North Adam Portfolio Allocation

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Real Estate

Firstly, investing in real estate provides diversification value because real estate returns have relatively low correlations with stocks and bonds. Secondly, real estate provides inflation hedge. Besides, the spectre of inflation is hovering, and real estate serves as an ideal hedge and brings steady cash flow. So, we recommend a slightly higher allocation in real estate to 2.00%.

International Equity

Compare to U.S. market, International market is less efficient especially in the emerging market. There are more opportunities than advanced market. As the advanced market became increasingly competitive, North Adams should pay more attention to overseas markets where far fewer funds were competing for deal. Since the increasing of globalization and declining of U.S. market capitalization, international equity can help investors to reduce currency exchange rate. Historical evidence shows that emerging market equities have high returns with high volatility. They also have low correlations to both domestic and international equities. And the evidence shows that including a small amount of emerging markets equity in a portfolio increases that portfolio's return while leaving volatility roughly the same.

Currently, North Adams has 5% asset allocation on international equity. We suggest to allocate more on this sector, for example, 9%.

Venture Capital

Venture capital is another asset has higher return and volatility. Currently, North Adams does not invest in this area yet. We think there are several reasons persuade us to add it. When start-up firms want to “leverage buyout”, the price to have firm’s stake is low. Thus, the potential return is high. Usually, the risks can be reduced by analyzing the firm’s financial position, products and managements.VC firms are very easy to locate because they are documented in business directories. We suggest to add 1.9% on Venture Capital.

New asset allocation

Asset classes

(%)

Domestic Equity

Fixed Income

INT’L Equity

Private Equity

Hedge Fund

Real Asset

Cash/Overlay

Venture capital

2015

53.80

32.20

5.00

0.70

1.80

1.30

5.20

0.00

Proportion

54.80

24.00

9.00

1.00

2.00

2.00

5.30

1.90

Actuarial Assumptions

Based on the actuarial assumptions, an investment return assumption of 7.75% for most local systems (assuming a reasonable asset allocation). The trend both in Massachusetts and across the country over the past 10 years has been to reduce this assumption. However, the Board decreased this assumption in this valuation to 7.5%. In our opinion, the assumed rate of return should be decreased in the future as it seems higher.

The Total Cost Increase Chart shows as below:

[pic 1]

From the chart, we can find that total appropriation assumed to increase 4.32% each year until FY28. Thus, for we decreased the investment return assumption, the assumed rate of return should large than the cost and cannot decreased for too much because any reduction in the investment return assumption increases the plan’s liabilities. Overall, 7.25% is the most reasonable investment return we believed.