JOI: Do you believe in the concept of the “new normal,” that we’re in for a long period of a slow economy with very low returns?
Shah: I think some of that is going to come through in the capital market assumptions when we do our annual strategic review. That’s where our long-term investing nature comes into play. We’re not going to make wholesale changes, but it’s certainly going to come into play as we do our strategic plan: What are you really expecting for the next few years? How do you want to make some changes?
We have a very long investment horizon, and we’re going to keep that in mind, because you don’t want to be on the wrong side. You don’t want to completely have a negative short-term outlook and substantially change your portfolio when you have a much longer time horizon.
JOI: How are you finding reasonable returns in the current environment? Has it been more difficult of late to meet your growth targets?
Shah: With multiple allocations in domestic equity and international equity—42 percent in domestic equity, 19 percent in international equity—certainly the market movements affect our returns. And we have 31 percent in fixed income. The market environment definitely has an impact on the shorter-term returns. But over the long term, we also have other asset classes where we’re hard at work, such as real estate and alternatives. In June, we completed a recommendation regarding our hedge fund review, and we’re making some changes there. We went down from three fund managers to one, and it will be a separate account strategy, so we can keep our entire portfolio in mind as far as the long, short, credit and macro strategies. It’s going to be much more customized to our overall portfolio.
JOI: Have you reduced the allocation to alternatives, or have you just put them all under one manager?
Shah: We have a 6 percent target for alternatives, and we’re actually under target. The hedge fund allocation increased slightly during a review earlier this year; it went from roughly $375 million to $500 million. We also continue to put some capital into private equity and real estate fund investments.
It all comes back to a long-term planning horizon. Within public markets, you want to make it run as efficiently as you can, and really think about what strategies you’re in. Then you also want to make sure within alternatives that you’re attracting top-quartile managers, because with below-top-quartile managers, between the fees and the liquidity issues, you’re better off not doing that. We will selectively add commitments in the alternative space to the extent we believe that there are strong managers.
JOI: Can you speak in general about how your asset allocations may have shifted in the last few years? Have there been any major changes?
Shah: Within the broader major asset classes, it has not changed much. It’s been pretty standard as far as the equity, fixed income and alternatives mix. We are underallocated in alternatives and real estate. In the past few years, they did a real estate surge, and we’re getting a little bit closer to the target.
JOI: Is the eurozone crisis affecting how you approach your international allocation?
Shah: The international equity rebalancing that we completed did get funded around that time, but net/net, our allocation to international equity was the same. Some of the money moved from international growth to international value, but from a portfolio perspective, we were not any more or less than we were before in terms of overall international allocation. We expect to stay at our current 19 percent. During our manager reviews though, we do talk in-depth about how they’re handling it, what they are doing—especially with active managers who are taking a subset of the opportunities. It does come into play at the individual manager strategy level, but at the portfolio level, our allocation’s the same.