Diversification Framework
Long-term asset allocation and risk guides
Asset Allocation and Risk Parameters
The TRS board of trustees sets long-term asset allocation and risk parameters. The board also approves the investment policy which guides staff in their work to achieve Trust return objectives. IMD manages its diversification process through three, separate portfolios of varying sizes.
The central strategy is comprised of a 57% allocation to both Public and Private Global Equity Markets. The central strategy is complimented by 21% Stable Value and 21% Real Return allocations designed to support the Trust in deflationary or inflationary regimes. The scenarios are each defined by GDP growth, inflation, earnings growth, productivity, political stability, and valuation.
Diversification Framework
The TRS Diversification Framework is how the pension trust fund allocates its assets to provide a long-term, risk-adjusted return through different economic and market environments. The framework groups assets into four main portfolios, which are designed to perform well in a certain economic environment.
The graphic above shows a probability distribution divided into three vertical sections with horizontal sections underneath. The distribution represents the fraction of TRS’ Trust invested in portfolios focused on each regime. These economic regimes are: Stable Value, at 21% of Trust assets, Global Equity, at 57% of Trust assets, and Real Return, at 21% of Trust assets. These portfolios are supported by a 5% levered allocation to Risk Parity which brings Trust investment exposure to 104%.
The Stable Value regime is characterized by negative GDP surprises, low inflation, negative earnings surprises, out of line valuations and a reallocation from investors to lower risk and higher quality assets. We have created a portfolio that includes Treasuries, Stable Value Hedge Funds, Cash and Absolute Return to outperform other assets in this regime.
The Global Equity regime is what we expect to be in most of the time. It is characterized by positive GDP surprises, neutral inflation, positive earnings surprises, reasonable valuations, and political stability. In this regime we have created a portfolio of Public and Private Equities to outperform other assets.
The Real Return regime is characterized by low GDP growth, high inflation, low inflation-adjusted earnings, and commodity demand exceeding supply. In this regime we have created a portfolio of Real Estate, Energy, Natural Resources, Infrastructure, Commodities and REIT investments to outperform other assets.
In addition, the Trust has a 5% allocation to Risk Parity, an independent allocation strategy that is expected to provide balanced returns across regimes. This is depicted as a horizontal category across all three regimes. The allocation sums up to 104% and therefore has leverage at the asset allocation level.
