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Tuesday, October 23, 2018


Benchmarking your retirement plan

Photo: istock.com/WDnet
By Marianne Marvez, Guest Columnist

Benchmarking the fees and services provided to retirement plans by their recordkeepers is not only a prudent practice, it is a fiduciary obligation. 

Why should you benchmark your plan?
  • Fulfill your fiduciary obligation to monitor your current service providers by gathering information required to review the quality of the services and assess the cost of those services to determine if they are reasonable.
  • Compare your current service provider against the competition to determine if the current provider is still a good fit for your plan.
  • Potential cost savings for both the plan sponsor and participants in the form of lower recordkeeping and investment costs.  
  • Refresh your plan design. It is prudent to review your objectives for offering a retirement plan. Have those goals changed, and if they have, what service enhancements might you consider adding to facilitate participant engagement, add value to the company and improve your ability to attract and retain talent?

There are no set industry standards that mandate how often a plan sponsor should benchmark their plan. Many industry experts suggest benchmarking recordkeeping fees every three to five years. Some plans may have pre-determined benchmarking frequency requirements written in their plan document or policy statement.

There are several different ways to benchmark a retirement plan. One method specifically designed to gather data on recordkeeping fees and services is a Request for Information “RFI”.  The RFI is customized with your plan’s information including demographic and cash flow data, and specific plan design and service requirements you wish to review.  The documentation is prepared and the RFI is sent to several recordkeeping firms which have experience with your size and type of plan. Each firm is asked to prepare a pricing proposal using only the specific customized plan data provided, to ensure an apples-to-apples comparison.    

This benchmarking method provides insight as to what other recordkeeping providers are willing to charge to service your plan and helps verify whether or not your current provider’s fees are deemed reasonable.  Having this plan-specific fee data gives you the information necessary to determine that your current fees are either reasonable and compare favorably with the fees of similar recordkeeping firms, or allows you to weigh the value of staying with your current provider against making a recordkeeper change. Changing providers can be costly in time, lost account history and stressful. It may be reasonable to pay a higher fee if the quality of service and measurable outcomes align with the purpose for offering the plan. 
The regulatory guidance on what constitutes “reasonable” is a bit gray, and nowhere does it say a plan sponsor has to choose the least expensive service provider.  However, it is clear that as part of a prudent process, employers must be able to justify their choices and maintain documentation to validate their decisions.  The majority of lawsuits brought against plan sponsors in the past ten years have not only centered on fees, but also the failure to monitor

The landscape of retirement plans has changed dramatically in recent years, especially in the way recordkeeping fees are paid.  Due to the consolidation of providers, the increased use of technology, the move away from funds that share revenue, and the fear of litigation, recordkeeping firms have seen their fees decline. If your plan has been with the same recordkeeper for several years and you have not discussed renegotiating your Fee and Services Agreement, now would be an appropriate time to benchmark the plan to ensure you are monitoring the quality of your recordkeeper and collecting the information to determine that their fees are reasonable for the services provided.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Innovest or TEXPERS. 


Marianne Marvez
About the Authors:
Marianne Marvez is a vice president at Innovest. She has more than 30 years of experience in the retirement plan sector. She is a member of Innovest’s Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients. Marianne holds a Retirement Plan Associate designation from the International Foundation of Employee Benefit Plans and the Wharton School of the University of Pennsylvania and she is also pursuing the Certified Employee Benefits Specialist designation. She is also holds the Series 65 License Registered Investment Adviser Representative though FINRA. Prior to joining Innovest, Marianne was a director with Empower Retirement, a senior consultant at Strategies, LLC, a vice president and senior relationship manager at Bank of America Merrill Lynch and spent 15 years with Invesco Retirement Plan Services as an associate partner and senior client relationship Manager. Marvez graduated magna cum laude from the University of Denver with a Bachelor of Arts in law and society and a certificate in conflict management studies. In addition, she is a board member of the Denver Chapter of the Western Pension and Benefits Council, a 28-year member of the Board of Directors for the Denver Santa Claus Shop, a member of Mile High United Way’s Women United, and a Junior Achievement volunteer. Marvez also volunteers at Arrupe Jesuit High School and actively participates in various charity fundraising events in the metropolitan Denver community. Marvez is a Denver native. She and her husband Ed have four grown children and enjoy traveling, skiing, hiking and kayaking.

