North Adam Portfolio Allocation
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North Adams Pension fund informationFunded Ratio71.1%Unfunded Liability$20.8MMarket Value$54.9M2015 Return-0.75%2015 Total return of Investment($72.7B)0.91%Based on the information, we can find that:1, The funded status is between 70% to 79%.2, The market value is less than 500 million, so it is a smallest plan. 3, The circumstance of pension fund investment in the year 2015 is a bad that the total return of investment is only 0.91%.Pension fund 2015 VS 2014YearAsset classesDomestic EquityFixed IncomeINT’L EquityPrivate EquityHedge FundReal AssetCash overlayReturn2015Proportion53.80%32.20%5.00%0.70%1.80%1.30%5.20%-0.75%2014Proportion60.10%22.20%9.80%0.80%1.80%0.00%5.30%12.28%Difference-6.30%10.00%-4.80%-0.10%0.00%1.30%-0.10%Compared the asset allocation between the year 2014 and 2015, we find that the fund decreased domestic equity and international equity for 6.3% and 4.8% respectively and increased 10% for fixed income.Asset classesDomestic Equityand Cash/OverlayFixed IncomeINT’L EquityPrivate EquityHedge FundReal AssetProportion59.00%32.20%5.00%0.70%1.80%1.30%Average Return(Quarter)2.79%1.64%2.12%3.34%2.61%2.04%Volatility(Quarter)7.74%2.07%9.45%4.70%4.19%4.45%The current fund asset allocation and historical data (1986-2015)
We can find that the conventional investment, including domestic equity, cash/overlay and fixed income, is 91.2% in the plan. This high proportion would lead the portfolio has lower return and risk. Thus, in order to increase the rate of return, we need to add the risk to the portfolio to approach the Efficient frontier. Our purpose is to decrease the proportion of fixed income and keep domestic equity same as proportion of year 2015, and increase the alternative investment of private equity, hedge fund, real asset and venture capital. We also want to increase the international equity.Asset class analysisDomestic equityFor the historical data, the domestic equity has a relative high average return and volatility. What’s more, the North Adams Pension fund is the smallest plan, for the small fund, it prefers the traditional strategies to the alternative investment, so we will increase the domestic equity. In this way, we can add the risk and domestic equity and can also keep the liquidity for the fund. So, we recommend increase the portion of domestic equity to 54.8%.        Private equityFrom the historical data, the private equity has a higher average return and risk, we can add the value of private equity to the portfolio to increase the rate of return and risk. For the small fund, having too much alternative investment would make fund carry high risk. Compared to the nature resources, real assets and absolute strategy, private equity would have higher correlation to the marketable securities. To improve the risk, the private equity also can provide high covariance to the portfolio. Thus, in our opinion, 1% of private equity is suitable for the portfolio.Fixed Income Different with major investment banks’ analysis in the beginning of 2016, the U.S. economic this year has shown us a higher development, while the employment rate has a good record as well. In view of above situation, the Fed is anticipated to raise up the Fed fund rate in this December.This is a bad news to domestic fixed income investors, because the increase of benchmark interest rate indicates higher required rates of return, which will directly make the prices of all the fixed income assets drop down. Not just a short-term negative trend, the long-term tendency of domestic fixed income market is also pessimistic, because once the Fed begin to raise up the Fed fund rate, it will possibly keep doing this periodically for a long time. Follow this trend, we should reduce our investment on domestic fixed income assets. Thus, we recommend decrease the portion of fixed income to 24.00%.        Hedge FundsHedge funds may be aggressively managed or make use of derivatives and leverage with the goal of generating high returns. And hedge funds may have low correlations with a traditional portfolio of stocks and bonds, allocating an exposure to hedge funds can be a good diversifier for North Adams. But the administration fees are relatively high, so we recommend increase the portion of hedge funds to 2.00%.