The $59 billion New Jersey Division of Investment, has made several changes to its alternatives investment portfolio including a slowdown in new commitments, on the back of a belief that large institutions with high allocations to alternatives will be forced to sell portions of their portfolios in order to raise liquidity and rebalance their overall asset allocations.
Its investment plan for this year will include a slowdown in new commitments to private equity, real estate and hedge funds; a greater focus on credit-related opportunities within private equity and real estate; and the targeting of potential opportunities to purchase interests in existing alternative investment partnerships in secondary market transactions.
At the end of December a new asset allocation was set which included a reduction in alternatives from 15.22 per cent in November 2008 to a new target for this year of 14.5 per cent. US high yield was the main beneficiary of the rejigged allocation (see table below).
A memo from William Clark, the director of the division of investments at the New Jersey department of treasury, outlined the plan to reduce or eliminate previously announced commitments, with the aim of providing greater flexibility to implement these strategies.
In private equity, the plan will reduce the commitment to three funds by about $115 million. For real estate, the plan will not close on two previously announced commitments totalling $250 million.
And for hedge funds it will redeem from one fund, Black River, and another fund which it was planning to redeem, Satellite Fund II, has announced it will wind down its operations. The total of these original investments was $200 million.
At the end of January the plan estimated its performance for the fiscal year was -22.58 per cent versus -24.57 per cent for the council benchmark.
Clark said this was attributable to an overweight position in domestic and international fixed income relative to public equities; an underweight position in commodities relative to benchmark; and an underweight position in financial services stocks in both domestic and international equities portfolios.
The new asset allocation sets ranges for each asset clss instead of target allocations. According to Clark the rationale for this was that given the extreme market volatility, the plan “strongly believes” that strategic asset allocations for institutional portfolios need to become more “market sensitive” than in the past.
He said the use of ranges would reinforce the consensus of the Council that the fund should maintain flexibility to react to rapidly changing economic conditions.
Table: New Jersey FY2009 asset allocation analysis
| Asset class | Nov 2008Â actual % | Target AA adopted in 2007 % | Proposed FY2009 allocation midpoint % |
|---|---|---|---|
| US large cap equity | 25.10 | 25.65 | 21.85 |
| US small cap equity | 1.32 | 1.35 | 1.15 |
| International developed markets equity | 14.52 | 21.00 | 17.00 |
| Emerging markets equity | 1.06 | 2.50 | 1.50 |
| Total Public equity | 42.00 | 50.50 | 41.50 |
| Long-term US FI | 29.57 | 23.75 | 30.00 |
| US high yield | 0.44 | 4.00 | 3.00 |
| International FI | 0.93 | 0.00 | 0.00 |
| Total FI | 30.94 | 27.75 | 33.00 |
| Commodities and other real assets | 1.77 | 4.00 | 3.00 |
| TIPs | 5.24 | 3.00 | 5.00 |
| Total inflation-sensitive assets | 7.01 | 7.00 | 8.00 |
| Private equity | 5.94 | 3.25 | 5.50 |
| Direct real estate | 3.67 | 2.50 | 4.00 |
| Absolute return | 5.61 | 6.0 | 5.00 |
| Total alternatives | 15.22 | 11.75 | 14.50 |
| Cash | 4.83 | 3.00 | 3.00 |
| Grand total | 100 | 100 | 100 |
