Asset Allocation at the Cook County Pension Plan

Asset Allocation at the Cook County Pension Plan
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Asset Allocation at the Cook County Pension Plan
The management of Cook County Pension Plan faces the reality of re-allocating its assets given that the current allocation model has been overtaken by events in the financial markets and the need to raise enough funds for the scheme, to meet the fund's funding demands both in the short and long-run. In this discussion, all the asset classes that include REITs, equities, cash, and fixed income will be evaluated, and the final allocated assets presented. In conclusion, there will be a recommendation on the pension fund's final asset allocation while considering its objective return and minimizing the investment risk or standard deviation.
Different asset classes bear diverse risks and return. Asset allocation is informed by the need to diversify the investment portfolio to spread the risk across different classes of assets to forestall the risk that comes with the market volatilities. This process ensures that investments are not concentrated in a given asset class because of the changing regulatory and general market trends. A long-term investment might have high and steady returns, but such investments are considered riskier due to the difficulty of predicting the long-term volatilities inherent in the financial markets. On the other hand, the risk on the Short-term investments is easier to predict given its shorter duration nature.
A Fixed Income investment pays a certain interest or coupon periodically to an investor, based on the amount of the investment, mostly calculated on the principal amount invested. Such an investment will usually pay back the principal at the end of the investment period. Equity investment typically involves putting funds in the stock market by buying company shares with the periodic dividends acting as the expected return. Apart from these two classes, which are majorly long-term investments, cash investments also provide short-term returns. Any other investments that do not fall into the above categories are collectively classified into the Alternatives class, including Hedge Funds.
The current asset allocation for the Cook County Pension Plan, with a return objective of 7.5%, has a total investment of $13,148,543, comprising the asset classes of Domestic, International, and Private Equities, REITs, Cash, Private Real Estate, and Hedge Funds. These are further broken down into ten (10) individual securities thus; US Aggregate Bonds (20%), US High Yield Bonds (6%), US Large and Small Cap (33%), AC World-Ex US (15%), Emerging Markets (6%), Private Equity (5%), US Core Real Estate (6%), US REITs (3%), and Macro Hedge Funds (6%).
With the realization that this allocation is not financially feasible, the whole asset classes will be re-evaluated afresh to arrive at a mix that will meet the requirements of the revised return objective of 7% while minimizing risk. The return objective is subject to the constraints for each asset class. The fixed income class has a target of 20%, with a minimum of 15% and a maximum of 25%. The Equity class has a target of 50%, with a minimum of 45% and a maximum of 55%, whereas the Alternatives class has a target of 30%, with a minimum of 20% and a maximum of 35%.
In addition, the classes have limits on the proportions of the individual securities. Under the Fixed Income class, the cumulative proportion of Leveraged Loans, High Yield, and Emerging Market Debt will not exceed 5% of the total asset allocation. International Markets will be restricted to 25% of the Equity class allocation, while Chinese, Hong Kong, UK, and cumulative Japanese markets in the Equity class are limited to 5% of the total allocation. The collective markets of Emerging Markets, Euro Area Large Cap, and AC Asia Ex Japan are also capped at 5% of the total.
The Alternatives class allocation is subject to the capping of 20% on total allocation on its securities of Direct Lending, Private Equity, REITs, Real Estate, and Infrastructure. In this evaluation, the 'Solver' feature of excel will give the optimal solution given the objective a...