Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

The PERA Board of Trustees has adopted new asset allocation targets following a year-long study into PERA’s investment portfolio and strategy.



The new allocation includes tweaks to several asset classes in an effort to reduce volatility in the portfolio while providing the potential for higher returns in the future.



<h4 class="wp-block-heading">Background</h4>



Every four or five years, the PERA Board conducts what is known as an asset/liability study to examine the PERA Defined Benefit Plan portfolio and ensure the mix of stocks, bonds, and other investments aligns with PERA’s funding goals. That process last took place in 2019, after which the Board adopted the current <a href="https://copera.org/asset-allocation">strategic asset allocation</a>.



The most recent asset/liability study began in September 2023, and over the past year, PERA’s investment staff have been working with the Board’s Defined Benefit investment consultant, Aon, to carry out the analysis. After examining various factors, such as the fund’s risk tolerance, market conditions, and projections for future returns, Aon presented its recommendations at the Board’s September meeting.



<h4 class="wp-block-heading">What’s changing</h4>



The new strategic asset allocation is expected to provide incrementally greater diversification in the portfolio by reducing the percentage allotted to Global Equity (i.e., stocks) and investing more in private asset classes such as Private Equity and Real Estate with the goal to slightly lower risk and add potential for higher returns over time for the entire investment portfolio.



The table below shows PERA’s current long-term target allocation and the new targets the Board adopted.



<figure class="wp-block-table"><table><thead><tr><th>Asset Class</th><th>Current Target</th><th>New Target</th></tr></thead><tbody><tr><td>Global Equity</td><td>54.0%</td><td>51.0%</td></tr><tr><td>Fixed Income</td><td>23.0%</td><td>23.0%</td></tr><tr><td>Private Equity</td><td>8.5%</td><td>10.0%</td></tr><tr><td>Real Estate</td><td>8.5%</td><td>10.0%</td></tr><tr><td>Alternatives</td><td>6.0%</td><td>6.0%</td></tr></tbody></table></figure>



Within the Alternatives asset class, the new policy increases allocations to real assets and private debt while reducing allocations to hedge funds and opportunistic investments.



By making these changes, the Board is aiming to strengthen PERA’s investment portfolio and ensure PERA remains on track to meet its goal of full funding.



“Asset allocation is the single largest driver of investment returns, and I appreciate the attention and care the Board has given to analyzing and updating our strategic asset allocation,” said Chief Investment Officer/Chief Operating Officer Amy C. McGarrity. “These new long-term targets are expected to help reduce risk in the portfolio and ensure we can continue to provide the lifetime retirement income that so many of Colorado’s public employees rely on.”



The Board also reaffirmed its long-term expected rate of return of 7.25%.



Asset Classes Explained:&nbsp;<a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-global-equity" target="_blank" rel="noreferrer noopener">Global Equity</a>&nbsp;|&nbsp;<a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-fixed-income" target="_blank" rel="noreferrer noopener">Fixed Income</a>&nbsp;|&nbsp;<a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-private-equity" target="_blank" rel="noreferrer noopener">Private Equity</a>&nbsp;|&nbsp;<a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-real-estate" target="_blank" rel="noreferrer noopener">Real Estate</a>&nbsp;|&nbsp;<a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Alternatives</a>



<h4 class="wp-block-heading">What’s next</h4>



With the Board’s adoption of a new strategic asset allocation, it’s up to PERA’s investment staff to begin the work of implementing the updated strategy. Aon expects the portfolio to reach its new long-term targets within two to three years.

PERA Board Adopts New Strategic Asset Allocation Following Study

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.



<h4 class="wp-block-heading">The importance of asset allocation</h4>



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.



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>.



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:



<figure class="wp-block-table"><table><tbody><tr><td>Asset class</td><td>Long-term target</td><td>Permissible range</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>



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.



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.



<h4 class="wp-block-heading">What is an asset/liability study?</h4>



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:



<ul>
<li>The relationship between assets (investments) and liabilities (benefits owed): 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>The fund’s risk tolerance: 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>Market conditions: 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>



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.



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.

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

Note: This article is part of a series highlighting each of PERA’s investment&nbsp;asset classes&nbsp;and how they contribute to a diversified portfolio that provides reliable income to Colorado’s retired public employees.



