* LA Fire and Police Pension allots 5 pct to commodities
* About $200 million to go into actively-managed derivatives
(Adds background on LA pension fund holdings in paragraph 15)
By Barani Krishnan
March 13 The largest public pension in Los
Angeles is investing $800 million in commodities over the next
two years, a quarter in actively managed derivatives, as it
tries to profit from markets that have frustrated many
The Los Angeles Fire and Police Pension System, with nearly
$16 billion in assets, said it is allocating 5 percent of its
money to commodities with investments that aim to maximize
returns and minimize downside risks. That includes commodity
futures, stocks and private equity.
One strategy is to put $200 million into an enhanced
commodity index-based investing model it hopes will deliver
gains above market expectations. The other is to invest in
stocks of commodity-related firms and private equity
partnerships in energy, agriculture, mining and healthcare.
Enhanced index-investing typically means actively buying and
selling commodity futures contracts in a portfolio that
otherwise passively follows a commodity index in the hope of
profiting from price gains in underlying contracts.
"This is the first time the system has invested in
commodities," William Raggio, interim general manager at LAFPP,
told Reuters in an email this week.
"The board and staff thought over the long run, this
(active) approach would provide better returns," he said.
Fresh worries over inflation from U.S. monetary easing have
recently pushed some state pensions to boost their exposure to
commodities, whose prices traditionally rise over time.
Vermont is one, planning to double the commodities
allocation in its $3.7 billion retirement fund to 4 percent,
state investment chief Stephen Rauth was quoted saying last
month by Pensions and Investments Online, a trade publication.
But retirement funds are also moving away from the trend of
passively investing in commodity indexes, a strategy that has
cost them dearly during market downturns.
The $7.8 billion Municipal Employees Retirement System of
Michigan demonstrated this last year, putting more money into
actively-managed real assets such as cattle and sheep farms in
Australia while trimming index-based exposure.
"Institutions looking to create real asset investments now
often have a mandate to hire managers who would actively manage
those portfolios," said Don Steinbrugge, managing partner at
Virginia-based pension consultant Agecroft Partners, in an
interview. He is also an investment committee member for the
city of Richmond.
Some pensions have maintained passive strategies, but
sharply pared commodity allocations. California-based Calpers,
the biggest U.S. retirement fund with $240 billion, dropped its
holdings in commodity derivatives to 0.6 percent by the end of
last year from 1.5 percent at end-2011.
Calpers was one of the first pension funds to invest in
commodity indexes when it made its first foray in 2007 to
diversify its portfolio and protect against inflation. Its
passive investment strategy caused it to lose hundreds of
millions of dollars when oil, metals and grains prices tumbled
during the financial crisis.
After more woeful returns until last year, the pension fund
switched most of its investments in commodities to
inflation-protected bonds in October 2012.
A TWO-YEAR PLAN
While the LA fire and police pension is much smaller than
Calpers, it is the biggest of Los Angeles' three public
retirement plans. A table of the city's pensions holdings from
last year showed the LAFPP holding about $14 billion, or about
40 percent of the total $32 billion in assets.
Los Angeles also has the largest pension obligation of
In LAFPP's case, it had approved its 5 percent allocation to
commodities as early as December 2010, but only finalized the
different investing models for the portfolio last October.
Raggio said the board approved for 50 percent of the
commodity assets to be used for public securities investments,
and 25 percent each for derivatives and private equity funds.
Breaking it down further, it mandated the derivatives
portion be 70 percent based on enhanced-indexing and 30 percent
on "active constrained" management.
"The allocation (is) to be carried out over a two-year
period," Raggio said. He did not say in which specific markets
or products it will invest.
According to documents on LAFPP's website, the active
constrained strategy will focus on creating "alpha" -- or gains
above market expectations -- while automatically capturing
"beta" -- or regular returns -- through its index investments.
Alpha-generating strategies include buying commodity futures
contracts further out on the futures curve of an index to
minimize losses from near-term price drops, and tactically
overweighting or under-weighting certain sectors of an index
based on return expectations.
(Editing by Josephine Mason and David Gregorio)