Iowa pension buying big into illiquids, mulls insourcing

The US state's biggest retirement fund has nearly trebled its target allocation to private credit and is adding private equity and real assets too. It is also eyeing other ways to boost returns.
Iowa pension buying big into illiquids, mulls insourcing

Thanks to the Covid-19 crisis, interest rates – and thus investment yields – are expected to remain low for even longer, so pension funds are under even greater pressure to generate sufficient returns to fund their future liabilities. To that end, such institutions in Asia and elsewhere are being forced into ever more drastic portfolio shakeups.

Like many of its peers, Iowa Public Employees’ Retirement System (Ipers) is heavily putting its faith in private markets. At its quarterly board meeting last Thursday (September 17), the $35 billion fund decided nearly to treble its target allocation to private credit from 3% to 8%. It also raised its target private equity allocation to 13% from 11% and its real asset target exposure to 8.5% from 7.5%. These shifts will be funded as Ipers' core fixed income portfolio target size shrinks sharply to 20% from 28%.

The Des Moines-based pension plan is also considering setting up an in-house investment team and starting to take a closer look at sustainable investment, chief executive Greg Samorajski told AsianInvestor last week. 


US public retirement schemes are facing many challenges right now, one of the biggest being falling domestic interest rates. This has led Ipers' consulting firm, Wilshire Associates, to cut the fund's assumed return on core fixed income from 3.05% to 1.25% over the next 10 years and from 4.55% to 3.3% over the next 30 years.

Greg Samorajski

“That's going to create some challenges for us" in respect of achieving investment objectives, said Samorajski, so the fund needs to find ways to increase its expected return.

In respect of the time frame for putting in place the private market allocation changes, “we will try to start implementing them as quickly as possible”, he told AsianInvestor. “It takes some time to find and then make investments in private markets.”

Asia Pacific accounts for a small portion of Ipers’ private markets exposure – for example, 2% of its private equity portfolio is in Asia and 1% in Australia. The fund also allocates to Asian public assets via passive and active equity strategies.

The decision to build overall private market exposure was based on one of four proposals made by Wilshire to help boost Ipers’ portfolio performance. Another that Ipers is acting on is to shift some assets from core fixed income to public equities.

The fund is also considering employing alpha-enhancement strategies such as market-neutral overlays. But it decided not to proceed with increasing leverage in the fund to make larger investments, another suggestion that Wilshire had made.


Moreover, at the September 17 meeting, the Iowa fund discussed the prospect of making its first move to insource some of its portfolio management, something it has considered since 2016 or earlier. At present, all of its investments are made via external firms, said Samorajski, but the thinking is that there are potential savings to be made.

“It’s a question of whether we want to bring some of that in-house and, if so, which asset classes we will look to do so with and what would need to budget for it,” he added. “If we did it, we would take a gradualist approach, starting with a pilot programme.” Alpha-enhancement strategies might be one of the areas to be included in such a project.

Some 40% to 45% of similarly sized funds are conducting some internal asset management, Samorajski said. For instance, Alaska Retirement Management Board, a pension fund where he had overseen the staff before joining Ipers, had managed a large chunk of its bond allocation in-house.

Building an effective internal investment team, however, is neither easy nor cheap – especially at a time when many asset owners are thinking similar thoughts. California State Teachers’ Retirement System and the Teacher Retirement System of Texas are just two examples of large US funds moving to build their in-house expertise, the former virtually from scratch and the latter from a higher base. Some large institutional investors in Asia and Europe are also increasingly going down this road.

Arguably an even hotter trend these days is sustainable investing, and it is one where, again, Ipers is a relative beginner. It received an educational presentation on the topic from fund house Wellington Management during last week's meeting.

Environmental, social and governance (ESG) issues have been much less of a focus for US pension funds in general than for their peers in Europe. But questions are now being asked as to whether Ipers should keep investing in energy companies, said Samorajski.

“The current policy is that we don’t consider ESG factors [when making investments], but solely what is the best return-maximising strategy,” he added. “We don’t impose restrictions based on ESG criteria – that’s up to our board or the legislature. As far as I know, there’s no proposal to implement any policies yet.”

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