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.

Advocating for fair and transparent markets is one of the cornerstones of Colorado PERA’s approach to <a href="https://www.copera.org/investments/investment-stewardship" target="_blank" rel="noreferrer noopener">investment stewardship</a>, and Chief Investment Officer/Chief Operating Officer Amy C. McGarrity has taken on a new role to help further that mission at the federal level.



The Securities and Exchange Commission (SEC) announced in September that McGarrity is one of six new members selected to join the SEC’s <a href="https://www.sec.gov/about/advisory-committees/investor-advisory-committee" target="_blank" rel="noreferrer noopener" class="broken_link">Investor Advisory Committee</a>.



The committee was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and its members include professionals and public officials with a range of experience and expertise in finance, investing and law. Members are tasked with advising the SEC and making recommendations on matters such as effective regulation, promoting market integrity, and protecting investor interests. Past recommendations have covered topics such as climate-related disclosures, investor education, and the rules governing financial account statements.



In addition to the SEC Investor Advisory Committee, PERA staff have been active in a number of industry organizations and advisory boards, such as the <a href="https://www.cii.org/" target="_blank" rel="noreferrer noopener">Council of Institutional Investors</a>, <a href="https://healthymarkets.org/" target="_blank" rel="noreferrer noopener">Healthy Markets Association</a>, and the <a href="https://pcaobus.org/" target="_blank" rel="noreferrer noopener">Public Company Accounting Oversight Board</a>, advocating for practices that benefit our members.



“At Colorado PERA, we firmly believe in using our influence as an institutional investor to advocate for strong and fair markets on behalf of the nearly 700,000 members we’re investing for,” McGarrity said. “I’m honored to be selected to serve on the Investor Advisory Committee and I look forward to working with my fellow committee members on some meaningful recommendations in the years ahead.”



McGarrity and the other members of the committee will serve four-year terms.

PERA CIO/COO Amy C. McGarrity Named to SEC Advisory Committee

Every year—often in the spring—publicly traded companies hold shareholder meetings and ask their investors to weigh in on issues such as corporate leadership and policies. It’s an important process, and one Colorado PERA takes seriously as an institutional investor.



At its September 20 meeting, the PERA Board of Trustees voted to approve updates to its Proxy Voting Policy, which guides staff in exercising PERA’s shareholder voting rights.



<h4 class="wp-block-heading">What is proxy voting?</h4>



Simply put, proxy voting is the process that allows shareholders—individuals who own stock in a company, as well as institutional investors like PERA—to provide their input on corporate management decisions without having to be present at shareholder meetings. Proxy voting matters can come from a company’s board or its shareholders, and they cover important decisions such as approving the members of the board, mergers, acquisitions, and the types of disclosures a company makes to its shareholders.



The PERA Board believes the shareholder right to vote is an asset of the plans to be managed under fiduciary care. Because PERA invests to provide retirement income for nearly 700,000 current and former public employees, our focus is on voting to encourage corporate behavior that can generate long-term financial value. Proxy voting is one way we practice investment stewardship for the benefit of our members. &nbsp;



In 2023, PERA cast votes on more than 68,000 proposals in more than 6,000 shareholder meetings. The overwhelming majority of those proposals—more than 99%—were related to corporate governance.



“Governance matters have always been our focus, and can include things like board elections and executive compensation,” said Senior Investment Stewardship Analyst Luz Rodriguez. “Those decisions can impact a company’s financial performance, which can, in turn, affect the investments we make on behalf of PERA members.”



<h4 class="wp-block-heading">Updating PERA’s policy</h4>



Over the course of several months, PERA staff have worked closely with the Board’s Investment Committee to review and update the Proxy Voting Policy. The full Board approved those changes in September, and they will go into effect in January 2025. The last update took place in 2021.



While some of the updates simply clean up or clarify language in the policy, others are more substantive and aim to provide additional information on PERA’s voting philosophy and processes. They include:



<ul>
<li>Clarifying PERA’s focus on governance matters. Not only are most proxy voting proposals related to corporate governance, but there’s a good body of research supporting the role of good governance in generating long-term value for shareholders.</li>



<li>Broadening the general scope of the policy to be more reflective of PERA’s global investments. For example, the updated policy refers to generally accepted accounting standards rather than U.S.-specific standards and expands language on greenhouse gas emission disclosures.</li>



<li>Clarifying which duties and responsibilities fall under the Board’s governance policy versus general practices. The Board is responsible for overseeing PERA’s investment program, including proxy voting. The Investment Committee is responsible for recommending changes to, and monitoring compliance with, governance and proxy voting policies, and staff is responsible for voting and reporting proxies.</li>



<li>Expanding on PERA’s approach to corporate board composition. The updated policy states that PERA will vote for proposals asking a company to provide a skills matrix that outlines the skills, experiences, background, and qualifications of board members, which can help give shareholders a better understanding of a board’s collective capabilities. The updated policy also states PERA will vote against certain director nominees if the company’s board does not provide this disclosure.</li>
</ul>







Through regular review and updates to the Proxy Voting Policy, the Board ensures that PERA’s policies effectively guide staff in engaging with the companies in which we invest in order to maximize risk-adjusted returns for our members.



“Our goal in voting proxies isn’t to dictate what companies do, but to encourage them to adopt sound governance practices that foster profitability and long-term shareholder value,” Rodriguez said. “As stewards of investments for nearly 700,000 current and former public employees, we take our shareholder responsibilities seriously.”



Take a deeper dive into proxy voting and PERA’s approach to investment stewardship by exploring the <a href="https://copera.org/investment-stewardship-report" target="_blank" rel="noreferrer noopener">2024 Investment Stewardship Report</a>.

