Maryland CIO lands on right balance for asset allocation

Following the 2008 global financial crisis, Mr. Palmer said staff worked to better diversify the system’s portfolio. In recent years, there’s been a focus on adding more risk while maintaining a high Sharpe ratio, a measurement of risk-adjusted return, Mr. Palmer added.

“It’s allowed us to become a bit more efficient in generating returns with the same level of risk,” he said.

The system’s five-year Sharpe ratio was 1.3 as of March 31, ranking in the fifth percentile among a peer group of other public pension plans, according to data from its investment consultant, Meketa Investment Group.

mr. Palmer said the pension fund, like other institutional defined benefit plans, has critics who say it should reduce the fees it pays by implementing a more passive 60% equity/40% bond portfolio.

Referring to the “rearview mirror crowd,” Mr. Palmer said critics point to the last decade of strong stock market returns as justification for their argument.

“If we had known 10 years ago that the S&P would be up 15% every year, we would’ve done that,” Mr. Palmer said. “But we thought it would be up 8% and it’s done phenomenally better than that, which makes it harder for it to do it again in the future.”

He said many investors and critics who have done well in the stock market over the past decade have stopped paying attention to the risk side. “They just like to lap up the strong returns and not pay attention to how much risk they’re taking to get it,” Mr. Palmer said.

Martin Noven, the pension fund’s executive director who joined the retirement system in July 2021, said there is also an active lobbying apparatus that wants retirement assets steered away from DB plans and into defined contribution plans where there is more money to be made.

“DB plans suck up a lot of investment assets that if those were in retail investments or 401(k)-style plans, there’s a lot of money to be made from the industry and it’s hard to battle the industry,” Mr. Novena said.

He added, “By having a much more diversified portfolio with non-correlated asset classes, when you’ve got something like this year where in a 60/40 portfolio when both the 60 and the 40 are going down, does show that yes, (the 60/40 portfolio) does work in a lot of markets, but for a sophisticated $70 billion investor that would be wholly inappropriate.”

mr. Palmer now has 40 people on his investment team, up from 22 when he joined the system in 2015. With an eye toward lowering the retirement system’s cost curve, the team now manages internally about $10 billion in assets on the public side and about $2 billion in co-investments on the private side, Mr. Palmer said, up from zero overall when he started.

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