MassPRIM: On dealing with 2015

The Massachusetts Pension Reserves Investment Management Board was well prepared for what turned out to be a challenging investing environment as 2015 came to a close.

Private equity led performance of the overall portfolio in 2015, but chief investment officer Michael Trotsky had readied the wider investment portfolio for more bearish times in more than one way.

“Last year was a bit more challenging for returns, and I think the silver lining is that we had been preparing for a tougher equity market in general in terms of returns for quite some time,” Trotsky says.

At the end of 2014, PRIM brought the global equity allocation down to 40 percent from 49 percent, a wise move considering global equities were down 0.32 percent, based on the MSCI World Index. PRIM also did a deep dive into the pension’s fixed income portfolio and – at the end of 2013 – moved 10 percent of its fixed income portfolio to long-duration Treasury STRIPS.

Treasury STRIPS, which stands for separate trading of registered interest and principal securities, are zero-coupon securities backed by the US government. By re-allocating a portion of the fixed income portfolio, he effectively turned its core fixed income portfolio into an insurance policy against a weaker equity market.

“When we did that, it was a bit controversial,” Trotsky says. “I remember some of my friends actually made some comments, ‘You’re crazy. Don’t you know interest rates are going up? That is not a good time to move into that allocation.’

“Well, it turned out to be just the opposite. Adding long-duration Treasurys was the simplest, most liquid and easy way to buy insurance.”

Finally, Trotsky and the PRIM’s investment team added a new allocation called Portfolio Completion Strategies, which is an allocation contingent upon finding suitable investments with the main goal of diversifying the overall portfolio. Areas of interest include agriculture, which comes in addition to the timberland allocation PRIM has had for several years.

“Most recently we decided to invest in agriculture,” says Trotsky. “What we like about timber is that it is an uncorrelated alternative asset that has some nice properties in terms of diversification and agriculture has many of the same properties.”