News Column

Memphis pension board votes to put assets in high-risk, high-reward investments

August 28, 2014

By Daniel Connolly, The Commercial Appeal, Memphis, Tenn.

Aug. 28--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.

"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."

That's a much more optimistic assessment than the one a national expert gave The Commercial Appeal last month, shortly after the board began discussing the proposed reallocation. "The portfolio that you described, it is clearly one that's going to be more volatile or more risky," said Don Fuerst, senior pension fellow at the American Academy of Actuaries. "Whether or not it actually produces a higher return, only time will tell."

The city of Memphis pension fund owes far more to retirees than it has on hand. If the pension fund investments perform well, the city will have to contribute smaller amounts of taxpayer money in coming years. If the investments perform badly, the city will have to contribute more.

Cities around the nation are investing pension money in more aggressive investments in the hope of winning higher returns, Fuerst said.

The pension board had previously approved one part of the reallocation, a decision to raise the percentage of real estate assets in the fund from 5 percent to 10 percent. The City Council is now considering the change.

The remaining changes approved Thursday became final with the pension board vote and will not go before the City Council.

Here's a summary of the other changes:

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.


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Source: Commercial Appeal (Memphis, TN)

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