As global stocks diverge, 

valuation comes into sharp focus


Photo: pixabay.com
By Gregory Kolb & George Maglares, Guest Columnists

Despite the recent sell-off, U.S. equities have clearly separated from the rest of the global pack based on strong underlying economic fundamentals aided by stimulus from tax reform and assorted deregulation. From that place of relative strength, U.S. leadership is actively seeking concessions from trade partners, including both traditional allies (NAFTA, Europe) and strategic competitors (China). These measures, in and of themselves, are increasing tensions and uncertainty around the globe, and it would seem that equity markets are contemplating various adverse impacts. For example, several major markets in Europe – such as the UK and Germany – as well as Hong Kong are down meaningfully on a year-to-date basis, which is a stark contrast to performance in the U.S.

U.S. Outperformance
There are likely multiple explanations for this bifurcation in performance. First, investors may be anticipating that the U.S. is likelier to emerge victorious amid these various trade disputes given that its economy is larger, stronger and relatively less dependent on exports than partners. Second, underlying U.S. economic conditions are accelerating with improving GDP, low unemployment and contained inflation. 

Third, a variety of headwinds are challenging other major economies. The Brexit negotiations between the UK and the European Union appear increasingly disorganized and chaotic with each side entrenched in its own negotiating position before a firm March 2019 deadline. In Italy, the new government has proposed fiscal measures that are increasingly in conflict with EU and European Central Bank rules, threatening a potential debt crisis. 

Fourth, emerging market currencies continue to decline in countries such as Turkey, Argentina, Brazil and India. This currency depreciation increases the risks for those countries to meet debt obligations, attract capital and sustain growth. 

Lastly, China’s ability to sustain its own debt-fueled growth becomes more challenging in the face of massive U.S. tariffs.

Potential Downside Risks
And yet through all this elevated concern, stock market valuations in the U.S. remain near all-time highs, with multiples close to levels only previously eclipsed right before the dot-com bubble collapsed. As tensions escalate, it appears that the U.S. is serving as a “safe haven” for many investors and attracting further capital. 

Still, it is important to consider downside risks in such scenarios. Stimulus measures eventually run their course and have diminishing marginal impact. We also observe that a strengthening dollar invested in markets outside the U.S. generally buys significantly greater earnings than it would in the U.S.

Staying Focused on Valuation
Given the current environment, we encourage investors to explore areas that are out of favor and where negative sentiment weighs on the valuations of businesses with competitive strengths and financial resources to endure near-term challenges. 

Today, this often means focusing on opportunities outside of the U.S. where multiples appear more attractive. It might also include stocks that traditionally fall into the “value” bucket and tend to be cyclical in nature, including automotive, media, building products, materials and chemicals. We believe gradually shifting into these types of equities could mitigate downside risks. In our opinion, when market performance diverges, deploying capital into such areas could deliver stronger relative returns in periods of elevated market stress.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Perkins Investment Management or its parent organization, Janus Capital Group, or TEXPERS. 


George Maglares
About the Authors:
George Maglares is a Portfolio Manager for Perkins Investment Management LLC and is responsible for co-managing the Perkins Global Value and International Value strategies, a position he has held since 2016. Since 2013, he has also been a research analyst covering non-U.S. securities with a focus on the industrials and consumer sectors. Prior to joining Perkins, Maglares was a senior analyst with RoundKeep Capital Advisors, an event-driven hedge fund. His experience also includes serving as an associate with Frontenac Co., a middle market private equity firm, and as an analyst with Lazard Frères & Co. LLC. Maglares received his bachelor's degree in ethics, politics and economics from Yale University. He holds an MBA with concentrations in finance, accounting and entrepreneurship from the University of Chicago, Booth School of Business, where he graduated with high honors. He has 14 years of financial industry experience.


