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Pension fund investments structured for the long term

Posted January 22, 2008 10:00 pm

Doug Finke

Think your 401k plan has taken a hit from the recent stock market decline?

Consider the state-funded pension systems that have billions of dollars invested.

The Illinois State Board of Investment oversees more than $12 billion in assets in pension funds for state government employees, judges and lawmakers. About 60 percent of that is invested in U.S. and foreign stocks.

ISBI executive director William Atwood said Tuesday the funds' holdings - both in U.S. and international stocks - have dropped by nearly $700 million since Jan. 1, a 10.5 percent decrease.

"For the last four or five years, markets have gone steadily upward," Atwood said. "Periods like the last six months are inevitable."

The Teachers Retirement System is the largest of the state-funded systems, both in number of participants and in assets. TRS chief investment officer Stan Rupnik declined to say how much money TRS has lost from the stock market decline until quarterly financial numbers have been given to the system's board.

"I think it is safe to say it was a difficult quarter," Rupnik said.

State pension payments are guaranteed, so they are not affected by the funds losing money on stock market investments.

Both men scoff at the notion of "market timing" in which investors try to guess when stocks will go up or down, moving money into and out of the market to coincide with rises and dips.

"That gets you into serious trouble," Rupnik said.

"That just doesn't work," Atwood said.

Instead, both systems use long-term strategies of diversification to allocate their assets among a variety of investments. With the help of consultants, the systems agree on a plan that calls for investing a certain percentage of fund assets in U.S. stocks, for example, and a certain percentage in foreign stocks, in bonds or real estate. The plans are reviewed every few years.

TRS adopted a new plan a year ago that called for dropping the amount invested in U.S. stocks from 41 percent of the total portfolio to 30 percent. Some of that money was invested in international stocks instead, some in commodities and some in inflation-linked treasury bonds.

Rupnik said the change was undertaken to recognize the more global economy, to diversify risk and to put money into inflation-proof investments.

"We wanted stuff that would not decline in a major market sell-off," Rupnik said. "It was a means of getting assets protected."

Atwood said the ISBI is about to undergo a similar review of its asset allocations.

"We're looking forward five years," Atwood said. "In a perfect world, we wouldn't pay too much attention to the slings and arrows of the past month, but I think the trustees can't help but pay attention to that."

Like TRS, though, the ISBI already puts money into a variety of investment types to protect against a severe decline in any one of them. The goal, Atwood said, is to have a mix that produces at least an 8.5 percent annual return, the benchmark of all the pension systems.

That benchmark is often exceeded. For the budget year that ended June 30, 2007, TRS had a return of more than 19 percent.

Both systems use external management companies to oversee the day-to-day operations of their assets. Money is placed with a financial management company that invests it in a certain area, such as stocks or real estate. It is analogous to an individual who buys into a mutual fund. The investor can put money into a stock mutual fund, for example, but does not pick which stocks to purchase.

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

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