Retirement insights from a Colorado PERA perspective

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

The PERA Board of Trustees met in Denver on Jan. 20 for its first meeting of 2023.



Trustees discussed the 2023 PERA-related legislative landscape, continued work on the Board’s strategic vision for the future, and heard updates from PERA staff.



<h4 class="wp-block-heading">Legislative update</h4>



The 2023 legislative session kicked off earlier this month, and the Board’s agenda included discussing recently introduced legislation pertaining to PERA.



One such bill, <a href="https://leg.colorado.gov/bills/sb23-056" target="_blank" rel="noreferrer noopener">SB23-056</a>, would require the state to make an additional payment of $35,050,000 to PERA. That amount, in addition to the amount included in <a href="https://peraontheissues.com/colorado-lawmakers-pass-bill-making-up-225m-payment-to-pera/" target="_blank" rel="noreferrer noopener">HB22-1029</a> from last year, is meant to fully recompense PERA for the state’s <a href="https://www.copera.org/recap-of-pera-boards-january-2023-meeting" target="_blank" rel="noreferrer noopener" class="broken_link">direct distribution payment of $225 million</a>, missed in 2020. The Trustees support efforts to increase funding to PERA.



Two other bills concern PERA’s investments: <a href="https://leg.colorado.gov/bills/sb23-016" target="_blank" rel="noreferrer noopener">SB23-016</a> would require the PERA Board to adopt a proxy voting policy that ensures any voting decisions align with the state’s greenhouse gas emission reduction goals, as well as require PERA to include in its annual <a href="https://www.copera.org/investment-stewardship" target="_blank" rel="noreferrer noopener">Investment Stewardship Report</a> a description of climate-related investment risks, impacts and strategies. <a href="https://leg.colorado.gov/bills/hb23-1092" target="_blank" rel="noreferrer noopener">HB23-1092</a> would require PERA staff to make investment decisions solely on financial factors and would prohibit consideration of social, political, or ideological interests. The PERA Board opposes efforts to restrict PERA’s investment options or compel PERA to invest in a way that prioritizes a policy outcome over fiduciary duties.



<a href="https://peraontheissues.com/2023-proposed-legislation-status/" target="_blank" rel="noreferrer noopener">Click here</a> for a regularly updated list of PERA-related bills and their status.



<h4 class="wp-block-heading">Strategic planning</h4>



The Board continued its yearlong process of developing a new strategic plan that will guide the work of the PERA Board and staff for the next half-decade. The plan’s goals will build on PERA’s mission and vision statements: To provide retirement security for our members while ensuring the sustainability of the fund, and to innovate and build on a tradition of service by being a trusted partner in order to meet the changing needs of our diverse membership.



The Board will continue working on a draft plan throughout the year, with the goal of adopting a new strategic plan for 2024 through 2029 by the end of the year.



<h4 class="wp-block-heading">Market and portfolio update</h4>



Chief Investment Officer/ Chief Operating Officer Amy C. McGarrity provided the Board with a market and portfolio update, in which she presented details on economic conditions and PERA’s investments.



While McGarrity did not have final details on PERA’s investment performance in 2022, she noted that markets had a rough year in 2022, ending the year with broadly negative returns.



As an investor in most markets, PERA can expect it is not immune from market downturns. As a long-term, perpetual investor, PERA remains strategically invested in the markets with the goal of earning a return over decades, McGarrity said. In fact, PERA’s most recent 30-year rate of return (through Dec. 31, 2021), which reflects many market ups and downs, is 9.0% (annualized, gross-of-fees).



<blockquote class="wp-block-quote">
RELATED: <a href="https://peraontheissues.com/staying-the-course-peras-approach-to-market-volatility/" target="_blank" rel="noreferrer noopener">Staying the Course: PERA’s Approach to Market Volatility</a>
</blockquote>



Full audited details on PERA’s investment performance for the year will be available with PERA’s Annual Comprehensive Financial Report, released in June.



