Category Archives: Indiana

Risk Parity in Indiana

For readers interested in either Indiana or investment strategy, see my letter (subscription) to the Indianapolis Business Journal commenting on the new asset allocation and risk management strategies at INPRS, the state’s $25-billion pension fund.

Ken Skarbeck’s column (Nov. 19) addressed a new strategy the Indiana Public Retirement System is using to diversify its portfolio. The new strategy, known as risk parity, has been around for over 20 years and will eventually compose 10% of INPRS assets.

Since the financial crisis of 2008, INPRS has dedicated significant time and resources to improve its risk management infrastructure. The decision to move a portion of the assets into risk parity – which seeks to diversify risk, rather than merely diversify asset classes – is one direct outcome of the new risk management program.

Risk parity attempts to balance risk across equities, bonds, commodities, and inflation-linked bonds. It recognizes the distinct performance characteristics of these assets during periods of robust or slow growth, for instance, or high or low inflation. For any given rate of return target, risk can be mitigated. Likewise, for a given risk appetite, returns can be improved. Nothing is a sure bet, but risk parity strategies have achieved robust returns while minimizing risk over most time periods.

Mr. Skarbeck makes a good point that historical volatility does not measure all types of risk. We heartily agree.

Mr. Skarbeck thinks stocks are a good bet right now. He may be correct. INPRS owns billions of dollars of equities and works with investment managers who have strong views, perhaps similar to Mr. Skarbeck’s, about the direction of stocks, bonds, and other assets. But as an entity charged with funding the retirements of 500,000 Hoosier workers and retirees, INPRS as a whole should not make overly concentrated bets.

Truly balanced portfolios recognize that neither INPRS, nor anyone else, knows with certainty what the global economy has in store. Committing to a concentrated asset mix because of a particular view on equities would represent the very type of risk Mr. Skarbeck warns against.

Fortunately, risk parity has performed well in all environments – from low inflation, high growth periods where stocks might outperform to high-inflation periods where commodities and TIPS might do better. That’s the point of the strategy: seek healthy returns sufficient to fund the retirements of INPRS members while minimizing downside risk.

Bret T. Swanson
Trustee and Investment Committee Member
Indiana Public Retirement System (INPRS)

Thanks, Kitch

Congratulations to my friend Ryan Kitchell for a stellar run as Indiana OMB director. Ryan and his team, working under the nation’s best governor, Mitch Daniels, achieved seemingly miraculous results in a brutal economic environment. Thanks from Hoosier taxpayers for your smarts, persistence, and all the effort and overtime. Chris Ruhl and team will now carry on the torch.

See the Indy Star article or Ryan’s cameo in this Weekly Standard story.


The Real Deal

We Hoosiers are lucky:

Perhaps most appreciated was the governor’s overhaul of the Bureau of Motor Vehicles. It’s gone from one of the worst in the country—a place, he says, “where people would take a copy of ‘Crime and Punishment'”—to one of the best, with an “average visit time of seven minutes and 36 seconds.”

I had my own experience about four years ago, before the BMV was overhauled, where I made some seven trips to the license branch and various other government offices over a period of weeks just to renew my driver’s license.

But as Kim Strassel tells us in her interview with Mitch Daniels, this is only the very tip of the iceberg. In a state challenged by our reliance on the automobile industry in particular and manufacturing in general, instead of imploding like Michigan or profligate California, we had a governor whose common sense, hard work, business savvy, and courageous budgeting has left Indiana in a much better spot than many other states. Especially given our special old-economy obstacles.

The Man Who Killed IU Basketball…

…in a Wall Street Journal interview.

As usual, when he’s not making poor decisions, this guy, this NCAA president who doesn’t even like sports, is wishy washy —

“I go through my song and dance: We have no role to play.”

“It’s more complicated than people think.”

“we have no role to play”

Brilliant, Miles, great stuff.

End of an Airport

Tomorrow I’ll fly out of the brand new Indianapolis Int’l Airport on its opening day, November 12. For those who have visited the old airport here, it looks like a massive improvement, both practically and aesthetically.

Update: The airport was even more visually spectacular than I’d expected. But security was still slow. And our plane left late because their weren’t enough gates, which really confused the pilot: “A new $1.1 billion airport, and there aren’t enough gates in the first hour of operation?”