Volatile market tests Oregon's strategy for public-pension fund investments
Oregon's new strategy for managing its multibillion public-pension fund through an uncertain economy is getting its first test.
While the estimated loss to the fund in the first quarter of this year was 7.8%, it was less than the 20% sustained by the Standard & Poor's 500 Index, the worst for S&P since the fourth quarter of 2008.
The Public Employees Retirement System board heard a final report last week from John Skjervem, the state's chief investment officer and an architect of the new strategy. Skjervem's last day was March 31; he announced in February he was leaving to become president of an asset management firm in Menlo Park, Calif.
Under the strategy, the PERS fund will not grow as much when financial markets surge — but will not drop as much when the markets plunge. While PERS manages the pension system for retired public workers, the Oregon Investment Council — the state treasurer and four other members — oversees state investments, the largest of which is the PERS fund.
Skjervem said it was too early to tell whether the new strategy will work if there is another economic downturn comparable to the financial-market crash. During that downturn, the PERS fund lost 28% of its value when it declined from $66 billion in December 2007 to a low of about $48 billion in March 2009.
The fund was about $79 billion at the end of the first quarter of this year.
Oregon's public-pension fund is among the nation's largest of its type. Benefits paid to about 150,000 public retirees come from investment earnings from the fund and contributions from state and local government employers.
When Skjervem joined the Oregon State Treasury in 2012 — just before the PERS fund reached its pre-recession mark — he and then-Treasurer Ted Wheeler embarked on a new strategy for managing it.
The new goal over a 40-year investment period for risk-adjusted returns is 7.2%, which matches the guaranteed rate of return for the current two-year cycle.
In 2019, the fund earned 13.56%, less than the S&P's gain of 31.56%. (The comparisons are inexact because the PERS fund has diversified investments beyond stocks.)
Skjervem said it's more akin to managing an endowment. "Any time that the market rallies, as it did in 2019, we will underperform on a relative basis," he said.
Skjervem used a baseball analogy to describe the past and current strategies. "We hit for power. We were sluggers. We were the Barry Bonds of public pension funds. We would often go up and hit a home run or strike out," Skjervem told the PERS board.
"But we have worked really hard to change that distribution. We have given up power for average. We are not swinging for the fences as much as we used to. We hope we are not striking out as much, and we are focusing not on slugging percentage, but on on-base percentage.
"That effort has resulted in a slight change in the distribution, not dramatic but slight — and meaningful."
Skjervem said the changes may not be evident because the mix of investments appears to be the same. But he said Oregon's new strategy is aimed at reducing the risks in fixed-income (bonds) and real estate investments. "We were taking a lot of risk in real estate and fixed income," he said. "The problem with taking risks there is that you do not get rewarded commensurately."
If the current downturn lasts two quarters or more — the definition of a recession — Skjervem said the effects will show up in the 2023-25 budget cycle. That's because the contribution rates that member agencies pay into the pension system for the next two years are based on the PERS valuation as of Dec. 31, 2019. The PERS board will set the actual rates for the 2021-23 budget cycle at its Oct. 2 meeting.
Skjervem said there is no magic formula for Oregon to follow. "We cannot earn a positive longterm return and inoculate the portfolio from losses. Those are mutually exclusive outcomes," he said. "We are losing money, but we are losing a lot less money than our peer group, because we own a lot less public stock and we have a much more diversified portfolio."
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