Retirement insights from a Colorado PERA perspective

Legislation & Governance

A Brief Look at PERA’s Opportunity Fund

Board meeting

Colorado PERA’s asset management focuses on maximizing risk-adjusted investment performance from the broad universe of investable assets. With about $44 billion in assets, this is a large and complicated task, and one that requires oversight from specialists with experience in various asset classes.

PERA differentiates its Investment Department by specific asset classes. equities, fixed income, private equity, and real estate (additional information on asset allocation can be found in a prior PERA on the Issues post, “Asset Liability Study Plots Course for Future”). However, there are some strategies that do not fit neatly into a specific category and some that are new and innovative and don’t fall into an existing category. PERA’s Opportunity Fund asset class includes these investments.

All PERA investment decisions are governed by a Board-adopted investment philosophy and set of beliefs, including the Opportunity Fund asset class (See PERA’s Statement of Investment Policy for details.) Opportunities exist throughout a market cycle, and thoughtful research and analysis can uncover unexpected and promising ideas. PERA staff may seek opportunities created by market dislocations to generate strong absolute returns. However, staff is also mindful that costs, risks, and complexity must be considered.

Opportunity Fund staff seeks diversified investment returns from a variety of different categories of assets. These different categories may be overlooked or inaccessible to certain types of investors, such as individuals or investors with a short time horizon, or need for liquidity. Some of these investments may require more patience than the public capital markets allow, and some may employ public market instruments such as stocks and bonds. Some investments may have a short- or medium-term investment horizon. Some use esoteric instruments and strategies, but others simply invest directly in basic industries. The universe of investment opportunities may appear to be expansive; however, in reality it is more exacting.

In many ways it is easier to define the Opportunity Fund by what it does not invest in. It does not contain investments that generally fall under the jurisdiction of other asset classes. That means there won’t be investments composed entirely of stocks, bonds, real estate, or private equity vehicles that have a longer time horizon (10-15 years). It does not invest in non-U.S. country specific funds, so there won’t be a Brazil-only commodity fund included in the portfolio. It also does not invest in vehicles that are exposed to life-settlements.

Investments that meet the criteria to be considered for the Opportunity Fund provide some element of risk-reduction, investment outperformance (“alpha” in investment lexicon), or a combination of the two. Currently, the “risk reduction bucket” of the Opportunity Fund is composed of timber assets. The outperformance category (“alpha bucket”) is composed of opportunistic energy investments and opportunistic credit, among others. The distinction may become blurred, along with multi-asset investment vehicles, which do not fall neatly into either category. For example, PERA’s Opportunity Fund invests in risk parity strategies, which allocate risk rather than capital across multiple asset classfications in order to achieve portfolio diversification. Additionally, PERA’s Board recently approved the exploration of the global macro strategy and the relative value multiple-strategy, which are similarly a blend of both risk reduction and outperformance.

If the foregoing discussion made the Opportunity Fund sound complicated, then it has been accurately captured. Each investment must meet numerous criteria and must prove that it offers promising benefits as either a diversifier or alpha generator or a combination thereof. Depending on potential size, the investment may also require the approval of PERA’s Board. For an investment idea to pass such a stringent test, the proposal truly must be a strong opportunity…and a good fit for the Opportunity Fund portfolio.

Asset classesA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.Asset classesA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.LiquidityThe ease with which an asset can be converted to cash without a significant loss of value.Asset allocationAn investor’s mix of stocks, bonds, and other investments. PERA’s strategic asset allocation is set by the PERA Board of Trustees.Private equityA type of investment in which investors purchase shares of a company that is not traded on a public stock exchange.Fixed incomeA type of investment that pays investors a fixed rate of interest over a set period of time. Bonds are a common type of fixed income investment.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.

Comments

  1. Robert Howell says:

    What is the position on bonds given increasing interest rates, does investment include moving to some percentage in cash based on recession?

    • Colorado PERA says:

      Dear Mr. Howell,

      The PERA Board of Trustees periodically reviews the asset allocation of the portfolio, but PERA is a long-term investor and does not seek to time the market. The asset allocation is set to mitigate the ups and downs of the financial markets while keeping risk and costs low. See the current asset allocation here: https://www.copera.org/investments/asset-classes

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