Gregory Kolb
Gregory Kolb is chief investment officer for Perkins Investment Management LLC, a position he has held since 2015. He is also a portfolio manager of the Perkins Global Value and International Value strategies. Kolb transitioned to the Perkins investment team from Janus in 2010. He joined the Janus investment team as a research analyst in 2001, became co-portfolio manager of Perkins Global Value strategy in 2005, and was named sole portfolio manager in 2009. Mr. Kolb has served as co-portfolio manager of the Perkins International Value strategy since its inception in 2013. His previous work experience includes roles as an associate director in UBS Warburg’s Financial Institutions Investment Banking Group and as an analyst for Lehman Brothers’ global mergers and acquisitions group. Kolb received his bachelor's degree in business administration from Miami University, where he graduated magna cum laude. Kolb holds the Chartered Financial Analyst designation and has 19 years of financial industry experience.

Market rout may spur rotation from growth to value


Photo: Pixabay.com/nattanan23
By Charles Roth, Guest Columnist

The early-October 2018 selloff in stocks has fueled speculation about an incipient rotation from growth to value. After a decade of growth stocks beating asset-heavy, stable earners and cyclical industrials, perhaps it’s time for a rebound in value. Recent exchange-traded fund flows and value vs. growth index returns suggest a shift in investor sentiment.

Since 2008, the S&P 500 Index has returned an annualized 14%, driven largely by large-cap growth. Corrections should be expected and welcomed. They create better price values for risk assets. Value can be assessed at the individual security or index levels, though we think it’s easier at the security level. Correctly timing index mean reversions is extraordinarily hard. It can look easy in hindsight, but head-fakes abound.

Take the Russell 1000 Value Index (RLV) relative to the Russell 1000 Growth Index (RLG), and the inverse RLG/RLV ratio. The mean reversions appear clear: as the Federal funds rate and the 10-year Treasury yield zig-zagged down from 1981 to 2008, value outperformed growth point-to-point. Over those nearly three decades, though, value outperformed in the first 10 years, then mostly lagged in the prelude to the Tech bubble. After that burst, value resumed beating growth until just before the Financial Crisis.

From the bottom of the Financial Crisis, growth then shifted into overdrive. It was fueled partly by unprecedented monetary policy: a ground-level benchmark rate and central bank asset purchases, which kept long-term rates at lowly levels for years to come. Until, perhaps, this fall, when the U.S. 10-year Treasury yield jumped about 40 basis points to around 3.20%. From September 11 to October 10, 2018, the Russell 1000 Value and S&P 500 Value indices both beat their growth counterparts by well over three percentage points.

Click chart to see enlarged image.

So declining Treasury yields combined with falling household savings created tailwinds for expanding consumption that boosted industrials, staples and infrastructure companies. But the Financial Crisis then induced consumer deleveraging. And tech’s intangible assets—intellectual property and patents—in many ways became more valuable than the fixed assets of old economy companies.
That’s reflected in index restructurings. The S&P Dow Jones and MSCI recently replaced the old telecommunications sector with a new “Communications Services” sector.

A quarter-century ago, the telecommunications sector was 9% of the S&P 500 Index, but by the end of August it had dwindled to less than 2%. Meanwhile, information technology’s weighting went from 6% to 26%, not including tech giants Amazon and Netflix, which were classified as consumer discretionary. Tech behemoths are now divided into three separate sectors. Big firms that own telecom and cable “pipes” are trying to leverage them with more valuable media and content offerings. The new communications services sector is 10% of the index.

Now, as rates rise valuations matter more. Whether growth or value stocks, if a company’s share price significantly diverges from its business fundamentals, opportunities to buy or sell are created. We think these are easier to spot than true index mean reversions.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Thornburg Investment Management or TEXPERS.


Charles Roth
About the Author:

Charles Roth is global markets editor for Thornburg Investment Management. Prior to joining Thornburg in 2013, he was an assistant managing editor at Dow Jones Newswires, the Wall Street Journal’s real-time financial news and analysis division, where he oversaw its bureaus in Latin America as well as the New York–based emerging markets group. He previously served as a senior writer in the emerging markets group, bureau chief in Venezuela, and staff reporter in Malaysia. Roth earned a bachelor's degrees from the University of Colorado at Boulder and an masters' degree from the Instituto Universitario de Desarrollo y Cooperación at the Universidad Complutense in Madrid, Spain. He was a Peace Corps volunteer in Mali.

