Illinois Fund Sees Value in Emerging Market Specialists

(February 18, 2011) — The Illinois State Board of Investment (ISBI) is considering whether to move some of its portfolio to dedicated emerging market specialists.

With heightened euphoria over emerging markets, the move represents the growing sentiment that managers based in the markets being invested in is more efficient than using someone “sitting at a desk on Wall Street,” the fund’s chief executive William Atwood told Global Pensions.

Atwood stressed that investing in emerging markets requires local knowledge and expertise and would therefore be more beneficial than using US-based counterparts.

Chris Tobe, a principal at Stable Value Consultants and an investment committee member and trustee at Kentucky Retirement Systems, told aiCIO that as funds become increasingly diversified, demand for emerging markets will obviously gain traction. However, he believes that in the near-term, the embrace of emerging market specialists may only become popular practice among the “mega” public and private plans. “Pension plans tend to move slower than people think. I can see the biggest plans — with assets of $30 billion and above — starting to use emerging market specialists more and more. But it will be a much slower process for plans under that size.”

As of the end of January, the asset allocation of the $10.7 billion ISBI was 35% domestic equity; 20% non-US; 10% to hedged-equity; 20% to fixed income; 10% to real estate; 5% private equity; 5% infrastructure, Atwood confirmed with aiCIO. “I don’t see us making dramatic changes to our asset allocation. We’re generally comfortable with it,” he said.

Separately, the state of Illinois is in the process of trying to bail out its struggling pension fund by selling $3.7 billion of bonds to make this year’s contribution. Last month, in order to help close Illinois’ $15 billion budget hole, legislators raised corporate and personal income taxes. Yet, the state still faces the worst-funded pension system among US states, according to the Pew Center on the States. In an act of desperation, Illinois is attempting to convince sovereign wealth funds to buy billions of dollars in bonds so that it can pay off its pension debt.