In order to generate strong returns and minimize risk, Rhode Island’s investments are spread across several different types of asset classes, a practice known as “diversification”.
Diversification allows the state to take advantage of a number of different investment styles without the risk of concentrating too much of the state’s funds in one type of asset class.
Different asset classes have different qualities. Some asset classes, including U.S. Equities and International Equities, are expected to produce strong returns over time but are also expected to have volatile performance during economic downturns. Other asset classes, for instance, fixed income and hedged equity, are expected to produce lower returns over time, but provide more stability during economic downturns.
Overall, Rhode Island invests a majority of its funds in asset classes that are expected to produce high returns, while still investing enough in lower-risk asset classes to protect the state’s position during economic downturns.
The State Investment Commission (SIC) adopts a Policy Allocation with targets for how the state’s funds should be invested across the various asset classes. Treasury investment staff has limited discretion to adjust the asset allocation of the portfolio in response to market conditions and to minimize the cost of rebalancing the portfolio.
The legacy asset allocation for the plan prior to the implementation of Back to Basics is available here