<h4 class="wp-block-heading">Chair/vice chair election</h4>



The Board concluded its meeting by voting on Board officers. &nbsp;Current Chair <a href="https://peraontheissues.com/meet-the-new-chair-of-peras-board/" target="_blank" rel="noreferrer noopener">Marcus Pennell</a> and Vice Chair <a href="https://peraontheissues.com/meet-the-new-vice-chair-of-peras-board-2/" target="_blank" rel="noreferrer noopener">Suzanne Kubec</a> were both re-elected to new two-year terms.



Four positions on the Board <a href="https://peraontheissues.com/candidacy-open-for-four-pera-board-seats-in-2023/" target="_blank" rel="noreferrer noopener">are up for election this year</a>, and candidacy is now open for those seats.



The next scheduled meeting of the Board of Trustees will take place on March 24, 2023.

Recap of PERA Board’s January 2023 Meeting

In this story:



<ul>
<li>The PERA Board approved and released the 2020 Comprehensive Annual Financial Report</li>



<li>In 2020, the total fund’s investment portfolio returned 17.4%, net of fees</li>



<li>The total fund was valued at $58.3 billion, up from $51.7 billion at the end of 2019.</li>



<li>The Annual Report also announced that the automatic adjustment provision (AAP) will go into effect in 2022</li>



<li>The primary drivers of the AAP going into effect were the updates to PERA’s actuarial assumptions and the impact of the pandemic on PERA’s membership</li>
</ul>



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The Colorado PERA Board of Trustees approved the release of the <a href="https://www.copera.org/colorado-pera-board-releases-2020-annual-report" target="_blank" rel="noreferrer noopener" class="broken_link">2020 Comprehensive Annual Financial Report</a> (Annual Report) during its Board meeting on June 19.



The Annual Report is a detailed summary of PERA’s investment performance, funded status and membership information for the 2020 calendar year.



“This report reflects the ways in which we met the challenges faced in a highly unusual year,” said Ron Baker, PERA’s Executive Director. “Last year was a tough year for so many people, and at PERA our focus remained on members and retirees.”



<h4 class="wp-block-heading">Global equities fuel strong investment return</h4>



For the year ending Dec. 31, 2020, the total fund’s investment portfolio returned 17.4%, net of fees, significantly above its benchmark of 14.1%. The 10-year annualized return is 9.4%. PERA’s funded ratio at the end of 2020 was 62.8%. The total fund was valued at $58.3 billion, up from $51.7 billion at the end of 2019.



Returns by asset class are shown below alongside the benchmark for each asset class:



<figure class="wp-block-image size-large"><img decoding="async" src="https://content.copera.org/colorado-pera-board-releases-2020-annual-report/"" class="wp-image-4488"/></figure>



<h4 class="wp-block-heading">Automatic adjustment provision goes into effect in 2022</h4>



While the investment returns were positive last year, it is important to remember that investment performance is one of <a href="https://peraontheissues.com/determining-peras-funded-status-part-art-part-science/" target="_blank" rel="noreferrer noopener">many factors</a> used to calculate a plan’s funded status.



In 2020, the Board reviewed PERA’s actuarial assumptions through a process known as an Experience Study, which takes place every four years. That review resulted in <a href="https://peraontheissues.com/2020-experience-study-preparing-for-a-secure-future/" target="_blank" rel="noreferrer noopener">changes</a> to assumptions used to calculate PERA’s funded status. The changes reflect that members are living longer and the workforce is growing more slowly than previously expected.



These updates to PERA’s actuarial assumptions, in addition to the impact of the pandemic on the membership, increased PERA’s liabilities. These increases in liabilities mean the automatic adjustment provision will be triggered in 2022.



Beginning July 1, 2022, employer and member contributions will increase by 0.50 percentage points of salary. The annual increase will be reduced by 0.25 percentage points.



“We understand the changes we’re announcing today are difficult for our members and retirees,” Baker said. “However, the impact is clear: This change will help PERA stay on track to reach its goal of keeping PERA secure for its members now and in the future.”



