations fail to meet its policy targets.

According to the retirement plan’s investment policy, the retirement plan’s asset mix needs “to be rebalanced to within the target ranges when fluctuations in market values cause the portfolio to fall outside the guideline ranges”.

The pension fund’s private debt portfolio comprised 6.7 percent of its total portfolio, falling far short of its 11 percent policy target as of 30 September.

In order to fulfil the rebalancing requirement, Meketa had recommended during the board’s September meeting that it implement “an investable private debt proxy”, or a substitution of one asset class exposure for another, “as a short-term solution for the retirement plan to reach its policy target for the private debt asset class”.

The board did not approve the proxy at that time, but instead voted to discuss the item further during its October investment committee meeting this week. As of press time, the investment committee meeting was in progress, and the board was not immediately available to comment.

The police and fire retirement plan’s private debt portfolio totalled $237.44 million as of 30 September, as a share of the plan’s $3.55 billion portfolio. The pension has invested in nine debt funds as of the end of third quarter. These commitments include Marathon Asset Management, Octagon Credit Investors, TPG Capital, Medley Capital and Shoreline Capital, PDI data showed.