Comments on the Md. State Retirement Pension Plan

I recently took a quick look at the Md. State Pension Plan year-end numbers. As a student of portfolio construction, here are a few comments. First, the numbers are presented in a way to suggest that the Plan utilizes a “tactical overlay” from its “target” or fixed asset allocation. Note that the targets for U.S. and international equity are equal and that the plan considers “global equity” a separate target in the plan. The total U.S. equity target is only 12.3% which is surprisingly low. But the current allocation to total equity is 51.2% of the plan which is a big bet on equities versus the target. My guess is that “credit/debt strategies” represent some kind of hedge-fund-like fixed income strategies, and combined with the fixed income allocation of 17.3% means 22.8% of the fund is fixed income oriented. Considering the fund only has 2% in cash and the total fixed income target is 25%, I would characterize this portfolio as a growth-oriented portfolio comparable to Pinnacle’s Dynamic Appreciation portfolio.

Of particular interest is the 37% target of the portfolio for alternative investments. The current 23.7% actual allocation sounds about right all things considered. Still, I can’t help but wonder if the 37% alternative target is expressing too much faith in Wall Street engineered financial products like hedge funds and private equity that promise better than market returns based on 1) a return premium due to their lack of liquidity, or 2) better management due to high fees. While the risk in the real estate allocation can be attributed to the asset class, the risk of the remaining alternatives can probably be attributed to the ability of the hedge fund managers to execute their strategies. Let’s hope the plan administrators don’t buy too much Wall Street BS about these strategies.

Pinnacle’s DA portfolio outperformed this portfolio for the trailing 3-yr and 5-yr period. To be fair, this looks like a typical institutional portfolio construction to me. Pinnacle assets under management: $870 million. State of Md. Pension assets: $35.9 billion.