Public funds and the investment return assumption


Photo: Pexels.com

By Tony Kay, Guest Columnist

Many public funds are facing increased scrutiny regarding their actuarial assumptions, none more openly than their investment return assumption. 

This projection, sometimes referred to as the actuarial assumed rate of return, is used to document the long-term investment return expectations of a pension plan. It is used in part to determine the level of funding by plan sponsors and members required to support benefits. As with all actuarial assumptions, the goal of the investment return assumption is to project the most likely picture of the plan’s operation over the long term. Some outside parties believe that the assumptions used by various Texas plans no longer represent an accurate long-term depiction of future experience and, as a result, are understating the costs of pensions. 

The call to reduce the investment return assumption is routinely rooted in the belief that future investment returns will not meet historical levels for many of the most commonly held asset classes. Interest rates in the U.S. are low, but generally rising, creating an environment where income from U.S. bonds is low and the possibility of negative returns is elevated.  U.S. equities have performed well since 2008, but valuations have increased.  Furthermore, the current economic expansion is one of the longest in U.S. history. Many other asset classes face challenges as well.

Facing the decision to change the investment return assumption is difficult for many boards.  Even small changes can have a big impact on a plan’s amortization period, the contribution rate of members and plan sponsors and potentially even future benefits. How is a board to know if it is making the right decision? 

To start, it’s important to know how pensions are funded. Knowledge of the following equation will help trustees understand the impact of changes to plan assumptions on other areas of the plan: Benefits + Expenses = Contributions + Investment Earnings

It’s also important to get clear and understandable guidance from the professionals you engage. Your actuary can help you understand your current assumptions and how they differ from actual plan experience. All assumptions, including the investment return assumption, should be reviewed periodically and adjusted as needed. 

Your investment consultant can help you understand the historical return for your plan and how changes to your asset allocation will impact the risk and expected return of your portfolio. For example, what should you expect if you increase your exposure to stocks by 5% or add a new allocation to global infrastructure? There are an almost unlimited number of asset allocation scenarios that can be modeled for consideration.

Finally, it’s important to be transparent and inclusive. As you gather information and seek guidance, share what you are doing with interested parties. Being proactive with this communication will help to calm the noise of those that seem determined to attack and/or eliminate retirement programs that work if administered well. 

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of AndCo Consulting or TEXPERS. 

Tony Kay
About the Author:

Tony Kay is a consultant at AndCo and is based in the firm's Dallas office. He has 13 years of financial industry experience and currently advises more than $3 billion of institutional assets. Kay currently provides consulting for a diverse client base including public and private pensions, defined contribution, and foundation clients. His work includes both strategic and tactical asset allocation, process development and oversight, and policy documentation. Kay concentrates his efforts on client consulting, capital markets, manager research, and portfolio monitoring. He leads and assists with investment research projects and manager analysis for our clients. He has also assisted in research covering opportunistic and non-traditional assets, including core real estate, non-core real estate, private equity, distressed debt, and energy infrastructure assets such as Master Limited Partnerships. Kay was recently invited to speak at TLFFRA about meeting investment return expectations. He has a bachelor's degree in business administration, finance, from University of Tulsa. 


Europe: 5 scenarios for investors to watch

Photo: Pexels/Slon_Dot_Pics

By Arnab Das, Guest Columnist

The future of the euro and that of the European Union are inextricably tied. The big question is how could today’s political landscape impact the region in the coming months and years – and what does that mean for investors?

