How Massachusetts Invests

John Osbon - September 11, 2012

If you had $50 billion to invest, how would you do it? Let’s take a look at the investment strategy of the Massachusetts Pension Reserves Investment Management board (PRIM), which invests that sum for the benefit of state employees, teachers and retirees.  PRIM has done well.  How have they done it and what can we learn from their approach?

PRIM’s long-term investment return goal is 8.25 percent. Since inception in 1985, the annual return has been a solid 9.83 percent. Even during the tumultuous last decade, PRIM has achieved a 7.25 percent annual return – below target but not bad, most would agree.  (Performance through 7/31/2012

The big 4

What are some of PRIM’s best practices that any investor can copy?  I’m happy to report its strategy is quite similar to that of Osbon Capital, with four primary themes:

  • Goal-based
  • Asset allocation/diversification
  • Indexing
  • Cost control

Goal-based – PRIM’s goal is specific, measurable, and based on its mandate – paying retirement benefits to state employees. The long-term investment return goal is 8.25 percent. Since inception in 1985, the annual return has been a solid 9.83 percent. Even during the tumultuous last decade, PRIM has achieved a 7.25 percent annual return – below target but not bad, most would agree.  (Performance through 7/31/2012)

Asset allocation/diversification – PRIM believes in diversification and asset allocation, and we see the result in its investment fund, the Pension Reserves Investment Trust Fund (PRIT). As its report states, “We believe that the most significant contributor to investment performance is asset allocation – being in the right asset classes at the right time.”

The state’s diverse allocation is 43 percent stocks, 23 percent bonds, and a hefty 34 percent in alternative investments.  Those alternative investments include 10 percent each in hedge funds, private equity and real estate and 4 percent in timber.

These allocations are not accidental; a chief responsibility of the PRIM board is to determine target allocations and ensure actual PRIT allocations stay in line through monitoring and rebalancing.

Indexing – When you have $50 billion to invest, you can pretty much have your pick of investment managers. What strikes me is that PRIM makes such extensive use of passive management – about three-quarters of its domestic equity portfolio and half of its international stock allocation is passively managed.

Its fixed income portfolio has passive bond indexes, too, as well at TIPS and global inflation linked bonds.

Instead of trying to “beat the market,” PRIM accepts the market return on huge portions of its portfolio.

Cost control – In addition to manager fees and performance fees, PRIM employs 5 external investment consulting firms.  The total cost?  Right around 50 basis points in 2011, down from 54 in 2010. As we often say, what matters is not how much you make, but how much you keep. PRIM is obviously tuned to the same channel and watches expenses carefully.

A lot to like

The goals of PRIM may not be the same as your goals, and its treasure chest may considerably outweigh your retirement account. Nonetheless, its methods – diversification, indexing and cost control – serve any investors well, in my view.  As a Massachusetts taxpayer, I’m glad to see PRIM is not paying a fortune in active management fees on the entire portfolio in a (potentially futile) attempt to beat passively managed indexes.

[If you’re interested in the details of PRIM performance and methods, here is its latest performance summary (through 7/31/2012) and its most recent annual report (for year ended 6/30/2011).] [hs_action id=”2410″]


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Discussion of PRIM is meant for illustrative purposes only and is not intended to suggest that the performance of its investments is equivalent or similar to those managed by the Adviser.  Investors should be aware that PRIM portfolios may have a different composition, volatility, risk, investment philosophy, time horizons, and/or other investment-related factors than any individual portfolio managed by the Adviser.  Therefore, an investor’s individual results may vary significantly from those discussed in this article.

 

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