Asset Classes Explained: <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-global-equity" target="_blank" rel="noreferrer noopener">Global Equity</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-fixed-income" target="_blank" rel="noreferrer noopener">Fixed Income</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-private-equity" target="_blank" rel="noreferrer noopener">Private Equity</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-real-estate" target="_blank" rel="noreferrer noopener">Real Estate</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Alternatives</a>



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<a href="https://peraontheissues.com/asset-classes-explained-global-equity/" target="_blank" rel="noreferrer noopener">Global Equity</a>, <a href="https://peraontheissues.com/asset-classes-explained-fixed-income/" target="_blank" rel="noreferrer noopener">Fixed Income</a>, and <a href="https://peraontheissues.com/asset-classes-explained-real-estate/" target="_blank" rel="noreferrer noopener">Real Estate</a> make up the bulk of PERA’s investment portfolio, but some of the plan’s smaller investments can be the strongest performers.



PERA’s fourth-biggest asset class is Private Equity, which made up approximately 10% of the total fund as of Sept. 30, 2022. Private Equity is an important part of the portfolio because of its potential for larger returns compared to other asset classes.



<h4 class="wp-block-heading">What is Private Equity?</h4>



Whereas Public Equity consists of shares in companies that are traded on public stock exchanges, Private Equity involves companies that are not publicly traded. Some common Private Equity activities include:



<ul>
<li>Buyouts: Purchasing a company or a portion of a company with the aim of increasing its value and then selling at a profit.</li>



<li>Venture capital: Providing funding to a new business in exchange for a share in the company, with the potential of making money if the business is successful.</li>



<li>Growth capital: Providing funding to a mature business that needs money to expand.</li>
</ul>



Tim Moore, PERA’s Director of Private Equity, said PERA invests in Private Equity through limited partnerships or funds, rather than making those transactions directly.



“We are looking to partner with private equity and venture capital firms (general partners or sponsors) with whom we give varying degrees of discretion to invest on our behalf,” Moore said. “These sponsors typically have expertise in specific areas or industries like consumer products, technology, energy, healthcare and other broad sectors.”



PERA was an early investor in Private Equity, making its first investment in 1982. Since then, the Private Equity team has been able to develop relationships with many of the key investors and top-performing funds in the asset class.



“The Private Equity team has a long tenure here at PERA, averaging more than fifteen years with the organization,” Moore said.



<h4 class="wp-block-heading">Why invest in Private Equity?</h4>



The costs of participating in Private Equity are higher than for publicly traded assets, but the expectations for performance in the&nbsp;asset class&nbsp;are also higher. Over time,&nbsp;Private Equity has <a href="https://content.copera.org/asset-classes-explained-private-equity/"></a>outperformed the public markets and delivered higher returns to the PERA fund. That means more money in the trust funds that provide benefits to Colorado’s public employees.



Over the past 20 years, Private Equity has generated approximately $8.5 billion dollars after fees, which provides an important boost to PERA’s finances. Without that income, it would take an estimated 25-plus additional years or extra contributions from public workers and their employers for PERA to reach its funding goal.



<h4 class="wp-block-heading">Promoting transparency</h4>



Unlike Global Equity and Fixed Income, where the price of the investment is publicly known, much of the information on the underlying investments in Private Equity isn’t public. In fact, Colorado state law limits how much information PERA can disclose about its Private Equity investments.



Within the limits of the law, PERA posts a summary of its Private Equity investments online each year after they are audited, and staff provide more detailed information to the Board of Trustees. PERA was also an early supporter of the&nbsp;<a href="https://ilpa.org/" target="_blank" rel="noreferrer noopener">Institutional Limited Partner Association</a>&nbsp;(ILPA), an organization that aims to improve reporting and transparency within the Private Equity field.



<a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">Click here</a> for more information on PERA’s Private Equity holdings.



Like the other asset classes, the Private Equity team maintains a focus on achieving returns over the long term rather than seeking out short-term gains. The result is strong performance that helps ensure the sustainability of the fund.



“Private Equity is a small portion of PERA’s overall portfolio, but it’s an important one,” Moore said. “By seeking out investment opportunities that outperform compared to other asset classes, we can ensure PERA has sufficient cash flow to provide reliable benefits to all our members and retirees who rely on them.”



