According to a recent article in CIO Magazine, the Dallas Police and Fire System’s new CIO, Kevin Custer, wants to both “improve fund liquidity and shift our growth engine predominantly to the public equity markets”. In order to implement the new asset allocation, the Board, Custer, and their consultant are going to dramatically reduce exposure to private markets, including “fully liquidate the plan’s private infrastructure and private debts holdings, and partially liquidate its holdings in private natural resources, as well as a host of other initiatives to help attain an average 7.25% per year.”
But, will this strategy accomplish their objective? We can certainly appreciate the need for improved liquidity given the plan’s <50% funded status and lower contributions. However, public markets have enjoyed a long bull market for both bonds and equities. How much do they have left in the tank?
Another potential strategy that they might want to consider would be to convert their current fixed income exposure (which they are increasing) to a cash flow matching strategy to meet current and near-term benefit payments. The cash flow matching implementation would extend the investment horizon for the balance of their assets while removing the need to liquidate the private investments, which carry a potentially enhanced return through the liquidity premium.
Finally, this alternative cash flow matching strategy will potentially stabilize the funded status of the Dallas P&F while setting it on a glide path toward full funding.