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Indiana adds derivatives, hikes risk parity allocation – Pensions & Investments

Indiana Public Retirement System’s board approved a new asset allocation for its $34.8 billion defined benefit plan that includes a new derivatives portfolio and a significant increase in its target allocation to risk parity.

The Indianapolis-based retirement system’s board approved changes recommended by investment consultant Verus Advisory following an asset-liability study at its May 7 meeting, spokesman Dimitri P. Kyser said in an email. The board hired Parametric Portfolio Associates to run the new derivatives portfolio.

Asset class targets total 115% with the introduction of the new derivatives portfolio to complement the current cash overlay portfolio in order to increase economic exposure to U.S. long-only government bonds and domestic large-cap equities, a presentation included with meeting materials showed.

The board approved the hiring of Parametric when Verus Advisory recommended choosing the firm since the manager already oversees the cash overlay program. Parametric uses futures contracts to get market exposure with the system’s frictional cash. With the cash overlay program, asset class targets previously equaled 109.1%.

Targets that were increased are risk parity to 20% from 12%; private markets to 15% from 14%; fixed income (inflation-linked) to 15% from 13%; commodities to 10% from 8%; and real assets to 10% from 7%.

Targets the board approved decreasing were absolute return to 5% from 10.6%; fixed income (ex-inflation-linked) to 20% from 22.5%; and public equities to 20% from 22%.

Also as a result of the asset-liability study, the board approved dropping its assumed rate of return to 6.25% from 6.75%.

As of Jan. 31, the DB plan’s actual allocation was 22.5% public equities; 20.1% fixed income (ex-inflation-linked); 13.7% risk parity; 12.3% private markets; 9.9% absolute return; 7.9% commodities; 6.9% fixed income; 6.3% real estate; and the rest in cash.