More information about PERA’s investments:



<ul>
<li><a href="https://www.copera.org/investment-stewardship" target="_blank" rel="noreferrer noopener">Colorado PERA Investment Stewardship Report</a></li>



<li><a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Statement of Investment Policy</a></li>



<li><a href="https://www.copera.org/asset-allocation" target="_blank" rel="noreferrer noopener">PERA Asset Allocation</a></li>



<li><a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">PERA Asset Classes</a></li>



<li><a href="https://www.copera.org/investment-faqs" target="_blank" rel="noreferrer noopener">PERA Investment FAQs</a></li>
</ul>

Asset Classes Explained: Private Equity

Note: This article is part of a series highlighting each of PERA’s investment&nbsp;asset classes&nbsp;and how they contribute to a diversified portfolio that provides reliable income to Colorado’s retired public employees.



Asset Classes Explained: <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-global-equity" target="_blank" rel="noreferrer noopener">Global Equity</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-fixed-income" target="_blank" rel="noreferrer noopener">Fixed Income</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-private-equity" target="_blank" rel="noreferrer noopener">Private Equity</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-real-estate" target="_blank" rel="noreferrer noopener">Real Estate</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Alternatives</a>



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Stocks and bonds—also known as <a href="https://peraontheissues.com/asset-classes-explained-global-equity/" target="_blank" rel="noreferrer noopener">Global Equity</a> and <a href="https://peraontheissues.com/asset-classes-explained-fixed-income/" target="_blank" rel="noreferrer noopener">Fixed Income</a>—make up about 70% of PERA’s investment portfolio, but the next biggest asset class is also an important one: Real Estate.



As of Sept. 30, 2022, Real Estate holdings accounted for about 12% of PERA’s Defined Benefit Plan assets. Those holdings include a wide variety of properties that provide steady income to help pay benefits for past, current, and future public employees in Colorado.



<h4 class="wp-block-heading">Why invest in Real Estate?</h4>



A key benefit of investing in Real Estate is the reliable income those investments can provide. PERA owns properties for which tenants pay rent, and that rental income is an important source of cash flow for the plan.



That reliable income also helps diversify PERA’s portfolio by reducing the risk of losses when other assets, like stocks, see a decline in value.



“Real Estate provides a low or negative correlation to Global Equity and Fixed Income,” said C.H. Meili, PERA’s Director of Real Estate. “That means when we see declines in the markets, Real Estate often holds steady or even performs better, providing some protection to the portfolio.”



<h4 class="wp-block-heading">PERA’s Real Estate holdings</h4>


<div class="wp-block-image">
<figure class="alignright size-large"><img decoding="async" loading="lazy" width="1024" height="690" src="https://content.copera.org/wp-content/uploads/2023/05/RE-property-types-June2022-1024x690.jpg" alt="" class="wp-image-44081" srcset="https://content.copera.org/wp-content/uploads/2023/05/RE-property-types-June2022-1024x690.jpg 1024w, https://content.copera.org/wp-content/uploads/2023/05/RE-property-types-June2022-300x202.jpg 300w, https://content.copera.org/wp-content/uploads/2023/05/RE-property-types-June2022-768x518.jpg 768w, https://content.copera.org/wp-content/uploads/2023/05/RE-property-types-June2022.jpg 1417w" sizes="(max-width: 1024px) 100vw, 1024px" /><figcaption class="wp-element-caption">PERA&#8217;s Real Estate holdings as of June 30, 2022.</figcaption></figure></div>


PERA was an early institutional investor in Real Estate, making its first investment in 1984. Since then, the plan’s investments have evolved and range from being a sole owner of a property to investing alongside other institutional investors in properties around the globe.



The vast majority of PERA’s Real Estate investments — 95% — are located in the United States, and they mainly consist of industrial, multifamily residential, office, and retail properties.



One of those investments, a large apartment complex in Dallas, Texas, has been part of the PERA portfolio for over 25 years, providing steady income and demonstrating how PERA’s Real Estate team generates value by being a long-term investor.



<blockquote class="wp-block-quote">
READ MORE: <a href="https://peraontheissues.com/long-term-gain-the-25-year-investment-that-continues-to-flourish/" target="_blank" rel="noreferrer noopener">Long-Term Gain: The 25-year investment that continues to flourish</a>
</blockquote>



In recent years, office investments have seen weaker performance with the rise of remote and hybrid work. Meili said PERA had made the decision years ago to gradually shift its portfolio toward more multifamily residential and industrial properties and fewer retail and office investments.



