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Oregon’s tactical opportunities portfolio underwhelms for fiscal 2019

Oregon Investment Council’s Opportunity Portfolio for its largest fund took a nosedive in short-term performance in fiscal year 2019, according to a presentation given to the council at its Oct. 30 meeting.

According to meeting materials published on Oregon’s website, the $1.7 billion portfolio had one-year returns of 3.6 percent as of June 30, well below its 6.7 percent benchmark. That was down from 7.3 percent one-year returns as of June 30, 2018. Its FY19 three-year returns were also below its benchmark, 6.7 percent versus 7.1 percent, as were five-year returns, 4.5 percent against a 6.5 percent benchmark.

Long-term returns were better. Seven-year returns were 8.3 percent, above its 6.7 percent benchmark, and 10-year returns were 10.6 percent against a 6.8 percent benchmark. They were both improvements over FY18.

“We continually monitor portfolio performance, both short- and long-term,” said Michael Mueller, the investment officer in charge of the portfolio, in a statement to Buyouts. “In general, we believe long-term performance is a more important indicator than short-term performance as short-term performance is influenced by a number of factors including sector exposures and the J-curve, from our more recent commitments.”

At the meeting, Mueller ascribed the poor returns to a specific investment that had not “performed as we had hoped,” but said the long-term returns put the portfolio in third place behind private equity and public equity.

“Over the long haul the portfolio has done its job,” he said.

Portfolio structure

The Opportunity Portfolio was launched in 2005 and is designed to “provide enhanced, risk-adjusted returns and diversification” to Oregon Public Employees’ Retirement Fund, which makes up $77.1 billion of the $106.8 billion the investment council manages overall.

“The goal really was to find a home for strategies or interesting investments that didn’t fit in any of the strategic investment asset classes that were already in the pension fund,” Mueller told the council at the Oct. 30 meeting.

As of June 30, the portfolio made up 2.3 percent of OPERF. The portfolio shifted a bit to private credit over the course of fiscal year 2019. As of June 30, it was made up of 51 percent debt and private credit investments, up from 41 percent at the end of FY18. Thirty eight percent was in diversified holdings, down from 46 percent the year before.

Last month, Teachers’ Retirement System of Texas revealed its co-investment vehicle with Apollo Global Management and KKR & Co had poor short-term private equity returns due partly to under-performing private credit strategies, as Buyouts reported.

Currently, 90 percent of Oregon portfolio’s value is concentrated among its seven largest investments. These include:

• $175.8 million (10 percent of the portfolio) to Fidelity Real Estate Opportunistic Income Fund, managed by Fidelity Investments;

• $353.4 million (20 percent) to Sanders Capital All Asset Value Fund, managed by Sanders Capital;

• $121.1 million (7 percent) to Nephila Advisors Juniper & Palmetto Funds, managed by Nephila Capital;

• $306.3 million (18 percent) to Blackstone Tactical Opportunities, managed by Blackstone Group;

• $352.1 (20 percent) to TSSP Adjacent Opportunities Partners, a $2.5 billion fund managed by TPG Sixth Street Partners which deploy across growth debt, direct lending and opportunistic credit, according to sister publication Private Debt Investor;

• $106.9 million (6 percent) to Lone Star Fund X, a $5.5 billion fund managed by Lone Star Funds that closed in 2016 and focuses on debt and private credit;

• $164 million (9 percent) to Owl Rock Capital Corporation, a business development company focused on private credit.

The fund also has $1.2 million in Apollo Credit Opportunity Fund II, run by Apollo.

Looking forward

The presentation noted that the current market environment was “less conducive to tactical opportunities” because “bond spreads are low, and equity multiples are relatively high.”

Oregon’s staff is prepared to shift focus from niche strategies to a market dislocation strategy should the opportunity arise, according to the presentation.

In 2018, the council committed $200 million to the TSSP Adjacent Opportunities Contingent Fund “to provide additional ‘flex’ capital in the event of a market dislocation over the next 32 months.” That deal closed in January and has proven to be the portfolio’s only deal this year. The report noted staff was being patient during a “beta trade’ bull market” and also had limited resources available.

In August, Oregon named Mueller as its investment officer dedicated to the Opportunity Portfolio, a post that had been vacant since 2014.

Action Item: Read Oregon Treasury’s Oct. 30 public meeting materials here.