PERA’s annual report is available <a href="https://www.copera.org/colorado-pera-board-releases-2020-annual-report" target="_blank" rel="noreferrer noopener" class="broken_link">here</a>. Highlights are also available in an interactive format at <a href="https://content.copera.org/colorado-pera-board-releases-2020-annual-report/" target="_blank" rel="noreferrer noopener">www.copera.org/snapshot</a>.

Colorado PERA Board Releases 2020 Annual Report

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

Colorado PERA’s Board of Trustees met on January 15. The meeting’s <a href="https://content.copera.org/recap-of-pera-boards-january-meeting/" target="_blank" rel="noreferrer noopener">agenda</a> consisted primarily of updates on operations from PERA staff, summarized below. It was also the first meeting run by the Board’s new leaders, <a href="https://peraontheissues.com/meet-the-new-chair-of-peras-board/" target="_blank" rel="noreferrer noopener">Marcus Pennell</a> and <a href="https://peraontheissues.com/meet-the-new-vice-chair-of-peras-board/" target="_blank" rel="noreferrer noopener">David Hall</a>.



<h5 class="wp-block-heading">Legislative update</h5>



Executive Director Ron Baker and Public and Government Affairs Manager Michael Steppat presented an outlook on the 2021 legislative session. 



The presentation largely mirrored the <a href="https://content.copera.org/legislative-qa-with-peras-public-and-government-affairs-manager/" target="_blank" rel="noreferrer noopener">legislative preview</a> published in PERA On The Issues in early January. The legislative session is on pause until mid-February at the soonest. When legislators return, addressing the COVID-19 pandemic will dominate debate.



<h5 class="wp-block-heading">Communications update</h5>



PERA Senior Director of Communications Patrick von Keyserling shared projects currently underway in the department. Changes members can expect in 2021 include:



<ul>
<li>The creation of a new dashboard that displays helpful information after logging in to a member account</li>



<li>Improvements to <a href="https://www.copera.org/" target="_blank" rel="noreferrer noopener">copera.org</a></li>



<li>A continued effort to transition to digital forms </li>
</ul>



<h5 class="wp-block-heading">Update from PERA’s Executive Director</h5>



Ron Baker shared some high level statistics with the Board, including:



<ul>
<li>PERA paid out $4.7 billion in benefits from January through November</li>



<li>PERA’s total membership was 636,159. These numbers are broken down by division below.</li>
</ul>



<figure class="wp-block-image size-large"><img decoding="async" src="" alt="" class="wp-image-4097"/></figure>



<h5 class="wp-block-heading">Investments update</h5>



PERA’s investment staff provided an update on each asset class to the Board, as well as a Market and Portfolio Update. These presentations are summarized below.



<ul>
<li>Global equities: Overall, PERA is overweight global equities, which means the amount currently in PERA’s portfolio is above the <a href="https://peraontheissues.com/pera-board-meeting-notes-setting-peras-portfolio-mix/" target="_blank" rel="noreferrer noopener">benchmark</a>. As of November 2020, the most recent date for which information is available, global equities made up 59.2% of PERA’s portfolio — higher than the 56.0% policy benchmark weight, but still within the Board-established allowable range of 48%-60%.</li>



<li>Fixed income: The current environment is volatile, and Treasury yields are near historic lows. Fixed income is a core asset class for PERA, providing long term income and stability, and is an anchor to offset some of the potentially more volatile components of the total investment portfolio. It made up 20.3% of PERA’s portfolio at the end of 2020.</li>



<li>Private equity: Tim Moore, PERA’s Director of Private Equity, described the private equity environment as being “measured and cautious.” He said that private equity managers in general are still assessing the impact of COVID-19’s effect on the economic environment and that PERA is poised to take advantage of opportunities when the market normalizes. Private equity made up 7.8% of PERA’s portfolio.</li>