Office properties made up about 13% of PERA’s Real Estate portfolio as of June 30, 2022, and Meili said PERA remains focused on investing in properties that have the potential for growth over long periods of time.



“While office investment performance has weakened recently, PERA is a long-term investor, and that encompasses many market cycles with ups and downs throughout,” Meili said.



PERA’s Real Estate portfolio includes direct ownership and real estate funds with other investors. Direct ownership provides the real estate team the ability to maintain control over important decisions and effectively manage the investments to meet the needs of PERA members.



“We believe in a well-diversified property and market portfolio with high levels of income-oriented investments,” Meili said. “Our focus is to provide the best-possible risk-adjusted returns for the PERA members and retirees who rely on us, and every investment decision is made with that goal in mind.”



More information about PERA’s investments:



<ul>
<li><a href="https://www.copera.org/investment-stewardship" target="_blank" rel="noreferrer noopener">Colorado PERA Investment Stewardship Report</a></li>



<li><a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Statement of Investment Policy</a></li>



<li><a href="https://www.copera.org/asset-allocation" target="_blank" rel="noreferrer noopener">PERA Asset Allocation</a></li>



<li><a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">PERA Asset Classes</a></li>



<li><a href="https://www.copera.org/investment-faqs" target="_blank" rel="noreferrer noopener">PERA Investment FAQs</a></li>
</ul>

Asset Classes Explained: Real Estate

Note: This article is part of a series highlighting each of PERA’s investment&nbsp;asset classes&nbsp;and how they contribute to a diversified portfolio that provides reliable income to Colorado’s retired public employees.



Asset Classes Explained: <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-global-equity" target="_blank" rel="noreferrer noopener">Global Equity</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-fixed-income" target="_blank" rel="noreferrer noopener">Fixed Income</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-private-equity" target="_blank" rel="noreferrer noopener">Private Equity</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-real-estate" target="_blank" rel="noreferrer noopener">Real Estate</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Alternatives</a>



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Fixed Income is the second largest of PERA’s five <a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">asset classes</a>, representing 20% of the total fund as of Sept. 30, 2022.



This&nbsp;asset class&nbsp;plays a critical role in the overall&nbsp;asset allocation&nbsp;by diversifying PERA’s portfolio. Fixed Income can act as a stabilizing anchor during turbulent times in the stock market and a balance against more volatile&nbsp;asset classes&nbsp;like&nbsp;<a href="https://peraontheissues.com/asset-classes-explained-global-equity/" target="_blank" rel="noreferrer noopener">Global Equity</a>.



<h4 class="wp-block-heading">What is Fixed Income?</h4>



Fixed Income investments are various types of bonds. A bond is very much like a loan issued by a bank. The bond issuer receives money from a bond purchaser and agrees to repay the bond at a specified interest rate on a fixed schedule, hence the name:&nbsp;Fixed Income.



The benefit of this type of investment is its predictability compared to other investments like stocks. Bonds often provide lower returns than stocks, but they’re also less risky because the interest rate and the timing of repayment on a bond are generally known at the time of investment. Unless the borrower defaults and fails to make payments, the income will flow in on a set schedule. Bond investments represent an important source of income and cash flow for PERA.



Director of Fixed Income Keith Tayman said this stability helps protect PERA’s overall portfolio.



“Fixed Income provides downside protection, which means it helps reduce the risk of losing money when the stock market goes down,” Tayman said.&nbsp;“That’s because when other assets, like stocks, go down in value, bonds often go up. This reduces the overall risk of the fund.”



<h4 class="wp-block-heading">Types of bonds</h4>



Bonds come in various types. Some, like&nbsp;<a href="http://www.investopedia.com/terms/t/treasurybond.asp" target="_blank" rel="noreferrer noopener">U.S. Treasury bonds</a>, are backed by the full faith and credit of the U.S. Government. Bonds issued by corporations are backed by a repayment pledge, giving the bond holder a lien on the assets of the corporation. If the corporation defaults on the bonds, the bondholders have claims on the corporation’s assets ahead of its stockholders.



Other similar investments include&nbsp;<a href="http://www.investopedia.com/ask/answers/07/securitization.asp?lgl=myfinance-layout-no-ads" target="_blank" rel="noreferrer noopener">securitized loans</a>&nbsp;that have claims on pools of assets like mortgage loans, auto loans, credit cards, and bank loans. By pooling assets such as mortgages into securitized bundles, the loans spread the risk of defaults across a large number of smaller loans and become economical in size for pension funds and other institutional investors to buy.



