N.C. Moves Toward Raising Alternative Caps

Pension System: North Carolina Retirement Systems

Total Assets: $78 billion

PE Assets: $3.8 billion

PE Allocation / Target: 4.9% / 6.5%

Chief Investment Officer: Kevin SigRist

At present, the North Carolina’s pension system invests 20 percent of its assets in alternative strategies, such as private equity, real estate and credit strategies. Individual decisions are spearheaded by Kevin SigRist, the system’s new chief investment officer.

Raising caps on alternative investments is often a precursor to raising targets and, ultimately, allocations to such assets. One example is the New Jersey Division of Investment, which moved to raise its cap on alternatives in 2011, just prior to lifting both its targets and commitments to such investments.

The measure to lift the limits on alternative investments, originally proposed by Janet Cowell, the state treasurer, eliminates caps for individual alternative categories in favor of an overall 40 percent limit. The change is intended to offer more flexibility on asset allocation decisions and also help the system move away from its substantial reliance fixed income and stocks, according to a memo provided by Julia Vail, a spokeswoman for the treasurer. Cowell, who is the pension system’s sole fiduciary, was not available for comment.

Mentioned in Senate Bill 558 is a warning about the difficulty of reaching the system’s 7.25 percent target rate of return given the fact that the pension has “a much higher allocation to fixed income assets than its peers.” It goes on to predict that this reliance on fixed income “will result in a serious underperformance of the overall portfolio.” In addition, said the bill, “the portfolio currently has a higher than desirable allocation to publicly traded stocks, which is a problem given the dangers of large equity market declines.”

The pension system’s current limits on alternatives include a 10 percent cap for real estate, a 7.5 percent cap on investments like private equity, a 6.5 percent cap for hedge funds, and 5 percent caps for both credit strategies and inflation protected assets.

The actual allocations to these asset classes are much lower than these caps, and include a 7.9 percent allocation to real estate, a 4.9 percent allocation to alternatives like private equity. Other alternative strategies together amount to 7.1 percent.