The three public funds in New Mexico could be allowed to use derivatives if legislation to be jointly proposed by the USD10 billion New Mexico Public Employees Retirement Association and the USD7.2 billion New Mexico Educational Retirement Board is approved. These funds along with the New Mexico State Investment Council are governed by different investment parameters, but this legislation would create a level playing field and give them more freedom, such as the ability to invest in hedge funds and use derivatives. The next session of the state legislature starts Jan. 18 and lasts 60 days; investment legislation will be discussed during this time. If the proposed legislation is passed, all three funds would likely invest in new asset classes and search for managers.
New Mexico PERA and the Educational Retirement Board are only allowed to invest in publicly-traded securities. They have a list of authorized investments and cannot step outside that list, explained Margie Homko, investment officer for the educational board. The funds want to abolish the list and adopt the prudent investor principle, as set out in Employee Retirement Income Security Act, which all corporate plans and most public plans use as guidelines.
If the law is passed, New Mexico PERA and the Educational Retirement Board both intend to consider investing in real estate, private equity and hedge funds. The retirement board already invests in REITs, which are publicly traded, but would examine opportunities in direct real estate holdings, Homko said. If the law is changed, PERA will examine whether to also use an active currency manager, said CIO Robert Gish.
The New Mexico State Investment Council hopes new legislation will allow it to use derivatives, to protect against downside risk and to enable it to act quickly in the case of a sudden fall in the market. For instance, if the fund were able to use derivatives, should equity markets take a tumble the fund would be able to reduce its equity exposure synthetically, which would be cheaper than selling shares one by one. In addition, the ability to go short would allow the fund greater access to hedge funds, said Charles Wollmann, spokesman.