PERA’s Fixed Income portfolio includes bonds issued by U.S. and foreign governments, government entities, and corporations. The overwhelming majority of those investments — nearly 92% as of Sept. 30, 2022 — are based in the United States. The bonds PERA owns are generally high quality, although PERA may have a modest exposure to emerging market and high-yield bonds.



<a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">Click here</a> for more information on PERA’s Fixed Income holdings.



<h4 class="wp-block-heading">Internal management of Fixed Income</h4>



PERA investment staff actively manage 100% of the Fixed Income portfolio in-house, and a big reason for that is the cost savings. PERA is able to achieve similar or better returns for about a third of the cost of outsourcing that management, according to Tayman.



“In addition, internal management of these assets allows us to quickly adjust in response to changing market conditions,” Tayman said.



After years of low interest rates, the Federal Reserve in 2022 began raising rates significantly in an effort to fight inflation. Those higher interest rates mean higher returns, or yields, for bonds. PERA’s Fixed Income team has been able to take advantage of higher yields in government-backed securities to generate more income, while reducing exposure to economically sensitive investments like corporate bonds.



“The Fixed Income team focuses on being good stewards of PERA’s assets,” Tayman said. “All of our investment actions are driven by the underlying philosophy of providing strong relative returns while ensuring the long-term safety and well-being of the assets entrusted to us.”



More information about PERA’s investments:



<ul>
<li><a href="https://www.copera.org/investment-stewardship" target="_blank" rel="noreferrer noopener">Colorado PERA Investment Stewardship Report</a></li>



<li><a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Statement of Investment Policy</a></li>



<li><a href="https://www.copera.org/asset-allocation" target="_blank" rel="noreferrer noopener">PERA Asset Allocation</a></li>



<li><a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">PERA Asset Classes</a></li>



<li><a href="https://www.copera.org/investment-faqs" target="_blank" rel="noreferrer noopener">PERA Investment FAQs</a></li>
</ul>

Asset Classes Explained: Fixed Income

Note: This is the first article in a series highlighting each of PERA’s investment asset classes and how they contribute to a diversified portfolio that provides reliable income to Colorado’s retired public employees.



Asset Classes Explained: <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-global-equity" target="_blank" rel="noreferrer noopener">Global Equity</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-fixed-income" target="_blank" rel="noreferrer noopener">Fixed Income</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-private-equity" target="_blank" rel="noreferrer noopener">Private Equity</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-real-estate" target="_blank" rel="noreferrer noopener">Real Estate</a> | <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Alternatives</a>



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Colorado PERA’s investment team, guided by the PERA Board of Trustees’ <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">investment policies</a> and <a href="https://www.copera.org/asset-allocation" target="_blank" rel="noreferrer noopener">strategic asset allocation</a>, invests plan assets with the primary goal of achieving the best risk-adjusted returns for members. The team pursues this goal through a well-diversified portfolio divided between five categories — or classes — of investments: Global Equity, Private Equity, Fixed Income, Real Estate, and Alternatives.



The largest single asset class is Global Equity, which makes up more than half of PERA’s total fund.



<h4 class="wp-block-heading">What is Global Equity? </h4>



The Global Equity asset class includes publicly traded stocks in companies based in the United States and abroad. It covers various sectors and industries, and encompasses companies of all sizes (large, medium, and small). Because Global Equity is such a large percentage of the portfolio, PERA’s Equities team has to manage a diverse group of stocks to limit the risk of any one holding, while earning the long-term financial reward for holding stocks.



PERA’s Global Equity portfolio includes shares in some of the biggest companies that conduct business around the world, such as Apple, Microsoft, and Amazon, as well as shares in smaller companies from various emerging economies. Global Equity is a primary driver of investment returns over the long term, in addition to providing liquidity to the portfolio.



<a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">Click here</a> for more information on PERA’s Global Equity holdings.



<h4 class="wp-block-heading">Internal vs. external management</h4>



Decisions about what to include in PERA’s equities portfolio fall to two groups: Internal managers (PERA staff) and external managers. PERA has a strong preference for internal management, with approximately 75% of its Global Equity holdings being managed by in-house investment professionals.



