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.

Note: This article is part of 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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As an institutional investor, Colorado PERA invests in all the major investment asset classes you may be familiar with: <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>, <a href="https://peraontheissues.com/asset-classes-explained-real-estate/" target="_blank" rel="noreferrer noopener">Real Estate</a>, and <a href="https://peraontheissues.com/asset-classes-explained-private-equity/" target="_blank" rel="noreferrer noopener">Private Equity</a>.



But what about opportunities that don’t fit neatly into one of those boxes?



That’s where Alternatives come in. As of September 30, 2022, Alternatives made up about 6% of PERA’s total portfolio.



<h4 class="wp-block-heading">What are Alternatives?</h4>



Simply put, Alternatives are investments that fall outside the other asset classes. They can be funds that include multiple types of assets, or a different type of investment entirely. Alternatives can involve new and innovative investment opportunities, complex or difficult strategies, or owning actual property.



PERA’s Alternatives team categorizes its investments into three groups based on the strategy underlying each type of asset:



<ul>
<li>Opportunistic: This strategy can include acquiring corporate debt of public and private companies, direct loans to private companies, and other types of transactions where the underlying assets are trading at discounted prices.</li>



<li>Real assets: Similarly to <a href="https://peraontheissues.com/asset-classes-explained-real-estate/" target="_blank" rel="noreferrer noopener">Real Estate</a>, this strategy focuses on “hard” assets that provide stable income over time. That can include timberland, farming operations, infrastructure projects like wind and solar energy, and even intellectual property like music royalties from radio stations and streaming services.</li>



<li>Risk mitigation: This group of investments includes various types of hedge funds, which can provide “downside” protection — in other words, they help limit the portfolio’s losses in down markets.</li>
</ul>



Gary Ratliff, Director of Alternatives at Colorado PERA, said PERA was an early adopter of these types of investment strategies.



“Back in 2008, The PERA Board of Trustees had the foresight to create an opportunistic asset class, which could take advantage of opportunities in hybrid investments which did not fit neatly into a single asset class or new investment funds which were designed as multi-asset class products,&#8221; Ratliff said. &#8220;Today, many of our peer institutions have followed suit.”



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



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



PERA maintains a well-diversified portfolio with a focus on long-term financial sustainability. That diversity is key, as it reduces the risk that any one investment or group of investments will threaten the stability of the overall fund.



While Alternatives can be complex and carry higher costs than more traditional investment types, they also provide better risk-adjusted returns and reliable income.



“In simple terms, a soundly constructed portfolio of Alternative investments can help PERA save money in a down market because the investments don’t experience the same kind of volatility as other assets like stocks,” Ratliff said. “That strategy helps ensure we can continue to provide reliable lifetime income to Colorado’s public employees.”



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: Alternatives

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>



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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>



<a id="_msocom_1"></a>

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

Colorado PERA’s asset management focuses on maximizing risk-adjusted investment performance from the broad universe of investable assets. All PERA investment decisions are governed by a Board-adopted investment philosophy and set of beliefs, including the Real Estate asset class. (See PERA’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> for details.)



PERA separates its Investment Department by specific asset classes: Equities, Fixed Income, Private Equity, Opportunity Fund, and Real Estate (additional information on asset allocation can be found in a prior PERA on the Issues post, <a href="https://www.copera.org/a-brief-look-at-peras-opportunity-fund" target="_blank" rel="noreferrer noopener" class="broken_link">“Asset Liability Study Plots Course for Future”</a>).



The Real Estate program’s objective is to generate diversified investment returns as well as to provide a steady stream of income in the form of rents to assist in the cash-flow needs PERA has when paying monthly retirement benefits.



Currently, the Board’s strategic target to Real Estate is 8.5 percent, with a range of 5 – 12 percent. Assets at the end of 2017 totaled $4.2 billion (8.6 percent) of the entire $49 billion portfolio.



PERA was an early institutional investor in Real Estate. The first Real Estate investment PERA made was made in 1984. Over the last 30 years, PERA’s investments in Real Estate have evolved and range from being a sole owner of a property to investing alongside other institutional investors in properties around the globe.



The Real Estate asset class, while offering diversification for the entire investment portfolio, is broadly diversified by property type as well as geographic location. Property types broadly include industrial, multifamily, office, and retail. PERA has Real Estate investments around the world in countries diverse as Australia, India, and China. PERA’s Real Estate investments are 97.4 percent domestic and 2.6 percent outside of the U.S.



