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.

In this story:



<ul>
<li>PERA invests for the long term for its members</li>



<li>The investment team considers a variety of risk factors when evaluating investment opportunities</li>



<li>Comparing the risk in PERA&#8217;s investment portfolios to the risk found in their respective benchmark portfolios is one way these factors are evaluated</li>



<li>Because investments contain multiple risks, PERA takes a comprehensive approach, considering the sum of these factors rather than each in isolation</li>
</ul>



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Colorado PERA invests billions of dollars on behalf of its members. It holds investments around the world in a variety of asset classes and industries. This diversified approach to investing helps PERA achieve its investment goal: to maximize risk-adjusted returns for the benefit of members and retirees.



PERA is also a long-term investor. To better understand how an investment might perform in the long-term, PERA’s investment team considers a variety of risks when evaluating investment opportunities.



Risks come in many forms, and they can be considered in isolation or in combination with other risks that can impact an investment decision. Examples can include:



<ul>
<li>Interest rate risk: How do interest rates impact valuations and expectations for future growth? </li>



<li>Competitive risk: Does a company operate in an industry that has highly innovative peers? </li>



<li>Climate risk: Does a company have a business plan that takes into account potential impacts of climate change? </li>



<li>Supply chain risk: How dependent is a company on resources that it does not directly control, and what are the risks associated with those suppliers?</li>
</ul>



PERA considers these and many others as they evaluate investments.



<h4 class="wp-block-heading">An Example of How PERA Evaluates Risk</h4>



One method PERA uses to evaluate risk is to compare a PERA portfolio to its respective benchmark .



For example, carbon risk is part of environmental or climate-related factors an investor may consider. So it can be helpful to compare the carbon risk in PERA’s portfolio to the carbon risk in the portfolio’s benchmark .



The chart* below shows the carbon intensity&nbsp;of a few PERA portfolios alongside the carbon intensity of each portfolio&#8217;s respective benchmark . Lower bars indicate lower carbon intensity . 



While PERA does not target specific environmental, social, or governance (ESG) scores when making investment decisions, these factors are part of a much broader mosaic of understanding of a company’s fundamental business.



<h4 class="wp-block-heading">The Importance of Sustainability</h4>



PERA has in place many measures to evaluate its portfolio exposures to various risks and opportunities. Because investments contain multiple risks, PERA takes a comprehensive approach, considering the sum of these factors rather than each in isolation.



Investing is also a dynamic activity. Markets evolve as political, social, environmental, and economic conditions change. Broadly speaking, a company that operates with sustainable business practices may be better able to navigate these changes. How? 



<ul>
<li>Sustainable business practices can signal the ability to manage risks and seize business opportunities more effectively than competitors. </li>



<li>Sustainable practices can lead to more efficient operations, which can boost profits. </li>



<li>Companies that have sustainable business practices also can attract and retain top talent. Top talent can yield innovation that enhances competitive advantages and, thus, returns to investors.</li>
</ul>



“PERA’s commitment to investing in companies that have strong financials, operations, and opportunities for growth means we have a bias toward higher quality companies in our actively managed portfolios,” said Tara Stacy, PERA’s Director of Investment Stewardship. “These companies are likely to score more favorably among their industry peers in other aspects of their business as well, such as in the management of various ESG risks.”



By focusing on financial sustainability, PERA is able to effectively evaluate and manage investment risks and opportunities across the portfolio in order to provide lasting benefits to its members and retirees.



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* This report contains certain information (the “Information”) sourced from MSCI ESG Research LLC, or its affiliates or information providers (the “ESG Parties”). The Information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. Although they obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/or completeness, of any data herein and expressly disclaim all express or implied warranties, including those of merchantability and fitness for a particular purpose. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein, or any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Evaluating Sustainability in PERA’s Investment Portfolio

Every investor, whether an individual or an organization like PERA, makes investment decisions based on their goals or objectives.



PERA’s investment goals and objectives are listed in the <a href="https://www.copera.org/good-governance-is-standard-practice-for-colorado-pera" target="_blank" rel="noreferrer noopener">investment policy</a> adopted by the Board. It reads, in part: “The function of PERA is to provide present and future retirement or survivor benefits for its members. This objective requires the prudent assumption of investment risk in seeking to maximize long-term investment returns…”



That statement lays out both the goal – providing benefits to members in perpetuity – as well as the way it will achieve this goal: by maximizing long-term risk-adjusted investment returns.



<h4 class="wp-block-heading">Investing: The Big Picture</h4>



The world of investment opportunities is vast. It’s often subdivided into asset classes, or groups of distinct types of investments. These include publicly traded stocks, bonds, and real estate. Each asset class has unique features and risks associated with it.



PERA’s Board ultimately determines how much PERA invests in each asset class. They do this through their asset allocation policy. This policy lays out a target for each asset class – a percentage of the total funds PERA invests that should be dedicated to each asset class. Because the value of every investment can fluctuate, it’s impossible to “hit” the target in practice. So, the Board also provides a minimum and maximum percentage that each asset class can hold.



