Investing requires an objective, just like charting a course on a map requires having a destination. A trip to Peru is not a successful trip if the objective had been Norway. Both destinations are viable options when you’re planning a trip, but they can’t both be the objective when you leave home: You can’t travel north and south at the same time. Investment objectives are no different.
In January 2019, Colorado PERA’s Board of Trustees stated that “PERA serves the singular purpose of ensuring the retirement security of Colorado’s current and former public servants.” That objective not only includes ensuring a secure retirement for the 82-year-old retired teacher who relies on PERA today, but also for the 25-year-old CDOT employee who doesn’t plan to retire until 2059.
To reach that overall objective, the Board stated that “PERA seeks to maximize long-term risk-adjusted investment returns while incorporating the fund’s liability characteristics.” In other words, PERA must make investments that, altogether, are most likely to provide security for more than 600,000 members.
The Board’s statement continued, “A central component in managing investment risk is diversification”. This allows an investor, like PERA, to spread out risk (as in “don’t put all your eggs in one basket”) by looking into the widest number of possible investment opportunities.
The Divestment Dilemma
In recent years, outside organizations have suggested that institutional investors like PERA adopt a new objective: Use pension fund dollars to make political or social statements. Over time, these divestment requests have included industries such as mining, fossil fuels, meat, tobacco, guns, and more.
Each divestment proponent seeks to do good as they define the term. And, in September, PERA staff met with one such group to hear their concerns. But making divestment an objective is problematic. Issues PERA’s Board has raised include:
- Limiting the investment opportunities available to PERA could lead to a less diversified portfolio. By accepting potentially more risk or smaller returns, this objective could conflict with PERA’s primary objective to provide retirement security to its members.
- Calls for divestment span many issues. Over time, proponents have identified various industries as candidates for divestment. Deciding which of these to act on would be extremely problematic given PERA’s investment objectives. PERA invests in companies, not causes. Becoming an arbiter on issues like meat consumption or guns is not within PERA’s purview.
- Divesting PERA’s existing holdings within an industry could lead to unintended outcomes. For example, PERA invests for the long term. Some investments might not be profitable today, but are expected to be in months or years down the line. Abruptly selling shares of a company, perhaps at a loss, would be in direct conflict with PERA’s main objective.
An Alternate Reality
Calls for divestment are gaining momentum. Proponents suggest that divesting from certain industries or companies will better enable PERA to achieve its long-term investment objective.
To demonstrate this, some organizations have proposed the following thought experiment: What if PERA had divested from a certain industry in the past and reinvested those dollars elsewhere? These thought experiments suggest PERA could have made millions or billions of dollars by investing differently in the past.
This type of thought experiment implies PERA could have made investment decisions years ago based on information only available today. That model does not reflect reality. While it’s always possible to find one company or industry that did better than another in hindsight, that isn’t a helpful guide when investing in the real world, where the future is unknown.
Investing for the Future
Finally, PERA does take into account that environmental, social, and governance factors can indeed affect a company’s long-term profitability. The ability to adapt to a changing world, do business in a sustainable way, and use resources in a way that ensures long-term success can be indicative of a quality company worth investing in.
Factors like these are part of a mosaic of factors PERA’s investment team considers when making any investment decision. Making investing decisions based on multiple pertinent data points instead of singling out one factor and ignoring the rest is the most responsible way forward for PERA and its members.