Unlike public equities (stocks) and fixed income (bonds) where the price of the investment is publicly known, PERA’s Real Estate portfolio investments are not traded on a public exchange. The PERA Real Estate portfolio’s investments are appraised annually and independently audited before being included in the total return information published in the <a href="https://content.copera.org/good-governance-is-standard-practice-for-colorado-pera/" target="_blank" rel="noreferrer noopener">Comprehensive Annual Financial Report.</a>



The PERA Board receives information on each Real Estate fund investment made and has the ability to access property-level information as desired. This information, while not publicly available, allows Trustees to have detailed information on the holdings within the portfolio. Fund disclosures made to the Board by staff include a fund overview, investment strategy, a summary of key investment personnel, historical investment performance, and fees. In addition, Trustees may request additional information, as available.



For more information on the PERA investment program see these PERA on the Issues posts:



<a href="https://content.copera.org/how-does-pera-measure-up/" target="_blank" rel="noreferrer noopener">What is a Policy Benchmark?</a>



<a href="https://content.copera.org/pera-board-meeting-notes-setting-peras-portfolio-mix/" target="_blank" rel="noreferrer noopener">Asset Class In-Depth: Private Equity</a>



<a href="https://content.copera.org/asset-class-in-depth-real-estate/" target="_blank" rel="noreferrer noopener">Asset Class In-Depth: Fixed Income</a>



<a href="https://www.copera.org/asset-class-depth-fixed-income" target="_blank" rel="noreferrer noopener" class="broken_link">Asset Class In-Depth: Equities</a>



<a href="https://www.copera.org/asset-class-in-depth-real-estate" target="_blank" rel="noreferrer noopener" class="broken_link">A Brief Look at PERA’s Opportunity Fund</a>

Asset Class In-Depth: Real Estate

Colorado PERA’s asset management focuses on maximizing risk-adjusted investment performance from the broad universe of investable assets. All PERA investment decisions are governed by a Board-adopted investment philosophy and set of beliefs, including the Private Equity asset class. (See PERA’s <a href="https://www.copera.org/good-governance-is-standard-practice-for-colorado-pera" class="broken_link">Statement of Investment Policy</a> for details.)



PERA differentiates its Investment Department by specific asset classes: Equities, Fixed Income, Private Equity, Opportunity Fund, and Real Estate (additional information on asset allocation can be found in a prior PERA on the Issues post, <a href="https://www.copera.org/a-brief-look-at-peras-opportunity-fund" class="broken_link">“Asset Liability Study Plots Course for Future”</a>).



The private equity program’s objective is to generate investment returns in excess of the publicly traded markets as well as to deliver investment returns that rank highly against the private market opportunity set. Currently, the Board’s target allocation range to private equity is between 5 and 12 percent, with assets at the end of 2016 at 8.4 percent ($3.7 billion) of the total $44 billion portfolio.



PERA was an early institutional investor in privately held (non-publicly traded) companies. The first private equity investment (formerly called Alternative Investments) PERA made was in 1982. Over the last 30 years, PERA has been able to develop relationships with the key investors and top-performing funds in the private equity space. Since inception, the private equity asset class has had an annualized net internal rate of return (IRR) of 10.4 percent as of December 31, 2016.



<blockquote class="wp-block-quote">
For a quick look at PERA&#8217;s private equity performance by the numbers, <a href="https://peraontheissues.com/wp-content/uploads/2018/05/PERA-Investment-Fees-Fact-Sheet.pdf" target="_blank" rel="noreferrer noopener">click here</a>.
</blockquote>



Unlike public equities (stocks) and fixed income (bonds) where the price of the investment is publicly known, private equities are not traded on a public exchange. In addition, much of the information on the underlying investments is generally not publicly disseminated. In fact Colorado state law limits the amount of information on PERA’s private equity investments that can be disclosed. In order to promote transparency in PERA’s private equity investments within the limits of the law, PERA posts a <a href="https://www.copera.org/we-hear-you-pera-and-private-equity-2" class="broken_link">summary of private equity investments</a> after these investments are audited each year.



