IMRF's Shah Stays The Course
The Journal of Indexes sat down with Dhvani Shah, who became the CIO of the Illinois Municipal Retirement Fund last December, to talk about her fund’s allocations and how it uses index strategies, among other topics. IMRF is the 51st-largest pension system in the United States and the second-largest (and one of the best-funded) public pension system in the state of Illinois.
JOI: How does your team approach the investment process?
Shah: We have an annual review of our investment policy statement, real estate policy statement and strategic asset allocation. That’s an opportunity to fine-tune things as needed. We also conduct an asset liability study about every three years. Actually, the next one is scheduled for next year, 2013.
Within our public market portfolio, we have active managers, as well as index investments. For example, within domestic equity, we have about $3.5 billion in index investments, which is about 43 percent of the large-cap portfolio, and 32 percent of the total domestic equity portfolio, which is $10.9 billion.
We have a mix of active and passive management in each of the major asset classes. In international equity, we have $1.7 billion in index investments, which is about 41 percent of the international large-cap, and 35 percent of the international portfolio. In fixed income, we have $1.3 billion in index investments, which is 19 percent of the fixed-income portfolio.
When you total those three categories, you come to about $6.7 billion, and our public market portfolio is about $24.1 billion, so that is about 28 percent in indexed assets. I believe there’s room for growth in the indexed portion of the portfolio. The only time you should be in an active strategy is if you believe that there’s a source of alpha—that the strategy can outperform. When we conducted our international equity rebalancing earlier this year, we were looking at not just the new managers we were adding, but also at that active/passive mix.
In that rebalancing, the international equity portfolio stayed at about 67 percent active and 33 percent passive. In the original scenario, passive management was actually going to go much lower, but we made that decision to not bring it down so much. When we evaluate managers, we keep that passive index option in mind. We are comparing their performance not just to themselves and their peers within the active space but also to indexed portfolio performance.
JOI: Are you using a core-satellite approach, with index-based investments at the core?
Shah: Yes, that’s exactly right—that’s exactly how it’s been built.
JOI: What kind of indexes are you using as the basis for your passive portion of the portfolio?
Shah: In the domestic space, we have a growth index, a value index and a market-cap index. In international equity, we have the MSCI EAFE index. We’re looking into whether we should be also thinking of ACWI or the emerging index, and so on. Within fixed income, we have the Barclays Aggregate Bond Index.