External consultants recommend three-bucket asset allocation, investable benchmarks; identify legal limits on repurchase agreements

Consultants from the ULR investment team presented a near-complete set of recommendations to the State Board of Finance for how the Treasury should measure and manage fixed-income investments. The consultants proposed a three-bucket strategic asset allocation framework — a liquidity bucket, a buffer (short-to-intermediate maturities), and a long-term bucket — and recommended ‘‘investable’’ benchmarks that the Treasury could actually implement if it chose to do so. The board voted to accept the consultants’ report by voice vote.

The consultants emphasized simplicity in performance measurement and reporting: choose benchmarks that are transparent and investable so the Treasury and the board can explain over- or under-performance relative to realistic objectives. They recommended an investment committee (already established), an investment manual, and a compliance position to support segregation of duties.

The presenters noted that, given Arkansas’s fixed-income-only mandate for the Treasury, there are limited ways to materially increase returns — principally lengthening maturities or taking additional credit risk — and recommended a clearly documented target allocation and reporting template so deviations and results can be explained.

During Q&A, a consultant said the only obvious legislative constraint he recalled concerned repurchase agreements, which the Treasury may be precluded from using because of legal limitations. Board members indicated that the restriction lowers short-term investment opportunities and said they would raise the issue with the Treasurer and, if appropriate, in a future legislative session.

The report remains subject to final review and buy-in from the Treasury investment team; consultants said they will meet with the team to finalize benchmarks and the draft investment policy updates before any changes to allowable assets or policy are made.