<li>Real estate: Real estate is undergoing a challenging time as retail, hotels, and office buildings all face difficulties stemming from the pandemic. PERA’s real estate portfolio is overweight toward industrial and multi-family properties and does not own any hotels or leisure properties directly. PERA’s real estate team is taking a long-term view by working with tenants in an effort to preserve rent collection. Real estate made up 8.2% of PERA’s portfolio.</li>



<li>Alternatives: New investments, including private global infrastructure, royalties, and agriculture, have helped diversify PERA’s portfolio. Alternatives made up 3.8% of PERA’s total portfolio.</li>
</ul>



A complete, audited report of PERA’s 2020 investment results will be available in the Comprehensive Annual Financial Report, released in June (read more about the CAFR <a href="https://www.copera.org/how-its-made-peras-financial-report-part-2" target="_blank" rel="noreferrer noopener" class="broken_link">here</a>). Why the wait? While the value of some asset classes, like global equities, are updated on a daily basis, other asset classes, like private equity, are valued on a less frequent basis.



The Board’s next meeting is on March 19.



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Recap of PERA Board’s January Meeting

Colorado PERA’s Board of Trustees met on Friday, September 11. In the meeting, the Board reviewed a report assessing its governance procedures and heard reports from staff, among other agenda items.



Staff Reports



PERA Executive Director Ron Baker noted the continuing ways in which PERA has adapted to a vastly changed environment. Baker shared with the Board up-to-date membership statistics:


<div class="wp-block-image is-style-default">
<figure class="aligncenter size-large"><img decoding="async" loading="lazy" width="517" height="301" src="https://content.copera.org/wp-content/uploads/2020/09/image.png" alt="" class="wp-image-44159" srcset="https://content.copera.org/wp-content/uploads/2020/09/image.png 517w, https://content.copera.org/wp-content/uploads/2020/09/image-300x175.png 300w" sizes="(max-width: 517px) 100vw, 517px" /></figure></div>


PERA’s Chief Investment Officer, Amy C. McGarrity, updated the Board on market conditions and PERA’s portfolio. She noted that the quick recovery seen in public equities has been as much as a surprise as the onset of the global pandemic and swift market decline.



This recovery, however, has been uneven as a few companies account for a significant portion of the recovery while other economic indicators, like employment, still face serious challenges ahead.



She added that, while the investment team did reallocate funds within asset classes in the preceding months, these changes were made within the framework of the <a href="https://peraontheissues.com/pera-board-meeting-notes-setting-peras-portfolio-mix/" target="_blank" rel="noreferrer noopener">Board’s asset allocation policy </a>rather than a tactical move.



Patrick Lane, PERA’s Chief Benefits Officer, shared a report outlining PERA’s service delivery so far this year. The number of retirements through July 31 is nearly identical to 2019. And, despite PERA’s physical buildings being closed to the public since March, PERA counselors have performed nearly as many individual counseling sessions as in 2019. However, PERA has processed nearly 15% more benefit estimates and 20% more applications to purchase service credit compared to last year.



Other details Lane shared include:



<ul>
<li>Member savings in <a href="https://www.copera.org/recap-of-pera-boards-september-meeting" class="broken_link">PER</a><a href="https://www.copera.org/recap-of-pera-boards-september-meeting" target="_blank" rel="noreferrer noopener" class="broken_link">A</a><a href="https://www.copera.org/recap-of-pera-boards-september-meeting" class="broken_link">Plus </a>457 plans recently crested $1 billion for the first time.</li>



<li>The call center has answered 122,976 calls through July 31. The most frequent questions have been about health care, web access, and retirement planning.</li>



<li>93,347 people are enrolled in <a href="https://www.copera.org/peracare" target="_blank" rel="noreferrer noopener">PERACare plans</a>.</li>



<li>The Field Education team quickly moved their curriculum to online-based <a href="https://www.copera.org/members/webinars" target="_blank" rel="noreferrer noopener">webinars </a>and have reached more than 15 times as many people through digital means compared to 2019.</li>
</ul>



Governance Review



The Board routinely has third parties assess its procedures and operations. Cortex Applied Research, the Board’s governance consultant, analyzed the Board’s governance framework and fiduciary best practices. Their findings included:



