Less volatility the aim for state investments

Doug Finke

Planning for retirement has two of the largest state government pension systems doing what a lot of Americans are doing — taking money out of the U.S. stock market and investing it in something less volatile.

Both the Teachers’ Retirement System, which invests retirement money for teachers outside of the city of Chicago; and the Illinois State Board of Investments, which does the same for state employees, lawmakers and judges, have changed their strategies in recent months, in both cases resulting in less investment in the stock market.

The decisions come at the same time both systems, like investors everywhere, have seen their returns and investment portfolios shrink in the declining economy. State pension payments are guaranteed, though, so they are not affected by investment losses.

“TRS has been proactive in seeking to fully diversify its investment portfolio as a way to reduce overall risk during down markets,” TRS spokeswoman Eva Goltermann said Monday.

As recently as February, TRS decided to speed up the process of moving money out of stocks and into a new class of investments the system says perform best during periods of high inflation. It’s a continuation of an investment strategy adopted by TRS in December 2006 that called for dropping the amount invested in U.S. stocks from 41 percent of the total portfolio to 30 percent.

TRS conducts an allocation study every three years to determine the best mix of investments.

In place of stocks, TRS invested in inflation-protected securities, international stocks and bonds, and commodities. Its new investments had a gross rate of return (before deducting management fees) of 18 percent for the 12-month period ending May 31, according to TRS.

Over the same period, TRS had an overall rate of return of only 1.28 percent on its investments. That return beat expectations, but it is a far cry from the 8 percent average return over the last 10 years.

The market value of the system’s assets also has taken a hit, dropping from $41.9 billion on June 30, 2007, to $40.3 billion on May 31. Goltermann said final numbers are not available for June, which could ease the drop.

TRS is not panicking.

“While that’s an enormous amount to everybody, to an institutional investor, we could make that up in a month or two,” Goltermann said. “We put more emphasis on long-term performance.”

ISBI in March adopted a new investment model that also called for less money in the stock market, although executive director William Atwood said it was part of a five-year review of investment strategy and not in response to a declining market.

“You want to impose discipline on yourself so you’re not casting your lot to the wind,” Atwood said.  “You ride through these various market cycles.  They don’t go up all the time, but as a trend, they do go up.  You do not make willy-nilly decisions.”

The new plan calls for increasing investments in international markets from 10 percent of the portfolio to 20 percent. Hedge fund investments will also go up 5 percent.  All of it will come out of U.S. stocks.

“We want to build a portfolio that gets us an 8.5 percent return with as little risk as possible,” Atwood said.  “It (the changes) was to reduce the volatility of the portfolio.”

Market value of ISBI investments dropped from $12.6 billion on June 30, 2007, to an estimated $11.4 billion on June 30, 2008 (final figures for last month are not available). Not all of that drop is from declining investments, though. About $504 million in assets were paid out to meet pension obligations, Atwood said.

One Illinois government investor is not changing his strategy despite dropping returns.  Treasurer Alexi Giannoulias said his office made only $375 million in investment income for the budget year that ended June 30. That’s a drop of $51 million from the previous year.

Worse, his experts expect only $138 million to $180 million will be earned in the current fiscal year, which began July 1. Money earned on state investments is turned over to the state’s general account.

However, Giannoulias’ office only invests state funds for short periods of time (less than a year) until they are needed to pay state expenses. That limits the investment options, which include things like U.S. treasury notes and short-term commercial paper.

Bob Crossen, cash manager for Giannoulias, said federal cuts in interest rates rippled through to the investments made by the treasurer’s office.

Doug Finke can be reached at (217) 788-1527.      


                 June 30, 2007     December 31, 2007  June 30, 2008  

ISBI          $12.6 billion        $12.3 billion            $11.4 billion*     

TRS          $41.9 billion        $41.7 billion           $40.3 billion (as of May 31)

*decrease includes $504 million paid in pension benefits to retirees