Six Themes Important to the Success of LAGERS’ Investment Portfolio

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Do you ever wonder how LAGERS manages $6+ billion for you, the member? Investing that much money is no easy feat, but the current 94.4% prefunded status speaks volumes on just how well LAGERS manages and invests our member’s assets.

The goal of LAGERS’ investment portfolio is to achieve a return (net of fees) of at least 7.25% annualized over the long-term. If the portfolio meets this goal, you can be assured that future benefits of LAGERS’ members are safe and secure. There’s a lot to talk about when it comes to investments and pensions. The following six topics briefly summarize how LAGERS’ invests its assets in order to achieve this goal.

Active Portfolio Management is warranted when LAGERS believes the asset class or investment strategy is reasonably inefficient or difficult to access on its own. LAGERS investment team does rigorous research to find external asset managers possessing skill, consistent performance and sufficient capacity to meet LAGERS’ needs. A formalized due diligence process is followed when hiring external asset managers, as well as conducting fee negotiations in order to cost-effectively retain only the best managers.

Strong Relationships with best-in-class asset managers contribute to LAGERS’ success. The investment team feels it is important to identify, cultivate, and foster relationships with like-minded partners from around the globe in order to broaden investment reach. We build success together based on cooperation, trust and transparency.  These managers must exhibit strong ethical behavior, superior professional management, repeatable processes, and a proven track record.

 Risks must be considered at the investment, manager, asset class, and total portfolio levels. While risk can be perceived by investors as negative and frightening, having some risk is good! LAGERS’ investment portfolio needs risk in order to function properly and meet expected returns. It is important not to avoid risk, but to practice risk-awareness by identifying, measuring and monitoring the different types of risk in the portfolio.

Asset Allocation through effective portfolio construction is fundamental to our success. LAGERS conducts a total allocation study once every five years to ensure that investments, combined with employer and employee contributions, will generate sufficient cash to fund retirement benefits in the most effective and efficient manner.  During this process, every asset class available is analyzed for its return and risk characteristics and an asset allocation is developed based on this analysis.  Proper diversification allows risk to extend across the portfolio, reducing the adverse impact of any one investment loss on the portfolio overall.  However, over-diversification, as well as numerous investment constraints, can reduce investment returns.

Flexibility while remaining disciplined allows LAGERS to adapt to business cycles and shifting investment environments. The expected returns of assets can change over time; however, the relative performance of asset classes and investment styles generally move back towards long term norms. Therefore, LAGERS’ investment strategy must remain flexible to adjust to the shifting investment environments.

Illiquidity Premium is the premium demanded for assets that cannot be easily converted into cash, such as private investments. This means that LAGERS expects a higher return for these assets.  Because LAGERS’ actual cash needs are very minimal, we have the ability to maximize the allocation exposed to this premium via a proper liquidity allocation.  Private assets tend to produce a higher return than public assets and also help to diversify the portfolio, which in turn decreases the risk of the total portfolio.

Although $6+ billion is a lot of money to manage and be responsible for, rest assured that LAGERS is investing under the mission of providing a secure retirement to our members!

 

Erin Stieferman, Investment Risk & Operations Analyst

Erin Stieferman, Investment Risk & Operations Analyst

 

 

 

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