<ul>
<li>PERA’s Governance Manual “ranks very highly; it is consistent with the published standards in almost all respects and generally meets or exceeds the practices of the peer group.”</li>



<li>The Manual “is among the most detailed and comprehensive manuals in the Peer Group.”</li>



<li>“The code of conduct was also particularly strong.”</li>



<li>PERA’s Governance Manual is held up as an example in multiple industry publications.</li>
</ul>

Recap of PERA Board’s September Meeting

This is the second installment of a two-part story. Read the first part <a href="https://peraontheissues.com/long-term-gain-the-25-year-investment-that-continues-to-flourish/" target="_blank" rel="noreferrer noopener">here</a>.



When PERA’s real estate team invested in a Dallas apartment community in 1995, they expected to be involved for about five years. Instead, the investment has played a prominent role in PERA’s real estate portfolio for 25 years and counting.



The driving force behind the decision to remain invested is straightforward. CH Meili, PERA’s Director of Real Estate, ran the Texas development for years before handing it off to Greg Chicota about five years ago. Meili makes clear what his mandate is at PERA: “Our number-one goal is to make as much money as we can for our members, within the risk parameters set out by the Board.”&nbsp;



But maximizing profits can coexist with other beneficial outcomes, too. In the case of this investment, that means identifying win-win situations for both investors and residents. Or, as Meili put it, “can we create benefits that will help tenant retention?”&nbsp;



Going Green: The Business Case



Eight years ago, the development underwent a master planning exercise. The plan emphasized sustainability when redeveloping communities, an outlook informed by an increased demand for environmentally sustainable living spaces. “Renters are looking for a landlord that doesn’t just give them marketing materials; they want to see something tangible,” Meili said.



What does tangible look like here? 



<ul><li>One of the newly renovated communities is a <a href="https://www.usgbc.org/cert-guide" target="_blank" rel="noreferrer noopener">LEED-certified</a> project, and two others have earned the <a href="https://www.energystar.gov/" target="_blank" rel="noreferrer noopener">Energy Star</a>. </li><li>Above-ground parking is buried in places, giving additional green space back to residents. </li><li>The development purchases 100% wind energy, saving more than 30,000 metric tons of CO2 emissions every year. </li><li>Nearly 5,000 toilets have been replaced with high efficiency models, saving 162 million gallons of water. </li><li>Efficient faucets and showerheads in renovated units add to water savings.&nbsp;</li></ul>



One of the more unusual examples of environmental sensitivity occurred when a number of large maple trees stood in the way of an upcoming renovation. Instead of tearing the trees down, they were moved to another location onsite. This temporary tree farm housed 60 trees until the renovation was complete, after which they were reincorporated into the scenery.



In addition to environmental concerns, the team took affordability and livability into consideration. At one point, the development had 6,700 units. That number has actually dropped to around 6,500 as developers built more trails, and gave residents more open spaces to enjoy. And, rather than catering to a single socioeconomic demographic, the development contains units geared toward a range of income levels.



Another project currently underway is bringing an array of retail shops, a hotel, and other commercial ventures to the center of the development, along with new residential units.



“It has a halo effect,” Chicota said. “Not only will the new units benefit from the amenities, we expect all the others in the community will have access to this—a rising tide that raises all ships.”



Investing for Members



Every investment has a story behind it, but this one stands out for a number of reasons.



First, the development in Texas illustrates the way in which PERA’s investment team incorporates a <a href="https://www.copera.org/the-25-year-investment-that-continues-to-flourish-part-2" target="_blank" rel="noreferrer noopener" class="broken_link">mosaic</a> of factors into every decision. “We get asked, ‘does PERA invest in environmentally sustainable projects?’” Meili said. The answer is complex. 