PERA’s Proxy Voting Policy Receives an Update

<h4 class="wp-block-heading"><a href="https://www.irs.gov/newsroom/irs-makes-direct-file-a-permanent-option-to-file-federal-tax-returns-expanded-access-for-more-taxpayers-planned-for-the-2025-filing-season" target="_blank" rel="noreferrer noopener">IRS Makes Direct File a Permanent Option to File Federal Tax Returns | Internal Revenue Service</a></h4>



During the last filing season, the Internal Revenue Service tested out a new system that allowed taxpayers in a dozen states to file directly with the IRS rather than using third-party tax preparers or software. The IRS says it plans to expand the system nationally and cover additional tax situations next year.



<h4 class="wp-block-heading"><a href="https://www.cnn.com/2024/06/05/investing/texas-stock-exchange/index.html?utm_term=1717673554632efed536092f5&amp;utm_source=cnn_Before+the+Bell+Thursday+6%2F6%2F24&amp;utm_medium=email&amp;bt_ee=5bhqpLc8vzFxpxpWhZTTt%2B3%2BaeKGqj8SPk%2FvnOmLul1SpxR9qRwnCPgsOXVbv36V&amp;bt_ts=1717673554634" target="_blank" rel="noreferrer noopener">Texas is Coming for Wall Street With a New BlackRock-Backed Stock Exchange | CNN Business</a></h4>



The New York Stock Exchange and Nasdaq may get all the attention, but they’re not the only stock exchanges in the United States, and there could soon be one more. A group backed by some large investors is planning to open a new national exchange in Dallas, Texas. The group is aiming to have the new stock exchange up and running in 2026.



<h4 class="wp-block-heading"><a href="https://www.healthyagingpoll.org/reports-more/poll-extras/most-older-adults-dont-know-about-resources-can-help-them-navigate-aging" target="_blank" rel="noreferrer noopener">Most Older Adults Don’t Know About Resources That Can Help Them Navigate Aging &amp; Caregiving | National Poll on Healthy Aging</a></h4>



A recent poll of Americans over the age of 50 found many people aren’t aware of and don’t use services and programs aimed at helping aging adults. The National Poll on Healthy Aging found fewer than 10% of people had used or knew a lot about programs such as Area Agencies on Aging (AAAs) and State Health Insurance Assistance Programs (SHIPs), which offer support at the local level.



<h4 class="wp-block-heading"><a href="https://www.kiplinger.com/retirement/aging-parents-what-you-need-to-know" target="_blank" rel="noreferrer noopener">Four Things You Need to Know About Your Aging Parents | Kiplinger</a></h4>



As members of Generation X and Millennials get older, they’re increasingly finding themselves stepping into the roles of caregivers for aging parents. Those parents haven’t always taken the necessary steps for succession planning or communicated their needs and wants to their children, so it’s important to ask the right questions. Here are some tips for getting started.



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News You Should Know is a digest of news from publications around the nation about finance, investing, and retirement.

News You Should Know: IRS Making Direct File System Permanent

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

At Colorado PERA, we invest for one purpose: To provide retirement benefits to PERA members for generations to come.



It’s not just our mission, it’s our passion. And it’s the reason we prioritize financial value—not personal or political values—in our investment decisions.



<h4 class="wp-block-heading">Fiduciary duty</h4>



<figure class="wp-block-embed is-type-video is-provider-vimeo wp-block-embed-vimeo wp-embed-aspect-16-9 wp-has-aspect-ratio"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" title="Prioritizing Financial Value Over Personal or Political Values" src="https://player.vimeo.com/video/863343330?dnt=1&amp;app_id=122963" width="640" height="360" frameborder="0" allow="autoplay; fullscreen; picture-in-picture; clipboard-write"></iframe>
</div></figure>



PERA serves nearly 700,000 current and former public employees who have worked hard to make our Colorado communities better places to live. Each of those members counts on PERA to provide a retirement benefit they cannot outlive.



The PERA Board and staff have a fiduciary duty to those members. That means we’re required by law to act solely in the interest of members and benefit recipients, and we must manage the trust funds only for their financial benefit. We make every investment decision with that duty in mind.



Each PERA member is unique, with their own personal values that guide them. It would be impossible to invest based on personal or political values of our individual members or stakeholders. Our fiduciary duty demands that we do what’s right for the membership as a whole, and that means focusing on financial value.



<h4 class="wp-block-heading">Prioritizing financial value</h4>



Our sole investment goal is to pursue the best risk-adjusted returns for our members. That means when we’re researching a possible investment opportunity or assessing an asset we already hold, our focus is on that investment’s ability to earn money over the long term.



We sometimes hear from stakeholders and others who want us to invest in some segments of the market or divest—sell our investments—from others based on their individual preferences or political beliefs.



That would be contrary to our mission and our fiduciary duty. Our approach involves finding companies, properties and investment funds that we believe will be competitive over time, allowing them to be profitable and generate returns to the portfolio.



Investing based on the financial interest of the whole PERA membership is our fiduciary duty, and we take it seriously because our hard-working members depend on us for their financial future.



Learn more about Investment Stewardship:



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



<li><a href="https://copera.org/stewardship-snapshot" target="_blank" rel="noreferrer noopener">Digital Snapshot</a></li>



<li><a href="https://www.copera.org/stewardship-videos" target="_blank" rel="noreferrer noopener">Video Library: Investment Stewardship</a></li>



<li><a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-global-equity" target="_blank" rel="noreferrer noopener">Asset Classes Explained</a></li>
</ul>

How PERA Prioritizes Financial Value Over Personal or Political Values

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>



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