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July 23, 2010
SBOE approves new asset allocation
AUSTIN – The State Board of Education approved a new asset allocation for its $22.2 billion Permanent School Fund Friday that includes, for the first time, making about a $100 million available for charter school facilities and putting $1.5 billion in a risk parity strategy.
After extensive debate, the board voted 7-6 with two members absent, to approve the new asset allocation mix that sets aside 0.5 percent of the fund for charter school facilities. Members approved a proviso that said funds would not be spent on the charter facilities unless the board received a favorable opinion from the state’s attorney general or express legislative authority.
Board Chair Gail Lowe will seek an attorney general’s opinion to clarify whether the board can invest in charter facilities and maintain its constitutional duty to meet the “prudent person standard” with all investments.
Determining the asset allocation “is the most important decision we make for the fund,” Lowe said.
The board approved the following spending strategy.
2010 Asset Allocation Update | | |
|---|
Category | Current Policy | New Policy |
|---|
| Large Cap Equities | 24% | 21% |
| Small/Mid Cap Equities | 7% | 7% |
| International Large & Emerging Equity | 18% | 18% |
| International Small Cap Equities | 4% | 4% |
| Total Equity | 53% | 50% |
| Core Bonds | 19% | 15% |
| Total Fixed Income | 19% | 15% |
| Real Estate | 6% | 6% |
| Private Equity | 6% | 6% |
| Real Return | 6% | 5.5% |
| Absolute Return | 10% | 10% |
| Risk Parity | 0% | 7% |
| Charter School Allocation | 0% | 0.5% |
| Total Alternatives | 28% | 35% |
| Expected Return | 7.80% | 7.82 |
The asset allocation strategy sets spending targets for the Permanent School Fund, which is the state’s public school endowment fund. It is one of the largest education endowments in the country.
Along with overseeing the fund, the board also authorizes the creation of new charter schools. There are currently 210charters holders.
Because charter schools do not have local taxing authority, their funding is dependent on state and federal aid and grants. Many operate on extremely tight budgets, leaving them unable to purchase property. They are often located in strip shopping malls or churches. Because they lease the property, they move from location to location far more frequently than does a traditional school.
Some board members argued that by investing in property that could be leased or rented by by charter schools, the board can help this segment of the school community while earning a return on the fund’s investment.
Other board members argued that there were too many unanswered legal questions surrounding this issue and said it would not be prudent to invest in charter schools that are considered so high risk that they are unable to get traditional bank loans.
As with the other asset classes, the board would hire a consultant to handle charter school facility purchases or vote on each specific purchase.
Following the advice of its investment consultant NEPC, LLC., the board also added a risk parity strategy to its investment plan. Risk parity is a term for a variety of investment techniques that attempt to take equal risk in different asset classes.