In general, benchmarks are used in many areas and according to definition, benchmarks are “something that serves as a standard by which others may be measured or judged.” With regard to investing, individuals are probably familiar with benchmarks like the Russell 1000 or the S&P 500. However these common benchmarks are insufficient for most institutional investors, like PERA, that have complex investment portfolios containing assets not available to individual investors in the retail market. Because portfolios like PERA’s have non-publicly traded assets like real estate and private equity, a custom benchmark is required to measure overall investment performance. This is what’s known as a policy benchmark The policy benchmark provides a point of comparison when assessing the investment performance of the total fund. PERA’s Board of Trustees compares the policy benchmark return to the fund total return to determine how the PERA investment team performed on a comparative basis over a given time period.
Since 2004, the Board, upon the recommendation of their investment consultant, has adopted a policy benchmark to represent their asset allocation decisions. In addition to offering a reference point, the policy benchmark allows the Board to express its investment goals in concrete terms, providing guidance for staff as well as other stakeholders of the fund. The policy benchmark also establishes the Board’s long-term view regarding investments, which puts into perspective any reaction, or over-reaction, to short-term market conditions.
The Board determines the asset allocation for PERA, which means that the Board broadly defines how the $44 billion in the fund will be invested by asset class. The Board’s Statement of Investment Policy guides this effort. This strategic asset allocation is believed to be the most important factor influencing long-term investment performance and asset volatility. As of December 31, 2016, the PERA policy benchmark is a combination of the benchmarks for 53.5 percent Global Equity; 23.5 percent Fixed Income; 8.5 percent private equity; 8.5 percent Real Estate; 5.0 percent Opportunity Fund; and 1.0 percent Cash. (For more information, see the Schedule of Investment Results on page 125 and the Fund Performance Evaluation on pages 127–128 of the Colorado PERA Comprehensive Annual Financial Report.)
Since the adoption of the policy benchmark in 2004, the fund has outperformed this measure, adding millions of dollars to the assets invested on behalf of the PERA membership.
Many public pension funds recently released investment results, having ended their fiscal years on June 30. Colorado PERA’s reporting year ends on December 31, so PERA’s returns cannot be compared to the return of funds that have June fiscal reporting periods. (See this PERA on the Issues post from August 16, “Comparing Apples to Apples: How Rates of Return Can Seemingly Vary from One State to Another” for details.)
Global equityA type of investment that includes publicly traded stocks in companies based in the United States and abroad.Asset allocationAn investor’s mix of stocks, bonds, and other investments. PERA’s strategic asset allocation is set by the PERA Board of Trustees.VolatilityA state of unpredictable activity in financial markets, during which prices can experience significant and/or unexpected swings in either direction. Private equityA type of investment in which investors purchase shares of a company that is not traded on a public stock exchange.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.BenchmarkA tool used to measure performance. For example, an investor can use a stock index as a benchmark to measure his/her own investment performance compared to the market as a whole.BenchmarkA tool used to measure performance. For example, an investor can use a stock index as a benchmark to measure his/her own investment performance compared to the market as a whole.BenchmarkA tool used to measure performance. For example, an investor can use a stock index as a benchmark to measure his/her own investment performance compared to the market as a whole.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.