Staff outlines expansion of fixed-income allocation, new public-credit risk framework

At the board meeting, staff presented the pension system’s annual public fixed-income and cash update and described changes to benchmark construction and implementation plans as the fund increases its allocation to income-generating assets.

Curt and Alo Martins of the investment team said the board-approved strategic asset allocation adopted last year established new targets that increase fixed-income exposure: an 8% target to Treasuries, a 12% target to public credit and a 1% target to cash. Combined with private-credit work, staff said the long-term goal is to reach roughly 31% in income-generating assets over time.

Alo Martins described the portfolio’s objectives — liquidity, income, diversification and capital preservation — and summarized markets in 2024. Staff noted material benchmark changes adopted last year: the public-fixed-income benchmark moved to a 50/50 blend of investment-grade corporate and high-yield indices, replacing the prior three-way benchmark that included a larger emerging-market component.

To implement the new benchmark and scale the allocation, staff said it created a public-credit risk framework with quantitative guardrails. The framework calibrated a target tracking error of about 150 basis points (with an allowable range of 100–200 bps), an assumed information ratio near 0.5 and a resulting long-run excess-return target of roughly 75 basis points. Staff also set allowable sector ranges that include a 30–60% range for on-benchmark sectors (investment-grade and high-yield corporate credit) and 0–20% ranges for off-benchmark buckets such as bank loans, CLOs, emerging-market debt and structured credit.

Staff said the portfolio is in compliance with the board’s asset-class allowable ranges and that the treasury sleeve is passively managed and tracking its index. The public-credit portfolio returned 6.7% for the year and outperformed its benchmark by about 110 basis points, while the treasury sleeve returned approximately 2.3% in line with its index. The new cash allocation—created mid‑year—returned about 2.9% since inception, staff said.

Commissioners asked about manager selection, the role of multi-sector managers and how CLOs (collateralized loan obligations) might be included. Staff said multi-sector managers may opportunistically access parts of the CLO market inside their guidelines and that the fund can, if desired, hire single-sector managers for structured-credit exposures provided the allocations fit the tracking-error and liquidity framework.

Staff recommended continuing a manager research agenda focused on investment-grade and high-yield strategies, refining mandates and potentially evaluating active approaches for part of the treasury allocation. The board did not take a vote; staff said it would return with implementation steps and manager recommendations.