The rise of populism – The European political landscape is pockmarked with populism as anti-globalization and anti-European sentiment continue to rise. Driven by issues such as mass migration, cultural liberalization, and national sovereignty, populist sentiment is, as we note, making Europe’s political battleground “hot” and harder to navigate.
North versus South: The spirit of populism differs vastly in Northern and Southern Europe. Northern populists in countries like the Netherlands tend to be right-leaning and populists in southern countries, like Italy and Greece, lean left. This north-south divide adds further fragmentation at a time when centrists are pushing for consensus in Europe. Could different forms of populism torpedo all hopes of cooperation?
Weakening ties with U.S.: With a big U.S. focus on “America First”, the risk of U.S.-EU trade war is real and could see Germany — with its huge trade surplus with the U.S. — hit the hardest of all. At the same time, we see such tensions giving rise to the very real possibility that Europe’s key defense guarantee might be hollowed out. No fan of NATO, Trump has characterized the EU as free-riding on U.S. support.
The rise of Russia: Russia is creating more instability in the region — President Vladimir Putin continues to promote Russian interests and to expand its sphere of influence, often at the expense of European interests. With NATO becoming increasingly fragile, the political rebalancing taking place between Europe and the U.S. will no doubt rattle Germany. The country’s high trade surplus and its overtly export-oriented economy has fueled discontent among allies, particularly the U.S. with whom its trade surplus topped €66 billion in 2017.
Energy and military strength:  Germany is also reliant on imported energy. In 2016, 32% of its coal and almost 40% of its oil came from Russia. We point out that Germany’s energy dependence underlines how frail its bargaining power is in a Europe facing disintegration and diminished security in the face of a weakened NATO. France could emerge a winner, with its strong military and a more favorable trade surplus with the U.S. Energy-wise, it’s also heavily reliant on its own network of reactors which are majority owned by the government.
Implications for investors – These developments will certainly impact markets and the euro but the extent of that impact depends on which way Europe evolves. Serious progress between countries and further integration is likely to lead to significant and sustained compression of country risk premia across bonds, credit and equity. However, should Europe move to disintegration, then that is likely to permanently widen some country risk premia.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Invesco Fixed Income or TEXPERS. 



Arnab Das
About the Author:
Arnab Das is head of Europe, Middle East and Africa and Emerging Macro Research at Invesco Fixed Income.  He joined Invesco in 2015 and is based in London. Das began his career in finance in 1992. He has served as co-head of research at Roubini Global Economics; co-head of global economics and strategy, head of foreign exchange and emerging markets research at Dresdner Kleinwort; and head of Europe, Middle East and Africa research at JP Morgan. He has also been a private consultant in global and emerging markets, and previously consulted with Trusted Sources, a specialist EM research boutique in London. Das studied macroeconomics, economic history and international relations. He earned a BA degree from Princeton University in 1986, and completed his postgraduate degree and doctoral work at the London School of Economics from 1987 to 1992.

Is the BBB credit bubble ready to burst?

Photo:iStock/Brian A Jackson

By Garry Creed, Guest Columnist

The size of outstanding BBB-rated corporate debt has exploded in recent years, nearly quadrupling since the 2000s. A booming BBB market has investors asking two key questions: Will these companies be able to maintain their investment grade status as the cycle turns and if not, what will be the impact on credit markets as they transition to high yield?

Will these companies be able to maintain investment grade status?
Our baseline view is credit will continue to benefit from a steadily growing U.S. economy over the near-to-intermediate term. Longer term, we believe we’ll see downgrades consistent with past economic cycles.

When the cycle turns, we expect downgrade activity from investment grade to high yield, commonly referred to as fallen angels, which will likely be consistent with past downturns in percentage terms. To assess the potential size of the next fallen angel wave, we applied Moody's historical rating migration percentages to the current BBB market value of $2.4 trillion as of Q2 2018. Assuming an average rate of 11% for the ten worst downgrade years, the next downgrade wave could exceed $250 billion if the severity mirrors prior years (Exhibit 1).

Exhibit 1: Potential magnitude of future fallen angel activity

Top 10 largest historical BBB to high yield downgrade rates applied to current BBB market size
Click chart to view larger image.
Source: Aegon AM US, Bloomberg Barclays and Moody's. Reflects top 10 largest ratings transition years from BBB to high yield ratings based on data from Moody's from 1970 – 2017. Applies historical downgrade percentages to BBB market size as of June 30, 2018.

