Return to search

Yield before liquidity in NMSIC’s new fixed-income portfolio

New credit allocations allow pension plan to ‘take advantage of illiquidity premiums’.

The New Mexico State Investment Council has bifurcated its fixed-income portfolio into liquid and illiquid credit, favouring alternative credit strategies over traditional, liquid investments, pension plan documents from last week’s meeting showed.

The council split the pension plan’s fixed-income investments into two categories: core assets and non-core assets, according to meeting agenda materials. The core bucket is used to “preserve capital, produce income, and to provide liquidity in the event of severe market shocks”, while the non-core bucket is used for yield-seeking investments.

The fixed-income portfolio represented 21.8 percent, or roughly $4.87 billion, of the pension plan assets as of the end of second quarter. The category will eventually grow to 23.5 percent of plan assets due to the new allocation targets.

Under the new structure, NMSIC’s portfolio will consist of 10 percent of core fixed-income investments. On the non-core side, 15 percent of Land Grant Permanence Fund and 12 percent of Severance Tax Permanent Fund – which are two of the funds SIC manages – will consist of non-core strategies.

Non-core assets include structured credit, direct lending or distressed loans, while core assets include US Treasuries, other municipal bonds and liquid securities.

The new target allocations for within non-core category includes 30 percent each for structured credit and direct lending and 20 percent each for unconstrained and distressed.

On top of direct lending, the non-core asset category also includes unconstrained loans, structured credit and distressed debt and pulls in other commitments from its absolute return bucket. The overall target allocation for non-core assets also increased to $3.04 billion, which, as of 30 June, stood at $1.76 billion. Target returns for the non-core fixed-income pool are 7-9 percent per year.

“Many of these strategies will not be liquid allowing the SIC to take advantage of illiquidity premiums available in these markets,” the document read, referring to non-core assets.

The other new fixed-income category, core assets, has a new target allocation of $2.35 billion, down from $3.25 billion as of 30 June. The New Mexico pension had a total of $22.33 billion in assets as of the second quarter.

This portfolio showed gross returns of 4.61 percent for the one-year period ending 30 June, compared with 4.65 percent over a five-year period and 4.16 percent over a ten-year period.