In its Annual State Retirement and Pension System’s Investment Overview (2012), the Department of Legislative Services asked the State Retirement Agency to answer a set of questions on its investment strategies. The State Retirement Agency recently addressed these questions, which include several hot topics in pension investing, such as allocation of funds in alternative asset classes, the assumed rate of return, and management fees. The following are excerpts from the Agency’s response:
On investment in alternative asset classes,
Over the last several years, the System’s exposure to alternative assets has expanded as assets have been gradually transitioned from traditional asset classes, like stocks and bonds, to non-traditional strategies such as private equity and debt, absolute return and hedge funds and commodities. These alternative assets provide attractive characteristics that improve the overall expected risk/return profile of the fund. Alternative assets serve various roles in the portfolio in addition to the broad diversification benefits provided by investing in more asset classes, including excess performance generation, risk reduction and inflation protection.
On the subject of assumed rate of return,
The return expectation is calculated annually by the board’s general investment consultant, based on the asset allocation and the capital market expectations (return, risk and correlations) for each asset. As of May 2012, the expected annualized long-term return was 8.3% assuming 3% annual inflation. The actuarial long-term assumed rate of return, currently 7.75% annualized, is adopted by the board in its annual actuarial review.
And, addressing the appropriateness of management fees paid to external asset managers,
The investment management report prepared annually by Greenwich Associates shows that in 2011 Maryland paid lower management fees than the state pension fund average for each asset class studied–active U.S. equity, active emerging market equity, active international/global equity and active fixed income.
Additional data on these topics are available in the Agency’s complete response.