The Equities Division has 15 people working on the asset class . They have all earned the right to use the Chartered Financial Analyst (CFA) designation, and eight of the 15 also have advanced degrees. The average investment experience of the team members is 18 years, making this a very experienced group of portfolio managers, analysts, and traders.



Jim Liptak, Director of Equities at PERA, said there are many benefits to managing the majority of assets internally, the biggest of which is the cost savings.



“We are fortunate at PERA to have the scale, resources, and skill to internally manage equities just as well — if not better — and at a much lower cost, than most external equity managers,” Liptak said.



By relying on internal equity asset management, PERA saves tens of millions of dollars in external manager fees every year.



That being said, external managers serve an important role. They offer unique perspectives and often use different strategies than what’s used in PERA’s internal portfolio management process, thus offering the opportunity to diversify the return to the overall asset class .



<h4 class="wp-block-heading">Active vs. passive management</h4>



The benchmark PERA uses for its Global Equity asset class is an index called the <a href="https://www.msci.com/documents/10199/42f6c769-59ec-4847-a334-24b549b72d9b" target="_blank" rel="noreferrer noopener">MSCI ACWI IMI with USA Gross</a>. It is a commonly used benchmark for institutional investors like PERA and is designed to capture 99 percent of the global equity market.



The Equities team achieves its diversified investment portfolio by using a combination of active and passive management strategies. On the active management side (about 68% of Global Equity assets), the investment professionals on the Equities team assess, buy, and sell stocks in an effort to exceed benchmark returns. With the passively managed portion of the portfolio, the team selects investments that mimic the index, with the goal of achieving similar returns.



The Equities team utilizes all the tools at its disposal to form a low-cost and well-diversified portfolio of stocks that outperforms the benchmark on a risk-adjusted basis over long time periods. That kind of performance helps ensure PERA can continue providing retirement and other benefits to Colorado’s public employees.



“Being good stewards of PERA members’ assets is the primary focus of the Equities team,” Liptak said. “Our long-term, high-quality investing philosophy, combined with an emphasis on cost and risk, reflect this focus and are appropriate for a long-term equity investor like PERA.”



More information about PERA’s investments:



<ul>
<li><a href="https://www.copera.org/investment-stewardship" target="_blank" rel="noreferrer noopener">Colorado PERA Investment Stewardship Report</a></li>



<li><a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-alternatives" target="_blank" rel="noreferrer noopener">Statement of Investment Policy</a></li>



<li><a href="https://www.copera.org/asset-allocation" target="_blank" rel="noreferrer noopener">PERA Asset Allocation</a></li>



<li><a href="https://www.copera.org/asset-classes" target="_blank" rel="noreferrer noopener">PERA Asset Classes</a></li>



<li><a href="https://www.copera.org/investment-faqs" target="_blank" rel="noreferrer noopener">PERA Investment FAQs</a></li>
</ul>



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Asset Classes Explained: Global Equity

Asset allocation is the primary determinant
of any portfolio’s risk, or volatility, and return potential, including PERA’s.
&nbsp;Asset allocation simply refers to the
portion of PERA’s total portfolio that is invested in the five <a href="https://www.copera.org/2018-markets-year-in-review" class="broken_link">asset classes</a>. The PERA Board
of Trustees regularly revisits <a href="https://www.copera.org/investments">the strategic asset allocation</a>
to determine whether the fund needs to be differently proportioned. A critical
part of that work is called an Asset/Liability Study, which evaluates the
relationship of the plan’s assets and liabilities, as well as the plan’s risk
tolerance. 



The Board’s investment consultants, Aon,
began the latest Asset/Liability Study in late 2018 and recently provided its findings
at the <a href="https://www.copera.org/board-directed-asset-liability-study-informs-peras-investment-strategy" class="broken_link">Board Planning Session</a> earlier
in September.



The key objective of the Asset/Liability
Study is to identify the appropriate risk posture for the portfolio in the
context of the liabilities of the portfolio, or the right level of risk for the
overall portfolio of assets. Making this determination requires three key
decisions: the overall mix between return-seeking and risk-reducing assets; the
composition of the return-seeking portfolio; and the composition of the
risk-reducing portfolio.



The Board is expected to use the results of
the Asset/Liability Study, the timing of projected cash outflows, and overall
risk tolerance of the fund in order to determine a strategic asset allocation
later this fall.



[PERA’s current asset allocation policy can
be seen <a href="https://www.copera.org/investments#assets">here</a>.]



