One of the most important jobs the State of Wisconsin Investment Board has in managing the Wisconsin Retirement System is determining how the trust funds will be invested. Striking an appropriate balance between the risk taken and returns generated is crucial in helping keep the WRS among the only fully funded public pension systems in the country.

In October investment staff and SWIB’s asset allocation consultant presented the results of SWIB’s annual asset allocation review. The review included an in-depth look at the current market and economic environment and themes, as well as developing trends that might impact SWIB’s investment decisions in the future. This year, in addition to the annual asset allocation review, SWIB incorporated results of a stress test of the WRS. Every two years, SWIB conducts robust stress testing of the system to evaluate and strengthen its investment strategy. Since 2013, SWIB has worked with the WRS’s independent actuary to conduct the stress testing ― not to calculate exact predictions, but to understand the range of potential impacts on the WRS of various market scenarios, including severely unfavorable markets. SWIB tests multiple scenarios with different asset mixes over long periods of time. The goal is to implement an asset allocation that fits in the “Goldilocks Zone”. This is an allocation that is neither “too hot” nor “too cold,” in terms of risk taken and expected returns.

"Asset Allocation Targets: 2020 vs. 2021

*Asset Allocation Target totals exceed 115% due to SWIB's overall leverage of Core Fund assets

Approximately one-half of the Core Trust Fund will remain invested in public equities. The remainder of this fund is diversified among fixed income, real estate, private equity, and inflation sensitive assets. The asset allocation review resulted in the recommendations that were approved by the Board of Trustees at its December meeting.  

“This is a robust, diversified asset allocation that can help us weather changes in market conditions without having to predict precisely when those changes will occur,” SWIB Executive Director/Chief Investment Officer Edwin Denson said. “We have allocated our capital to areas where we feel the most confident we can generate reasonable returns based on the risk we are taking.”

Within the public equities and public fixed income asset classes, the 2022 asset allocation is tilting toward sub-asset classes with more active return potential in order to increase the probability of maintaining the WRS’s fully funded status over the long-term.  Denson said the asset allocation allows SWIB to take full advantage of the skill and knowledge of staff.

“The confidence we have in the allocation comes, in part, because of the highly qualified staff we have managing risk and generating the necessary returns through active management,” he said.

Denson added that having the right asset allocation and staff in place is especially important, given the design of the WRS.

“The unique shared risk/reward design means investment returns directly impact annuity adjustments for retirees and contribution rates for employees and employers,” he said. “The struggle is finding the right balance between taking enough risk to make sure the WRS is providing the benefits promised to its participants while avoiding taking too much risk that could cause volatile swings in annuity adjustments and contribution rates. We believe that we have an asset allocation mix that gets that balance right.”

There were no recommended asset allocation target changes for the Variable Trust Fund, which is required by Wisconsin law to only invest in equities. The Variable Fund is invested in 70% domestic and 30% international public equities.

More information about SWIB’s investment guidelines can be found at www.swib.state.wi.us/statutes-guidelines. Stress testing results can be found at www.swib.state.wi.us/stresstesting.