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<p class="wp-block-paragraph">At its <a href="https://copera.org/pera-on-the-issues/recap-of-pera-boards-september-planning-session-meeting-2/">September meeting</a>, the PERA Board of Trustees kicked off an important analysis of PERA’s investment portfolio and strategy. Known as an asset/liability study, the project will help Trustees determine whether changes are needed to PERA’s mix of investments.</p>



<h2 class="wp-block-heading">The importance of asset allocation</h2>



<p class="wp-block-paragraph">PERA’s strategic asset allocation—the mix of stocks, bonds, and other investments that make up the portfolio—is the most important factor that drives the fund’s investment performance. PERA needs to be able to pay monthly benefits to current and future retirees for decades to come, so it’s important we have a portfolio that supports that mission.</p>



<p class="wp-block-paragraph">Each category of assets serves a distinct purpose, with the result being a diversified portfolio that’s meant to withstand ups and downs in the market and produce returns over the course of decades. Read more about the role each asset class plays in our series, <a href="https://peraontheissues.com/asset-classes-explained-global-equity/" target="_blank" rel="noreferrer noopener">Asset Classes Explained</a>.</p>



<p class="wp-block-paragraph">The Board is responsible for determining the asset allocation, which staff then implement. The PERA Board typically conducts an asset/liability every four or five years and adopted PERA’s current asset allocation following the last study in 2019. That study resulted in the following targets:</p>



<figure class="wp-block-table"><table><tbody><tr><td><strong>Asset class</strong></td><td><strong>Long-term target</strong></td><td><strong>Permissible range</strong></td></tr><tr><td>Global Equity</td><td>54.0%</td><td>48% to 60%</td></tr><tr><td>Fixed Income</td><td>23.0%</td><td>18% to 28%</td></tr><tr><td>Private Equity</td><td>8.5%</td><td>4% to 13%</td></tr><tr><td>Real Estate</td><td>8.5%</td><td>4% to 13%</td></tr><tr><td>Alternatives</td><td>6.0%</td><td>0% to 12%</td></tr><tr><td>Cash</td><td>0.0%</td><td>0% to 3%</td></tr></tbody></table></figure>



<p class="wp-block-paragraph">The actual percentages in each asset class can vary based on market fluctuations, but must fall within the allowable range set by the Board. This ensures PERA’s portfolio is in line with the Board’s goals and strategy.</p>



<p class="wp-block-paragraph">Through the process of regular asset/liability studies, the Board has made incremental adjustments to PERA’s asset allocation over time to achieve an annualized return of 8.3% over the past 30 years.</p>



<h2 class="wp-block-heading">What is an asset/liability study?</h2>



<p class="wp-block-paragraph">Over the next several months, PERA’s investment consultants will work with staff and the Board to conduct the asset/liability study. It’s an in-depth analysis that looks at various factors, including:</p>



<ul class="wp-block-list">
<li><strong>The relationship between assets (investments) and liabilities (benefits owed):</strong> The study will involve modeling various scenarios over time to see how different investment decisions could impact the plan’s funding long-term. Are there any asset mixes that are more likely to help PERA reach its funding goals?</li>



<li><strong>The fund’s risk tolerance</strong>: How much risk can the fund take on appropriately? Should the portfolio include more potentially volatile investments like stocks, or more lower-risk investments like bonds? Increasing the amount of risk can bring the potential for higher returns while lowering risk can protect the fund from losses in down markets.</li>



<li><strong>Market conditions</strong>: Since PERA is a long-term investor, it’s important to look at what the future might hold. While the Board doesn’t have a crystal ball, it will work with experts to forecast market conditions for the various asset classes to understand the potential returns over the next several decades.</li>
</ul>



<p class="wp-block-paragraph">The study will help the Board determine if the current mix of investments is appropriate to help PERA reach its funding goals, or if changes are needed to adjust the level of risk in the portfolio. If the Board decides to make changes to the strategic asset allocation, staff will work to modify the portfolio accordingly.</p>



<p class="wp-block-paragraph">The Board expects to dive deeper into the details at its November meeting, with the possibility of finalizing the study as soon as the spring.</p>


Two people analyzing financial charts and graphs on paper, with a laptop displaying a stock market graph in the background.

Asset/Liability Study: A Guide to Building a Strategic Portfolio