Tag: memphis pensions

Memphis Fund Ramps Up Risk With New Investment Strategy

Memphis pension investment strategy

It’s been brewing for months, but now the decision is unanimous: the board that governs the City of Memphis Retirement System has decided to turn to a higher-risk investment strategy involving increased allocations toward private equity, hedge funds and foreign stocks and bonds. From the Commercial Appeal:

The Memphis pension board cast a unanimous voice vote Thursday morning to shift hundreds of millions of dollars in retirement assets out of U.S. stocks and bonds and into assets with higher risk and potentially higher rewards, such as international stocks and bonds, and new investments in private equity and hedge funds.

The city would sell a large portion of its U.S. stocks and bonds and increase its holdings of foreign stocks from 22 percent of the portfolio to 31.7 percent. The fund would also invest 13.4 percent of the portfolio in bonds from abroad.

The pension fund would invest 4.4 percent of its portfolio in private equity companies and 4.2 percent of its holdings in hedge funds.

These numbers are “targets” — the actual percentage of investments in each class can change depending on various factors, such as investment performance.

Earlier this summer, the fund approved doubling its real estate allocation—from 5 percent to 10 percent.

Some members of the board wondered what would happen it the strategy turned sour. The Commercial Appeal reports:

“If we went with these changes, what’s the worst case scenario?” pension board member Derek Brassell asked before the vote.

“The worst case is the same worst case we would have with the existing portfolio. So it’s no different than it was before,” responded Lawrence H. Marino, senior vice president with the city’s investment advisory firm Segal Rogerscasey.

“What we’ve done is by diversifying, we can get lower risk with the same return, or we can get higher return with the same risk. Here we’re opting to get higher return with the same risk.”

Other experts had previously advised the fund that, though higher risk was guaranteed, higher returns were not a given.

“Only time will tell,” said Don Fuerst, senior pension fellow at the American Academy of Actuaries.

Memphis’ Pension Fund Is Considering Going All-In On High-Risk Strategies

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For the last two years, the City of Memphis Pension Fund has been considering an overhaul in investment strategy. The strategy: re-allocating hundreds of millions of dollars from U.S. stocks and bonds into higher-risk investments. That entails increased allocations toward private equity, hedge funds, foreign stocks and bonds and real estate investments.

On August 28, the board that makes investment decisions for the fund will vote on the change in policy.

The board had already voted at its last meeting to allow the fund to double its real estate investments, from 5 percent of its portfolio to 10 percent.

More from the Commercial Appeal:

The strategy, recommended by investment advisory firm Segal Rogerscasey, was introduced to the pension board last week by pension investment manager Sam Johnson and city Finance Director Brian Collins.

It increases loss risk but could lead to bigger rewards.

Collins said the board’s investment committee had been reviewing the changes for two years and that investments in international securities would help the fund achieve its target 7.5 percent return. “So much of the high single-digit and double-digit growth is outside our borders,” Collins said.

The pension board decided Thursday to delay a vote on the investment strategy until at least its next meeting, scheduled for Aug. 28. The board did vote to allow the City Council to consider a proposal to raise the proportion of real estate investment from 5 percent of the pension portfolio to 10 percent.

The strategy might work, Fuerst said, but there’s a risk. “If they don’t accomplish those returns, it would mean the need for sharply higher contributions, or possibly the type of situation you’ve seen in Detroit, where you’ve seen benefit cutbacks.”

Memphis’ Finance Director was quick to defend the proposed changes. Increase allocations in private equity, he pointed out, doesn’t automatically mean more risk.

He also laid out the specific allocations he envisioned the fund making toward various higher-risk, higher-return investments:

Under the plan he presented, the pension fund would invest 4.4 percent of its portfolio in private equity companies, which often specialize in buying troubled companies, turning them around and reselling them for a profit.

The pension would invest 4.2 percent of its holdings in hedge funds, private investment groups run by money managers who pursue a wide range of strategies.

The city would sell some U.S. stocks and bonds, reducing their combined percentage of the portfolio from 73 percent to 49.7 percent.

The pension fund would increase its holdings of foreign stocks from 22 percent of the portfolio to 31.7 percent. The fund would also invest 13.4 percent of the portfolio in bonds issued outside the U.S.

As of June, the Memphis Pension Fund was valued at $2.2 billion. As such, even a re-allocation of a few hundred million dollars would result in a significantly altered asset allocation compared to the current distribution of assets.