Asset allocation is the primary determinant
of any portfolio’s risk, or volatility, and return potential, including PERA’s.
Asset allocation simply refers to the
portion of PERA’s total portfolio that is invested in the five asset classes. The PERA Board
of Trustees regularly revisits the strategic asset allocation
to determine whether the fund needs to be differently proportioned. A critical
part of that work is called an Asset/Liability Study, which evaluates the
relationship of the plan’s assets and liabilities, as well as the plan’s risk
The Board’s investment consultants, Aon,
began the latest Asset/Liability Study in late 2018 and recently provided its findings
at the Board Planning Session earlier
The key objective of the Asset/Liability
Study is to identify the appropriate risk posture for the portfolio in the
context of the liabilities of the portfolio, or the right level of risk for the
overall portfolio of assets. Making this determination requires three key
decisions: the overall mix between return-seeking and risk-reducing assets; the
composition of the return-seeking portfolio; and the composition of the
The Board is expected to use the results of
the Asset/Liability Study, the timing of projected cash outflows, and overall
risk tolerance of the fund in order to determine a strategic asset allocation
later this fall.
be seen here.]
Reevaluating its strategic asset allocation
every three to five years, as PERA does, is a best practice for institutional
investors and a cornerstone of prudent governance of a pension plan. The
updated asset allocation policy will provide guidance on the most appropriate
mix of assets to be held in the PERA Trust Funds in order to meet the future
financial needs of the plan for the sole benefit of its members and retirees.
Also included in the Asset/Liability Study is
information about key assumptions and possible alternative portfolio
capital market expectations for a variety of
asset classes are used to model different asset allocations based on Aon’s
expectations. Since PERA is a long-term investor, it relies on long-term
assumptions about how the capital markets will perform and economic
environments will shift.
and performance expectations with different asset allocations. Aon’s
analysis looked at a range of combinations of different asset classes in a
variety of weights, including global equity, fixed income, private equity, real
estate, private debt as well as asset mixes designed to mitigate risk. Aon
generally favors careful diversification into a broad set of asset classes with
attractive risk and return properties to improve portfolio efficiency, and its
specific analysis for PERA has been customized to reflect PERA’s particular
needs and circumstances.
Additional information from the presentation
of Aon to the Board at its September Planning Session can be found here.
As the Board continues the process of
refining the analysis of the Asset/Liability Study and developing its updated
strategic asset allocation, PERA on the Issues will continue to provide new
information on the Board’s conclusions.
VolatilityVolatility of returns is the measurement used to define risk. It describes the variation of price of a financial instrument over time. The greater the volatility, the higher the risk.DiversificationA strategy of reducing exposure to risk by combining a wide variety of investments within a portfolio.