Those factors weren’t pursued for their own sake, but investors took them into consideration when charting the course forward. They recognized the economic opportunity in pursuing green initiatives. They recognized the need for livable spaces at multiple income levels. And they capitalized on it.&nbsp;



Second, the Dallas development demonstrates the benefits of active ownership. Meili said that his team spends 75% of their time adding value to existing investments while spending the other 25% looking for new opportunities.



Spending the majority of time on increasing the value of existing investments shows that investing isn’t just spotting the next big thing and riding the wave. Investing means hard work, creating value along the way.



The decision in 1995 to invest in this opportunity was just the first step in a long process—not a lottery ticket that happened to contain lucky numbers. The time and effort PERA’s real estate investment team has invested into this project have contributed to the investment&#8217;s success. 



Editor’s note: PERA has chosen to not publish the name of this investment in accordance with Colorado law and PERA&#8217;s&nbsp;standard disclosure practices for these types of investments.

The 25-year Investment that Continues to Flourish, Part 2

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

Colorado PERA’s Board of Trustees met on June 19. At the meeting, the Board approved the release of PERA’s 2019 Comprehensive Annual Financial Report. This report, which is covered at length in <a href="https://peraontheissues.com/pera-releases-2019-financial-returns/" target="_blank" rel="noreferrer noopener">another story </a>on PERA On The Issues, includes information on PERA’s investment returns for the 2019 calendar year. The total fund’s investment portfolio returned 20.3 percent, net-of-fees.



The Board covered a number of other <a href="https://www.copera.org/pera-board-discusses-investments-during-june-meeting" target="_blank" rel="noreferrer noopener" class="broken_link">agenda items</a>, including information about legislation, the PERA Board election, and updates on projects currently underway within the organization.



Top of mind for many, however, was the investment landscape so far in 2020. While the CAFR mentioned above contains a detailed, audited account of 2019, it does not contain information past December 31, 2019. Investment returns for 2020 will be released in 2021. However, the Board did receive investment reports about broad trends to consider.



PERA’s investment staff monitors market trends, and the Board receives an outside perspective on PERA’s investments with help from its investment consulting teams at Aon, a leading global professional services firm. Laura Flaum, a senior consultant at Aon, shared with the Board her view on the year thus far: “We do expect to see the PERA portfolio make up some of the losses that we [saw in the first quarter] given the portfolio’s exposure to global equities,” she said. <a rel="noreferrer noopener" href="https://www.copera.org/pera-on-the-issues/pera-board-discusses-investments-during-june-meeting" target="_blank">Global equities</a> make up just over half of PERA’s <a rel="noreferrer noopener" href="https://peraontheissues.com/pera-board-meeting-notes-setting-peras-portfolio-mix/" target="_blank">asset allocation</a>.



Flaum added that PERA’s second-largest asset class, <a href="https://peraontheissues.com/asset-class-depth-fixed-income/" target="_blank" rel="noreferrer noopener">fixed income</a>, has played an important role so far in 2020. Fixed income, which makes up about a quarter of PERA’s overall asset allocation, consists of bonds issued by both companies and governments. Flaum explained that fixed income serves as downside protection and a risk mitigation tool during market downturns.



During the volatile markets in the early part of the year, Flaum said that fixed income “did perform as it was intended to, and this really illustrates the benefits to having a diversified portfolio.”



The Importance of Staying the Course



PERA’s Chief Investment Officer, Amy C. McGarrity, spoke to the Board about PERA’s investment strategy during volatile times. “There’s no shortage of people with opinions on where the markets are going in the near term,” she said. “But, in my opinion, market timing is extremely difficult.”



McGarrity briefly shared an example to illustrate her point. If you invested $10,000 in the S&amp;P 500 on January 1, 2000, and left your money invested for the entire 20 years, your portfolio would have grown to $32,192 at the end of 2019.



But let’s say you miss just the five best days during those two decades. Your portfolio would be worth $21,359 today—48 percent smaller compared to those who were invested the entire time.



And, if you missed the 20 best days during that 7,305-day span, your initial $10,000 investment would be worth $10,145—virtually unchanged.