Reevaluating its strategic asset allocation
every three to five years, as PERA does, is a best practice for institutional
investors and a cornerstone of prudent governance of a pension plan. The
updated asset allocation policy will provide guidance on the most appropriate
mix of assets to be held in the PERA Trust Funds in order to meet the future
financial needs of the plan for the sole benefit of its members and retirees. 



Also included in the Asset/Liability Study is
information about key assumptions and possible alternative portfolio
compositions:



<ul><li>Long-term
capital market expectations for a variety of
asset classes are used to model different asset allocations based on Aon’s
expectations. Since PERA is a long-term investor, it relies on long-term
assumptions about how the capital markets will perform and economic
environments will shift. </li><li>Risk
and performance expectations with different asset allocations. Aon’s
analysis looked at a range of combinations of different asset classes in a
variety of weights, including global equity, fixed income, private equity, real
estate, private debt as well as asset mixes designed to mitigate risk. Aon
generally favors careful diversification into a broad set of asset classes with
attractive risk and return properties to improve portfolio efficiency, and its
specific analysis for PERA has been customized to reflect PERA’s particular
needs and circumstances.</li></ul>



Additional information from the presentation
of Aon to the Board at its September Planning Session can be found <a href="https://content.copera.org/board-directed-asset-liability-study-informs-peras-investment-strategy/">here</a>.



As the Board continues the process of
refining the analysis of the Asset/Liability Study and developing its updated
strategic asset allocation, PERA on the Issues will continue to provide new
information on the Board’s conclusions.

Board-Directed Asset/Liability Study Informs PERA’s Investment Strategy

New video series answers your questions about PERA’s investment program.



How are investment performance goals set? How does PERA determine benchmarks for non-publicly traded assets like private equity and real estate? How have PERA’s investments performed over the long-term?



Questions like these are addressed in the newest edition of
the PERA “We Hear You” videos. These videos feature interviews with PERA’s
Chief Investment Officer as well as members of the investment staff answering
questions from PERA members. 



The video program is designed to complement the <a href="https://www.copera.org/investments">extensive
information</a> about these practices – everything from asset allocation
to performance metrics – available on PERA’s website and included in the Comprehensive Annual Financial Report. 



The <a href="https://www.youtube.com/watch?v=kXvik9vXMHA">PERA’s Investment Benchmarks</a> video covers how the PERA investment team works with the PERA Board of Trustees to establish performance targets and reviews the long-term goals of the investment program. Watch it below, on the <a href="https://www.copera.org/pera-on-the-issues/we-hear-you-peras-investment-program-2">copera.org website</a>, or on <a href="https://www.youtube.com/user/ColoradoPERA">PERA’s YouTube channel</a>.



Have a question? Please <a href="mailto:askpera@copera.org">keep them coming using this link</a>; future
videos will be based on your questions and will include information about the
work we do for you.



<a href="https://www.youtube.com/watch?v=kXvik9vXMHA">We&nbsp;Hear&nbsp;You&nbsp;Video: PERA&#8217;s&nbsp;Investment&nbsp;Benchmarks</a>



Additional resources:



<a href="https://www.copera.org/we-hear-you-peras-investment-benchmarks-2" class="broken_link">What Is a Policy Benchmark?</a>



<a href="https://content.copera.org/we-hear-you-peras-investment-benchmarks-2/">WeHear You: PERA’s Investment Program Overview</a>

We Hear You: PERA’s Investment Benchmarks

New video series answers your questions about PERA&#8217;s investment program.



What investments are included in PERA’s portfolio? How does PERA
staff make those decisions? How does PERA manage the risk that comes with any
kind of investment? 



Questions like these are addressed in a new series of videos recently released by PERA. The genesis of the series started with frequently asked questions from PERA members and stakeholders. Titled the “We Hear You” series, the video collection features interviews with PERA’s Chief Investment Officer as well as members of the investment staff answering questions from actual members. The purpose of the series is to broaden awareness of PERA’s investment program, guiding practices and the goals it seeks to achieve on behalf of the membership. 



The video program is designed to complement the <a href="https://www.copera.org/investments">extensive
information</a> about these practices – everything from asset allocation
to performance metrics – available on PERA’s website and included in the Comprehensive Annual Financial Report. 