The challenge for investors like PERA is balancing public access to private information with the need to be good stewards on behalf of the PERA membership, all the while upholding contractual obligations that allow PERA to maintain constructive relationships with investment partners. PERA uses a two-tiered approach, providing a summary of the investments in the portfolio on an annual basis which is available to the public (see above), in addition to providing more detailed information to the PERA Board to assist in their oversight of the program. The PERA Board receives information on each private equity investment made. This information, while not publicly available, allows Trustees to have detailed information on private equity investments. Disclosures made to the Board by staff include a fund overview, investment strategy, a summary of key investment personnel, historical investment performance, and fees. In addition, Trustees may request additional information, as available.



As the private equity investment asset class has evolved, so has PERA’s approach. PERA investment staff recognized that the asset class broadly was growing and that more investors (and their assets) were being attracted to the asset class due to its higher expected returns. With the growth of the private equity asset class, it became increasingly clear that standardized, detailed data on partnership terms would be helpful to review on an ongoing basis. To that end, PERA was an early supporter of the <a href="https://ilpa.org/">Institutional Limited Partner Association</a> (ILPA), an organization created “to enhance and improve investor reporting and transparency.”



Working with other institutional investors, members of the private equity community, and through active participation in the ILPA, PERA has promoted increased disclosures and transparency of private equity investments. Careful consideration of the value to access private equity investment opportunities, as well as being prudent stewards of retirement assets, is balanced by PERA’s two-tiered approach to disclosing private equity investment information to the Board and public.



For more information on the PERA investment program see these PERA on the Issues posts:



<a href="https://content.copera.org/how-does-pera-measure-up/">What is a Policy Benchmark?</a>



<a href="https://content.copera.org/how-does-pera-measure-up/">Asset Class In-Depth: Fixed Income</a>



<a href="https://www.copera.org/asset-class-depth-fixed-income" class="broken_link">Asset Class In-Depth: Equities</a>



<a href="https://www.copera.org/asset-class-in-depth-real-estate" class="broken_link">A Brief Look at PERA’s Opportunity Fund</a>

Asset class in-depth: private equity

Fixed Income is one of <a href="https://www.copera.org/2018-markets-year-in-review" target="_blank" rel="noreferrer noopener" class="broken_link">five broad asset classes</a> in PERA’s investment portfolio and represents about a quarter of PERA’s $45 billion portfolio. This asset class plays a critical role in the overall asset allocation by serving adding diversification to PERA’s portfolio, acting as a stabilizing anchor during turbulent times in the stock market and a balance against other asset classes like <a href="https://www.copera.org/asset-class-depth-fixed-income" target="_blank" rel="noreferrer noopener" class="broken_link">equities</a>. The investment returns from fixed income have been favorable historically and help meet PERA’s investment objectives.



What is Fixed Income?



Fixed Income investments are various types of bonds. A bond is very much like a loan issued by a bank. A 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: fixed income. The benefit of this type of investment to a bond purchaser, or investor, is that the rate of return and the timing of repayment 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. This certainty is offset by the fact that the issuer is not obligated to pay back any more than the amount specified in the bond.



Types of bonds



Bonds come in various types. Some, like <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 <a href="http://www.investopedia.com/ask/answers/07/securitization.asp?lgl=myfinance-layout-no-ads" target="_blank" rel="noreferrer noopener">securitized loans</a> 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.



Quality of bonds



Bonds also come in various credit qualities and their <a href="http://www.investopedia.com/terms/y/yield.asp" target="_blank" rel="noreferrer noopener">yield</a> is proportional to their risk. U.S. Treasury bonds are considered the highest quality and are most likely to be repaid on a full and timely basis. These bonds are rated AAA by <a href="https://www.copera.org/asset-class-depth-fixed-income" target="_blank" rel="noreferrer noopener" class="broken_link">credit rating agencies</a>. Securitized mortgage-backed securities are also generally rated AAA. AAA bonds have the lowest risk and offer lower yields. The lower the rating in credit quality, the more bonds tend to compensate investors for taking higher credit risk with higher yields. Corporate bonds cover the full rating spectrum. Investment-grade corporate bonds are rated between AAA and BBB. High-yield corporate bonds, or what some refer to as junk bonds, go from BB to C.



Term of bonds



Bonds are also issued for various terms or maturities. Longer term bonds typically have a higher yield because the investment is tied up for a longer period of time. Just like all of the other asset classes, bonds have unique characteristics that affect the value of the investment. The PERA Fixed Income team takes into consideration these characteristics when managing the investment portfolio.



