Florida Pension Officials Announce Portfolio Latitude

February 14, 2003 (PLANSPONSOR.com) - Money managers at the Florida Retirement System (FRS) will have a new investment building block to work with when assembling a portfolio asset mix - global equities.

The Florida State Board of Administration’s (FSBA) Board of Trustees announced it was adding the global stocks to the allowable asset classes of the $80-billion FRS. The FSBA board also tinkered slightly with FRS fixed-income and real estate holdings and made a small cut to its expected rate of investment return.

“Because our public stock investments have been completely partitioned between the US and non-US markets, our system of risk control precluded active managers from making tactical investment decisions globally,” Coleman Stipanovich, FSBA executive director, said in a statement. “The addition of the global equity asset class expands the opportunity set for public equity managers, giving them greater opportunities to add value to FRS.”

FSBA has experience in international equity management dating back to 1993 when foreign equities were first added to the FRS portfolio. For 2003, FRS’s target allocation for foreign equities will increase to 14% from 12%, while the global equities class will represent approximately 4% of plan assets, the statement said.

More Portfolio Tinkering

In their tinkering with portfolio investment policies, Stipanovich also announced that board members made several other investment mix changes for both the FRS fixed-income and real estate positions. In light of diminished return expectations across all asset classes, FSBA is reducing fixed-income exposure to 21% from a previous target of 25% to better match anticipated long-term liability growth.

In the real estate class, FRS will increase its target allocation to 7% from a previous level of 4%.   The change in its real estate allocation was made to enable FRS to benefit from its real estate experience and what it sees as increased inflation that leads to higher returns in this asset class, according to the statement.

“FSBA has the critical mass and expertise to buy, manage and hold high-quality properties that generate consistent and predictable returns,” Stipanovich said in the statement.   “Our real estate holdings have stable, bond-like income properties, but will not be as vulnerable to the challenges bonds face as interest rates begin to rise with (an economic) recovery.”   

With the cumulative changes to the FRS investment strategy, FSBA has reduced its real target rate of return to 4% from 4.3%. The target rate of return was reduced as a result of an anticipated dampening in the rate of real growth for FRS liabilities, based on current and expected wage, hiring and termination patterns, according to the FSBA statement.

Stipanovich said that reducing the target rate of return is also a recognition of diminished expectations for investment returns over the planning horizon.   It allows an asset allocation that provides an “acceptable probability” of maintaining full funding status over the long term, he said.

The FSBA provides investment, financial and administrative services to hundreds of Florida state and local government entities. The FSBA manages about $116 billion in assets, including the assets of the FRS – the fourth-largest US public retirement system.