The first video in this series covers the ABCs of PERA’s Investment Program. You can watch it below, on the <a href="https://www.copera.org/pera-on-the-issues/we-hear-you-peras-investment-program-2">copera.org website</a>, or on <a href="https://www.youtube.com/user/ColoradoPERA">PERA’s YouTube channel</a>. Have a question? Please <a href="mailto:askpera@copera.org">keep them coming using this link</a>; future videos will be based on your questions and will include information about the important work done at PERA to serve its members.



<a href="https://youtu.be/b_72wXvXFmg">We Hear You Video: PERA&#8217;s Investment Program</a>

We Hear You: PERA’s Investment Program

In general, benchmarks are used in many areas and according to definition, benchmarks are “<a href="https://www.merriam-webster.com/dictionary/benchmark" target="_blank" rel="noreferrer noopener">something that serves as a standard by which others may be measured or judged</a>.” With regard to investing, individuals are probably familiar with benchmarks like the <a href="http://www.investopedia.com/terms/r/russell_1000index.asp" target="_blank" rel="noreferrer noopener">Russell 1000</a> or the <a href="http://www.investopedia.com/terms/s/sp500.asp" target="_blank" rel="noreferrer noopener">S&amp;P 500</a>. However these common benchmarks are insufficient for most institutional investors, like PERA, that have complex investment portfolios containing assets not available to individual investors in the retail market. Because portfolios like PERA’s have non-publicly traded assets like real estate and private equity, a custom benchmark is required to measure overall investment performance. This is what’s known as a policy benchmark. The policy benchmark provides a point of comparison when assessing the investment performance of the total fund. PERA’s Board of Trustees compares the policy benchmark return to the fund total return to determine how the PERA investment team performed on a comparative basis over a given time period.



Since 2004, the Board, upon the recommendation of their investment consultant, has adopted a policy benchmark to represent their <a href="https://www.copera.org/a-brief-look-at-peras-opportunity-fund" target="_blank" rel="noreferrer noopener" class="broken_link">asset allocation</a> decisions. In addition to offering a reference point, the policy benchmark allows the Board to express its investment goals in concrete terms, providing guidance for staff as well as other stakeholders of the fund. The policy benchmark also establishes the Board’s long-term view regarding investments, which puts into perspective any reaction, or over-reaction, to short-term market conditions.



The Board determines the <a href="https://www.copera.org/2018-markets-year-in-review" target="_blank" rel="noreferrer noopener" class="broken_link">asset allocation</a> for PERA, which means that the Board broadly defines how the $44 billion in the fund will be invested by asset class. The Board’s <a href="https://www.copera.org/good-governance-is-standard-practice-for-colorado-pera" target="_blank" rel="noreferrer noopener" class="broken_link">Statement of Investment Policy</a> guides this effort. This strategic asset allocation is believed to be the most important factor influencing long-term investment performance and asset volatility. As of December 31, 2016, the PERA policy benchmark is a combination of the benchmarks for 53.5 percent <a href="https://www.copera.org/asset-class-depth-fixed-income" target="_blank" rel="noreferrer noopener" class="broken_link">Global Equity</a>; 23.5 percent <a href="https://content.copera.org/policy-benchmark/" target="_blank" rel="noreferrer noopener">Fixed Income</a>; 8.5 percent Private Equity; 8.5 percent Real Estate; 5.0 percent <a href="https://www.copera.org/asset-class-in-depth-real-estate" target="_blank" rel="noreferrer noopener" class="broken_link">Opportunity Fund</a>; and 1.0 percent Cash. (For more information, see the Schedule of Investment Results on page 125 and the Fund Performance Evaluation on pages 127–128 of the <a href="https://www.copera.org/comparing-apples-apples-rates-return-can-seemingly-vary-one-state-another" target="_blank" rel="noreferrer noopener" class="broken_link">Colorado PERA Comprehensive Annual Financial Report</a>.)



Since the adoption of the policy benchmark in 2004, the fund has outperformed this measure, adding millions of dollars to the assets invested on behalf of the PERA membership.



Many public pension funds recently released investment results, having ended their fiscal years on June 30. Colorado PERA’s reporting year ends on December 31, so PERA’s returns cannot be compared to the return of funds that have June fiscal reporting periods. (See this PERA on the Issues post from August 16, “<a href="https://www.copera.org/policy-benchmark" target="_blank" rel="noreferrer noopener" class="broken_link">Comparing Apples to Apples: How Rates of Return Can Seemingly Vary from One State to Another</a>” for details.)

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