US - The Fresno County Employees' Retirement Association (FCERA) will consider selling Treasury Inflation Protected Securities to take advantage of the high prices resulting from recent market volatility.
The board of the $3bn pension fund will discuss reducing its allocation to TIPS from 4.3% to 3% and instead increasing its allocation to high yield debt, according to a meeting agenda posted on the fund's website.
FCERA approved a 2% allocation to TIPS in February 2009 to protect against inflation and increased the allocation to 4% on 2 March 2011, a memo to the board from Jeffrey Maclean, senior consultant at Wurts & Associates, the scheme's general consultant, said.
Since 2 March, the TIPS index has returned 9.7%.
"This most recent price appreciation was the result of a ‘flight to safety', whereby investors rushed out of risk assets and into US Treasury obligations, the asset class perceived to be relatively low-risk. The increased demand has driven down real yields to historically low levels. On a go-forward basis, the firm still maintains our concerns over inflation, but actions by the Federal Reserve have quelled these fears in the short term," Maclean said.
Meanwhile, spreads of high yield debt over Treasuries has widened to more than 600 basis points, and Maclean believes the growing economy and strong corporate balance sheets will lead to low default rates of 1% to 2% going forward.
Maclean recommends increasing the allocation to Loomis Sayles, one of the scheme's two opportunistic fixed income managers, to 4% from 3.2%.
FCERA is not the only pension fund taking advantage of the price shift in TIPS. In a comment piece written for Global Pensions, William Atwood, executive director of the $11.5bn Illinois State Board of Investment said staff there also sold off TIPS to take advantage of rising prices. (Read full comment piece here)
Separately, FCERA needs to rebalance its core fixed income and international equity allocation as a result of recent market movements. FCERA is now overweight core fixed income and underweight international equity.
Maclean recommends reducing the allocation to fixed income manager Western Asset Management to $160m from $197m.
The allocation to developed international equity would then be increased to 15% from 12.9%. If approved at tomorrow's meeting, the allocations to international equity managers Research Affiliates and Oechsle International Advisors will increase from $192m and $195m respectively to $225m each.
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