Investment benchmarks



PERA’s fixed income portfolio is benchmarked against the <a href="https://www.bloombergindices.com/bloomberg-barclays-indices/#/" target="_blank" rel="noreferrer noopener" class="broken_link">Bloomberg Barclays U.S. Universal Bond Index</a>. This is a broad-based index including a representative sample of the universe of investment-grade, high-yield, and emerging market bonds issued in the United States. The index is weighted by capitalization, meaning that each bond is weighted relative to its size. The benchmark provides a baseline for comparing PERA’s investment performance against the investable fixed-income universe.



Portfolio allocation



The size of PERA’s Fixed Income allocation in the investment portfolio is guided by PERA’s Board of Trustees with advice from their independent investment consultant and PERA staff. This is set forth in 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>. Currently, the Fixed Income allocation target is 23.5 percent of the total portfolio with a range between 18 percent and 28 percent of total assets. According to a recent <a href="http://www.nasra.org/publicfundsurvey" target="_blank" rel="noreferrer noopener">national survey</a>, this is comparable to most U.S. public pension funds. PERA manages roughly 75 percent of the Fixed Income portfolio internally, providing significant cost savings for PERA members.



Investment environment



In November of 2008, the <a href="https://www.federalreserve.gov/aboutthefed.htm" target="_blank" rel="noreferrer noopener">Federal Reserve</a>, or “The Fed,” under Chairman Ben Bernanke initiated an unconventional monetary policy of <a href="https://en.wikipedia.org/wiki/Quantitative_easing#US_QE1.2C_QE2.2C_and_QE3" target="_blank" rel="noreferrer noopener">quantitative easing</a> to help restart the economy after the great recession. To implement this monetary policy, the Fed engaged in open market purchases of U.S. Treasury and mortgaged backed securities; both are fixed income securities. The Fed grew its <a href="https://fred.stlouisfed.org/series/WALCL" target="_blank" rel="noreferrer noopener">balance sheet portfolio</a> from $900 million prior to the recession to $4.5 trillion today through purchases of $3.5 trillion in bonds. This step in aggressive monetary expansion probably saved the U.S. economy from a severe recession, but the <a href="https://www.copera.org/asset-class-depth-fixed-income" target="_blank" rel="noreferrer noopener" class="broken_link">longer term consequences</a> are still unknown. The Fed stopped expanding its balance sheet in October 2014, but continues to reinvest maturities and principle payments into U.S. Treasury and mortgage-backed securities in order to keep its portfolio size stable. Currently the Fed Governors are reviewing plans on how to <a href="https://www.wsj.com/articles/federal-reserve-readies-plan-for-balance-sheet-1491000013https:/www.wsj.com/articles/federal-reserve-readies-plan-for-balance-sheet-1491000013" target="_blank" rel="noreferrer noopener">unwind their balance sheet</a>. Among investors there is widespread speculation on how the fixed income market will react once the Fed discontinues reinvestment of maturing securities and perhaps initiates outright sales.



Monetary policy and fixed income markets



The almost decade-long period of artificially low interest rates has been called by some a <a href="https://en.wikipedia.org/wiki/Financial_repression" target="_blank" rel="noreferrer noopener">financial repression</a>. The very low rates available to savers have reduced the income of retirees who expect to live off their investment income. For pension funds this is an almost universal problem with a <a href="http://www.oecd.org/finance/financial-markets/48537395.pdf" target="_blank" rel="noreferrer noopener" class="broken_link">2013 OECD report</a> highlighting how low interest rates reduce the expected rate of return on pension assets and may push investment managers to take on larger risks in a search for yield. The Fed’s low rate policy has constrained pension funds and <a href="https://www.copera.org/asset-class-depth-fixed-income" target="_blank" rel="noreferrer noopener" class="broken_link">forced institutional investors to seek alternatives</a> that come with additional risks, costs, complexity, and may be less liquid than traditional fixed income.



Link to other investment asset class articles on POTI:



<a href="https://www.copera.org/asset-class-depth-fixed-income" target="_blank" rel="noreferrer noopener" class="broken_link">Equities</a>



<a href="https://www.copera.org/asset-class-depth-fixed-income" target="_blank" rel="noreferrer noopener" class="broken_link">Opportunity Fund</a>

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