“The key, in my opinion, is to remain invested in markets,” McGarrity said, “because it’s very difficult to predict where it’s going in the near term.”



One way PERA’s investment team responded to volatility was to keep an eye on PERA’s asset allocation, ensuring that the overall portfolio stayed within the Board’s guidelines as values changed quickly. McGarrity said that doing so is crucial to meeting long-term objectives. “We think over time that the <a href="https://www.copera.org/2018-markets-year-in-review" target="_blank" rel="noreferrer noopener" class="broken_link">asset allocation</a> that [the Board has established] will achieve the results that we are expecting,” she said.

PERA Board Discusses Investments During June Meeting

Colorado PERA’s Board of Trustees met on Friday, March 20, in historic fashion. Board members called in. Those in PERA’s Denver building sat noticeably far away from one another. All this in response to the COVID-19 health crisis we all face. Aside from the unfamiliar seating arrangement, however, this scheduled meeting went on as planned.



At this meeting, the Board did not take major action on any issue. They did receive numerous updates about PERA operations and updated policies under routine review.



Executive Director’s Report



Executive Director Ron Baker informed the Board about <a aria-label=" (opens in a new tab)" href="https://peraontheissues.com/peras-response-to-covid-19/" target="_blank" rel="noreferrer noopener">PERA’s response</a> to the global pandemic. “Work at the building is vastly reduced, but we’ve been able to maintain a high level of service via remote working,” he said. 



Baker said that PERA is prepared to continue delivering retirement benefits to PERA&#8217;s benefit recipients. Services members rely on, including PERA’s customer service call center, field education services, and individual counseling sessions, are all still available online and over the phone.



Baker also noted that, amid the upheaval caused by COVID-19, progress toward achieving long-term strategic goals continues to be made. Examples include expanding the use of web-based counseling and launching organization-wide communications initiatives to better engage new PERA members and deliver information to all members in a more streamlined, accessible way.



Investment Updates



Against a backdrop of high global market volatility, Amy C. McGarrity, PERA’s Chief Investment Officer, delivered an update of PERA’s investment operations. 



McGarrity noted the sharp increase in volatility across global markets. In any given short-term period, the portfolio may perform better or worse than long-term expectations. Instead of trying to predict what the markets will do from day to day, the PERA portfolio is positioned to deliver the expected long-term rate-of-return assumption (7.25 percent) over the long term (30+ years).



She said that the investment team “continues to perform at a high level” and that many have experience from the similarly volatile 2008-09, which gives them valuable insight as they work to achieve their investment goals.



Other investment activities since the Board last met include:



<ul><li>The addition of the PERAdvantage 2065 Fund to the target date funds available to members who participate in PERAPlus. Target date funds allow people to invest in a well-diversified portfolio, taking on risk appropriate for their age, with a single click. This newest fund is designed for people who intend to retire on or around the year 2065.</li><li>PERA’s Fixed Income asset class (DB Plan) is now entirely internally managed. PERA identified this as an opportunity to expand its proven ability to deliver compelling long-term returns at a low cost.</li><li>Investment Operations established a business continuity plan to ensure continued management of PERA’s portfolio if PERA systems were unavailable.</li></ul>



Active Risk Policy



PERA’s Board sets multiple policies related to investment activities, including PERA’s Active Risk Policy. At the meeting, Aon delivered a presentation on this topic. At the end of the presentation, the Board made minor policy adjustments. 



Active risk is the amount of risk a portfolio has when measured against its <a aria-label=" (opens in a new tab)" href="https://peraontheissues.com/policy-benchmark/" target="_blank" rel="noreferrer noopener">benchmark</a>. For example, an active risk of 1.0 percent means that in two out of every three years, the return can be expected to be within 1.0 percent of the benchmark. In nine out of every ten years, the return can be expected to be within 2.0 percent of the benchmark. 



