SCOPE:
For more than a decade, EnnisKnupp has advised Large Public Fund in successfully managing an opportunity fund within its larger portfolio. An opportunity fund is designed to encourage investment in innovative approaches or ideas.
APPROACH:
The Large Public Fund opportunity fund was created in March 1999 by the Board of Trustees. It came from a shared vision of the Large Public Fund’s former CIO and EnnisKnupp. The goal was to test sensible new ideas that had long-term promise. New programs would be designed to promote learning. While they did not have to pass materiality tests, they did have to pass the tests of prudence and potential future contribution to the larger portfolio’s overall return.
Initially, Large Public Fund was authorized to invest up to 5% of the portfolio in “incubator” concepts. Within the 5% limit, initial allocations to specific investments tended to be modest to help limit the inherent risks. Once proven, the successful concepts were moved to the larger portfolio as appropriate.
RECOMMENDATIONS:
Over the years, EnnisKnupp has recommended and helped Large Public Fund implement allocations to the following “incubator” concepts:
- April 1999…TIPS introduced. Initial allocation was $75 million to two managers. At inception, the portfolio was all passive, but we gradually introduced active management.
- July 1999…Financial sector portfolio introduced. Specializing in bank stocks, the initial allocation of $12 million went to one manager.
- March 2000…REITs introduced. The initial investment of $105 million was split among three managers.
- September, 2001…Private/public equity portfolio was added. The initial allocation of $25 million went to one manager.
- May 2002…Global equity portfolio introduced. The $150 million investment was divided between two managers.
- January 2003…Futures-based portable alpha strategy introduced. Initial allocation of $50 million went to a single manager.
- March 2004…International equity all-cap portfolio started. The $30 million investment was allocated to one manager.
- December 2004… Implemented manager development program.
OUTCOMES:
Large Public Fund has been pleased with the results of the opportunity fund during the past 10 years. TIPS were transitioned from the opportunity fund to a separate asset class in July 2004, and currently make up 5% of the overall policy target. The financial sector portfolio specializing in bank stocks was integrated into the U.S. equity asset class in July 2003. REITs were also transitioned to a separate asset class in April 2001, and now account for 4% of the overall policy target.
The global equity portfolio was moved to a separate asset class in January 2004, and now accounts for 9% of the overall policy target. The futures-based portable alpha strategy was transitioned to the U.S. equity asset class in October 2005. The international equity all-cap portfolio was integrated into the non-U.S. equity asset class in June 2006. Finally, the managers originally part of the Managers Development Program were transferred to their appropriate asset classes in October 2007.
Currently, three areas are being actively considered for inclusion in the Large Public Fund opportunity fund – infrastructure, commodities, and climate change. Large Public Fund continues to use the opportunity fund as a means to test new strategies.