Florida creates infrastructure allocation

An investment policy approved by the trustees of the Florida State Board of Administration will give the state’s $110bn retirement system the flexibility to invest up to 2% of its assets in infrastructure. The move is part of a broader portfolio transition that shifted about 10% of allocations away from listed equities and fixed income towards alternatives.

The trustees of the Florida State Board of Administration, the manager of the Florida Retirement System, have approved a new investment policy that will see the $110 billion pension carve out its first-ever allocation for infrastructure, with a target of 2 percent.

The allocation is part of a broader reformation of the pension’s portfolio, which included an expansion into alternative investments like private equity, real estate and infrastructure at the expense of more traditional asset classes like listed equity and fixed income.

The new investment policy will greatly expand a category of investments called “strategic investments”, which comprises debt funds, infrastructure, hedge funds, commodities and timberland, from a current level of 1.8 percent to 11 percent.

Florida: saving for retirement
through infrastructure

“The purpose of that is to allow for greater flexibility, to give opportunities to your skilled professional staff and external investment advisors to add value and also to reduce risk by diversifying more away from traditional asset classes,” Mike Sebastian of Ennis Knupp & Associates, the pension’s investment advisor, told the trustees at a meeting Tuesday. 

The policy will also expand private equity, which currently stands at 3.5 percent, to 5 percent, and real estate, now 6.4 percent, to 7 percent.

These gains will come at the expense of more traditional asset classes like listed equity and fixed income. The new policy will merge the pension’s domestic and foreign listed equities, which currently constitute 57.4 percent of the portfolio, into one category called global equities that will be targeted at 52 percent of the portfolio. Fixed income will shrink from 26.1 percent to 24 percent and high-yield income investments of 2.1 percent will be eliminated altogether.

The trustees, Florida chief financial officer Alex Sink, Florida Governor Charlie Crist and Florida Attorney General Bill McCollum, welcomed the new investment policy, approving it by a unanimous vote. But the approval, which came at the end of a nearly six-hour long meeting, was not without some questions about the new asset mix.

Tell me what infrastructure means

Alex Sink

“Tell me what infrastructure means,” Sink asked Sebastian, the Ennis Knupp consultant.  “I can make that up, something that I think it means but I’d rather you tell me what it means.”

“Long-term investments in physical, income-producing properties like airports, toll roads, courthouses, and so on,” Sebastian answered.

“So it’s like if we wanted to buy Alligator Alley, for example – that would be an example of an infrastructure investment?” Sink asked, referring to a failed toll road auction held by Flordia last year.

Long-term investments in physical, income-producing properties

Mike Sebastian

“Yes,” Sebastian answered.

Florida should expect a return for infrastructure investments of about 8.8 percent, Ennis Knupp said in an investment policy review presented to the trustees.

As of now, Florida doesn’t have any fund investments in infrastructure, let alone direct investments in assets like Alligator Alley. The new investment policy opens the door to changing that, but Dennis MacKee, the pension spokesperson, cautions that “a lot has to happen before we get this implemented”. 

Most importantly, because the Florida legislature has capped the pension’s allocation to alternatives to 10 percent, the pension will have to get legislators’ ok to scale-up the strategic investments allocation to 11 percent and expand private equity.

“That’s 13 months away,” MacKee said, because the legislature won’t be in session again until March of next year and any laws it passes won’t take effect until July.

MacKee added that the pension has room to make some “evolutions” toward the new policy targets since there’s about 2.4 percent left in before it hits its statutory ceiling of 10 percent in alternatives.