What makes this particular measurement notable? Having a policy that establishes a cap on active risk puts a measurable limit on the amount of risk taking that can occur at any given time. It’s important to note that the goal is not to eliminate all risk. Taking a certain amount of risk is important as risk corresponds to potential investment returns. According to Aon’s presentation, this window of allowable risk levels gives investment staff the flexibility to “take advantage of opportunities when they present themselves.”



Aon’s report stated that PERA’s “[global equities] active risk range has historically been between 40 and 120 [basis points], well below the 225 [basis points] allowable maximum” and that “PERA’s active risk profile has been consistently more conservative than peers.” 



Fixed income active risk “has ranged between 20 and 50 [basis points]”, also well below the allowable maximum and “relatively more conservative” than peers.



At the end of the presentation, the Board made minor modifications to PERA’s active risk <a label=" (opens in a new tab)" rel="noreferrer noopener" href="https://www.copera.org/pera-board-meets-amid-unusual-circumstances" target="_blank" class="broken_link">policy</a>. Among other changes, risk levels will be calculated over a five-year period instead of three, and the process for PERA staff to report to the Board if risk levels exceed the limit at the end of any fiscal quarter was formalized. The Board committed to deepening their knowledge of active risk with annual educational sessions on the topic.

PERA Board Meets Amid Unusual Circumstances

This week has been filled with uncertainty. As details about the current coronavirus outbreak emerge, people everywhere are wondering how this might affect them, their neighbors, and their families.



<div class="wp-block-image"><figure class="alignright size-large is-resized"><img decoding="async" loading="lazy" src="https://www.copera.org/peras-chief-investment-officer-addresses-market-drop"Amy McGarrity" class="wp-image-2159" width="205" height="256"/><figcaption> Amy C. McGarrity, PERA Chief Investment Officer </figcaption></figure></div>



Before addressing what this means for investors, and PERA in particular, I’d like to acknowledge that the health crisis behind the decline in global equity markets is an issue that goes deeper than money. Our thoughts are with those who have become ill, and our hearts go out to those families who have lost loved ones. We are thankful for the hundreds of thousands of health professionals worldwide who are treating patients, taking measures to prevent the spread of this virus, and those studying ways to combat it.



At PERA, we are acutely aware of the concern our members might have about the increased market volatility brought about by this virus. We are in the business of providing retirement security, and news of market declines can be unsettling. At Colorado PERA, we invest strategically, meaning we remain invested in our <a label="primary asset classes (opens in a new tab)" rel="noreferrer noopener" href="https://www.copera.org/2018-markets-year-in-review" target="_blank" class="broken_link">primary asset classes </a>throughout the market cycle. In other words, we do not attempt to time the market. 



Our strategic asset association is determined by an asset-liability study the Board routinely undertakes. We can’t predict when market volatility will occur. However, we can—and do—incorporate risk into our investment decisions. The most recent asset-liability study, completed in December 2019, resulted in the following strategic asset allocation targets:



<ul><li>Global Equities: 54%</li><li>Fixed Income: 23%</li><li>Private Equity: 8.5%</li><li>Real Estate 8.5%</li><li>Alternatives: 6%</li></ul>



In any given short-term period, the portfolio may perform better or worse than long-term expectations. Downturns are expected, and the swiftness with which they can occur often overshadows the rise in markets, even though positive market environments typically outweigh the negative impact of historical downturns. Global equities<a href="#_ftn1">[1]</a> have indeed lost 7.7 percent from the beginning of 2020 through the market close on February 27. However, when looking at the 10-year period ending on February 27, the overall return is 8.3<a> </a>percent. 



Instead of trying to predict what the markets will do from day to day, the PERA portfolio is positioned to deliver the expected long-term rate-of-return assumption (7.25 percent) over the long term (30+ years). 



The markets don’t always go up. However, we are confident that PERA is well positioned to continue to invest through the ups and downs of the market cycle, providing the opportunity to achieve our long-term goals. 



 &#8211; Amy C. McGarrity



PERA Chief Investment Officer 



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<a href="#_ftnref1">[1]</a>
As measured by the MSCI ACWI IMI (benchmark for PERA Global Equity asset class)

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