By Muskan Arora
The $143.1 billion New York State Teachers’
Retirement System will carve out a $500 million emerging market debt (EMD)
strategy within their fixed income portfolio.
The EMD strategy will focus on non-US investment grade rated government, government related and corporate bonds which can offer a credit spread over U.S. Treasuries. This sleeve will not include any securitized bonds.
The $500 million allocation can be funded in $250 million increments initially invested in US Treasuries.
The new internally managed US dollar
strategy sleeve will take up 20% of the global bond allocation bucket or 0.4%
of the portfolio’s assets, according to the April board meeting.
The proposed benchmark is fully contained in the Global Bonds benchmark and partially in Domestic bind benchmarks, placing the securities in the investible parts.
Benchmark includes bonds from 28 countries, with a limitation, however, to individual country weights and 10% cap. The cap has lowered the combined weight of Chinese and Saudi issuers to 20% against 31% if uncapped.
For the countries including Brazil, Columbia and South Africa, the market value includes investment grade corporate or government-related bonds where the government is rated high yield.
Permitting up to 10% BB-rated securities
would allow the inclusion of the government
debt of these three countries and 13 others including Indonesia, UAE and more.
Michael Federici, along with consultant
Callan, believe that the EMD strategy would allow a better long-term return
outlook as compared to full global aggregate, to maintain focus on higher quality
credit, and simpler implementation and management fee saving.
However, introducing this sleeve comes with
its own risks including that Reg S-only portions of the benchmark are less
investable, EMD had a higher volatility and has previously been through
periodic crisis, exposed portfolios to country concentration risk, higher commodity
exposure and higher trading cost of the US dollar.
The global bond sleeve sits, within the
fixed income sleeve, at a target allocation of 2%, as of December 31. The FI
sleeve allocates $26.6 billion against a target of 20%.
The fixed income bucket includes the internally-managed Domestic and Short-Term
Bond portfolios and the externally managed US High Yield, Global Bond, and Carbon Transition
strategies.
The global bond portfolio comprises of global
aggregate and carbon transition alongside the proposed EMD sleeve.
Similar to Carbon Transition, the EMD strategy will be managed against a subset of the Global Agg
index—the US dollar emerging market portion. This will result in a Global Bond allocation that is roughly
split 70/10/20% between full Global Agg, Carbon Transition corporates, and EMD.
The system has rehired Callan as their
general consultant for the next one year, as approved in the recent meeting.