The Board regularly reviews and updates its asset allocation policy. Read more about the last time the Board did this, in late 2019, in <a href="https://peraontheissues.com/pera-board-meeting-notes-setting-peras-portfolio-mix/" target="_blank" rel="noreferrer noopener">this PERA On The Issues story</a>.



Within that framework, PERA’s investment team makes its investment decisions.



<h4 class="wp-block-heading">Investing Responsibly</h4>



From time to time, outside groups push to mandate PERA to take up additional goals and objectives. These movements often advocate for the use of divestment – or selling off investments – in an effort to achieve policy goals unrelated to retirement security.



Regardless of a person’s attitude toward any particular policy goal, divestment is not an effective way to achieve that goal. Previous PERA On The Issues stories <a href="https://peraontheissues.com/peras-investment-objective-ensuring-retirement-security/" target="_blank" rel="noreferrer noopener">like this one</a> have explored some of the ways in which divestment is ineffective.



The PERA Board’s <a href="https://www.copera.org/pera-board-of-trustees-updates-divestment-policy-statement" target="_blank" rel="noreferrer noopener">Statement on Divestment</a> explains their position in full, but states that “divestment is costly and limits PERA’s ability to effectively seek the best risk-adjusted returns to secure the retirement benefits of public servants.”



<h4 class="wp-block-heading">The Benefits of Engagement</h4>



PERA maintains its focus on being a responsible, engaged investor. What does this look like?



<ul><li>Every shareholder of a company owns a piece of that company. As a result, they are able to voice their opinions on some business decisions through voting. PERA outlines its approach to dozens of issues it reviews when voting in its <a href="https://www.copera.org/proxy-voting-keeping-policy-current" target="_blank" rel="noreferrer noopener">Proxy Voting Policy</a>, which the Board last updated in early 2021.</li><li>When casting these shareholder votes PERA considers many issues, including sustainability issues that could have a financial impact on a company. &nbsp;</li><li>There are many sustainability factors that could have a financial impact on PERA’s investments. PERA’s most recent <a href="https://content.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/" target="_blank" rel="noreferrer noopener">Stewardship Report</a> lists a few: carbon emissions, labor rights, natural resource utility, executive oversight, animal welfare, corporate culture, and social impact. As the report states, “When stewardship efforts impact a firm’s financial success, they become financially meaningful to stakeholders.”</li><li>PERA advocates for companies to reliably inform shareholders about any climate-related risks and opportunities that could have a financial impact on the company. PERA has voted in support of 91 environmental proposals over the past three years.</li><li>With this information, investors are able to make better-informed decisions about how they invest. In PERA’s case, this means making investment decisions that align with PERA’s goals and objectives. Companies that adopt sustainable business practices may signal quality and longevity, which are important features for a long-term investor like PERA.</li><li>PERA staff actively engage with portfolio companies, legislators, regulators, standard setting bodies, and other institutional investors about matters that can impact PERA’s investments and the integrity of global markets.</li></ul>



<h4 class="wp-block-heading">Investing for Members</h4>



The world has faced a variety of critical issues since PERA’s founding in 1931. Maintaining focus on the primary goal has served PERA and its members well. The following statement from the Board’s Statement on Divestment shows that they intend to maintain that focus well into the future: “PERA serves the singular purpose of ensuring the retirement security of Colorado’s current and former public servants.”

Issue Spotlight: Responsible Investing

The year so far has been marked by changes—unexpected, difficult, and sometimes disorienting changes. Colorado PERA has been around since 1931. It has been through a world war and a cold war, the dotcom crash and the digital revolution. In other words, while 2020 has been tough, it is neither the first nor the last year of seminal change.



In June, PERA released its <a aria-label="undefined (opens in a new tab)" href="https://peraontheissues.com/pera-releases-2019-financial-returns/" target="_blank" rel="noreferrer noopener">Comprehensive Annual Financial Report</a>. It answers, among other things, a common question about PERA: “How did PERA’s investments perform last year?” This is an important question to ask. Another question, asked a little less frequently, is this: “How is PERA positioning its investment portfolio for the future, a future that will continue to see changes?&#8221;



That question is answered in the recently released <a href="https://content.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/" target="_blank" label="undefined (opens in a new tab)" rel="noreferrer noopener">2020 Investment Stewardship Report</a>. Stewardship means “taking care of something.” In this case, “something” is members’ dollars. This report helps demonstrate the ways in which PERA is continuously evolving, adapting to an ever-changing environment, while keeping its fiduciary duty to members at the center of decision-making processes.



