FROM: Don Pierce, Chief Investment Officer
SUBJECT: PGIM Fixed Income Termination
RECOMMENDATION:
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Recommend that the Board approve the termination of the investment in PGIM Fixed Income’s Emerging Markets Debt Opportunities Fund.
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BACKGROUND:
Staff recommends that the Board formally terminate SBCERA’s investment in the Emerging Market Debt Opportunities Fund run by PGIM Fixed Income. SBCERA initially invested in 2014 with a $50 million allocation; an additional subscription of $30 million was made in 2015. As of March, the account value was about $122 million. For the ten-year period ending March 31,2025, the fund returned 4.3% net of fees, which is 200 bps above its benchmark: 50% JPM EMBI Global Diversified/ 50% JPM GBI-EM Global Diversified. Performance this fiscal year has been stronger with a net return of 6.9% as of March 31 vs. its benchmark of 6.1%.
Notwithstanding the recent performance improvement, staff lacks confidence in the strategy. While PGIM and the portfolio management team have executed well, staff does not have believe that this allocation will contribute to SBCERA’s overall portfolio objectives. We continue to observe high yield potential in emerging markets debt investments; however, this has not translated through to returns in this strategy - most notably due to currency headwinds.
Investment staff believes that SBCERA’s capital would be more effectively deployed in other strategies. Proceeds from this termination will be allocated across the portfolio in accordance with the Board’s asset allocation targets. Pro forma for this termination, Emerging Market Debt will make up about 4% of plan assets, below the 6% asset allocation target and within the 1-10% range. Emerging Market Debt is a component of the Global Fixed Income allocation with a board established target of 17% of plan assets. The portfolio is currently overweight to Global Fixed Income based on the Informed Rebalancing targets - current target is 20.6%. We expect to bring recommendations to the Investment Committee and Board in the coming months to allocate a portion of Global Fixed Income to European Debt managers.
BUDGET IMPACT:
None.
STRATEGIC PLANNING GOAL/OBJECTIVE:
Prudent Fiscal Management
STAFF CONTACT:
Jacob Abbott
ATTACHMENTS:
None.