Highlights of the report include:



<ul>
<li>PERA created the Investment Stewardship Division. Having resources dedicated to formalizing and advancing investment stewardship initiatives demonstrates PERA’s commitment to this organizational priority.</li>



<li>By consistently focusing on the most compelling expected risk-adjusted returns, PERA’s <a href="https://content.copera.org/the-importance-of-stewardship-in-uncertain-times/" target="_blank" label="undefined (opens in a new tab)" rel="noreferrer noopener">Real Estate portfolio</a> has generally earned strong returns from investments in green buildings and affordable housing, as well as local Colorado properties, among many other investments.</li>



<li>As an institutional investor, PERA uses its voice to advocate for transparency and disclosure in financial markets. Making information about PERA’s investment activities more accessible to our members and others who have a stake in PERA’s success is equally important. To that end, PERA is also increasing the transparency of its own investments by producing a number of short videos, hosted on <a href="https://www.copera.org/" target="_blank" aria-label="undefined (opens in a new tab)" rel="noreferrer noopener">copera.org</a>.</li>
</ul>



Change seems especially acute in 2020, but the truth is that it’s an ever-present factor. Building an organization that can nimbly adapt to change and that takes the initiative to integrate a variety of considerations into investment decisions helps keep PERA relevant, innovative, and, ultimately, a source of value to our members.



You can find the complete 2020 Investment Stewardship Report as well as the Executive Summary <a href="https://content.copera.org/the-importance-of-stewardship-in-uncertain-times/">here</a>. 



PERA On The Issues will be highlighting key sections in the coming months.

The Importance of Stewardship in Uncertain Times

How should PERA invest the roughly $50 billion PERA portfolio? 



That question was answered on November 15, when PERA’s Board of Trustees approved updated asset allocation guidelines. Asset allocation is the term used to describe how the total amount of dollars invested are divided among various investment types, also known as asset classes. 



The Board does not make individual investment decisions—PERA’s investment team fulfills that role. Instead, the Board sets the course for PERA’s investment strategy, broadly speaking. This is not a one-time decision. The Board usually reviews and approves asset allocation needs every three to five years. 



The Board first sought a thorough review of its options. In particular, they weighed how different proposed options would contribute to the overall goal of becoming fully funded in 30 years. They considered risk, return, and the <a href="https://www.copera.org/protecting-shareholder-rights-pera-advocates-for-members-and-investors">cost</a> of managing investments, among other factors. 



The Board worked with Aon, an outside firm, on this project. Aon compiled a report that included multiple options for the Board to consider. (Read prior reporting on this process <a href="https://content.copera.org/pera-board-meeting-notes-setting-peras-portfolio-mix/">here</a>. The full report can be viewed in full <a href="https://content.copera.org/pera-board-meeting-notes-setting-peras-portfolio-mix/">here</a>.)



The Board sets two important guidelines for each asset class. The first is a long-term target, which is defined by a specific percentage. The second is a target range, which includes a minimum and maximum percentage. 



The target range gives the investment team increased flexibility. For example, if one asset class is performing better than expected relative to other asset classes, it might grow beyond the long-term target. The target range’s higher ceiling allows that asset class to continue to grow without unnecessarily selling assets, which incurs additional costs. 



<figure class="wp-block-table aligncenter"><table><tbody><tr><td>PERA’s asset allocation, as approved by the Board Effective 1/1/2020 </td></tr><tr><td>
 
 </td><td>Long-Term Target </td><td>
 Target Range
 </td></tr><tr><td> <a href="https://www.copera.org/pera-board-meeting-notes-setting-peras-portfolio-mix">Global Equities</a> </td><td>54% </td><td>48%-60%</td></tr><tr><td> <a href="https://content.copera.org/asset-class-in-depth-real-estate/">Fixed Income</a> </td><td>23% </td><td>18%-28% </td></tr><tr><td> <a href="https://content.copera.org/pera-board-meeting-notes-setting-peras-portfolio-mix/">Private Equity</a> </td><td>8.5% </td><td>4%-13% </td></tr><tr><td> <a href="https://content.copera.org/real-return-investments-for-inflation-protection/">Real Estate</a> </td><td>8.5% </td><td>4%-13% </td></tr><tr><td>
 Alternatives*
 </td><td>6%</td><td>0%-12% </td></tr><tr><td>
 Cash
 </td><td>0% </td><td>0%-3% </td></tr></tbody></table></figure>



*Note: The
asset class currently named Opportunity Fund was renamed Alternatives,
effective 1/1/2020.







Choosing an asset allocation is a decision that individuals and institutional investors alike must make. But this comparison has limits. Individuals investing for their own retirement have a closed time frame. They need income in retirement, but that need ends upon death. PERA, on the other hand, operates in an open-ended environment. It needs to last in perpetuity. When the Board sets the asset allocation, they seek to maximize long-term returns, meeting the retirement security needs of all 600,000 Colorado PERA members



For more information about PERA’s investment strategy and performance history, visit the <a href="https://www.copera.org/investments">investments page</a> of copera.org or watch the video below.







<figure><iframe loading="lazy" width="560" height="315" src="https://www.youtube.com/embed/b_72wXvXFmg" allowfullscreen=""></iframe></figure>

PERA Board Meeting Notes: Setting PERA’s Portfolio Mix

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



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



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



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



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

Tag Archives:

Evaluating Sustainability in PERA’s Investment Portfolio

Issue Spotlight: Responsible Investing

The Importance of Stewardship in Uncertain Times

PERA Board Meeting Notes: Setting PERA’s Portfolio Mix

What Is a Policy Benchmark?

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