What will be the impact on credit markets as BBB-rated companies transition to high yield?
First, a weakening credit environment is likely to increase the risk premium required by investors to hold investment grade bonds as they begin to price in the risk of downgrades. Second, the transition from investment grade to high yield may cause dislocation in the high yield market.

Continuing with our earlier example, $250 billion of migration in a year is roughly equivalent to 20% of the aggregate high yield market and approximately equal to the average annual gross high yield issuance over the past ten years through August 2018. Contrary to most new high yield issuance, downgrades typically aren't price sensitive. They happen regardless of market conditions or investor demand and prices adjust to facilitate the needed transitions. Furthermore, fallen angels tend to rise when the high yield market is also facing fundamental pressures from weakening credit conditions. When considering this, and overlaying the scale of downgrades in our high yield market example, one can see why it is likely that the rise in fallen angel activity could have a meaningful impact on high yield spreads.

We remain constructive on credit fundamentals
In the near-to-intermediate term, we believe the potential downgrade risks are manageable and unlikely to manifest into a broader credit issue without a risk-off market event. Eventually there will be a downturn in the credit markets as the business cycle turns. The extreme growth in BBB corporate credit market, coupled with aggressive borrowing practices, is likely to give way to the next wave of fallen angels. While the timing of such an event is hard to predict and there will be consequences for credit markets, a rise in fallen angel activity also provides opportunities to active investment managers that are able to effectively manage client portfolios and navigate the crossover credit market from an investment grade and high yield perspective.


The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Aegon Asset Management or TEXPERS. 


Garry Creed
About the Author:
Garry Creed, CFA, is chief credit strategist responsible for credit strategy and oversight of the U.S. strategy team. He also provides oversight to the sovereign research team and Aegon Investment Management, B.V. research analysts. Garry is a member of the Senior Management Group and the Responsible Investment Technical Committee. Prior to his current role, Creed led Aegon’s Special Situations group, a predecessor to the current Distressed team. During his career, he has covered numerous industries for investment grade and high yield as an analyst. Prior to joining the Investment team, Creed served in various accounting and administrative management capacities. He has 28 years of industry experience and has been with the firm and its affiliates since 1988. Creed received his bachelor's degree from Wartburg College and his master's degree in business administration from the University of Iowa.

Five-Year Market Outlook


Slow growth creates headwinds for 

public fund and Taft-Hartley plans


By Jim McDonald, Guest Columnist

Public fund and Taft-Hartley plans face headwinds in today’s market environment and we do not see that changing over the next five years. Getting asset allocation “right” will be paramount in achieving your critically important plan objectives. Our latest five-year market outlook can serve as a useful reference as you tackle strategic portfolio construction decisions.

Equity valuations look high in a historic context, core fixed income yields are low and only a few asset classes are likely to produce high single-digit returns, namely private equity and emerging market equities (see Exhibit 1). This will be the primary challenge pensions face in building cost-efficient and lower risk portfolios that return 6-7% annually over the next five years.

Traditional approaches to bolster returns often resulted in a flight to private markets, but high fees and lack of transparency make that space potentially harder to invest in with today’s heightened fiduciary standards. High yield, emerging market debt and emerging market equities have been popular public market options that we believe remain attractive over the next five years.

While low interest rates and elevated global equity valuations will persist, a greater focus on risk budgeting may require pensions to expect more active return contributions from their core risk assets.

Two key strategic themes are driving this outlook — Mild Growth Myopia and Stuckflation.

Exhibit 1: 5-Year Forecasts for Key Asset Classes
Click chart to see larger image.

U.S. Growth: Low and Slow
Our Mild Growth Myopia theme discusses how the current U.S. economic expansion has been much slower versus previous periods. Nearly 10 years into the current expansion, the cycle has matured and recession odds have risen — but the onset of a slowdown will be later and less threatening than suggested by the standard playbook.

As shown in Exhibit 2, even if the U.S. grew at our expected nominal growth rate of 3.8% for five more years, the cumulative growth would still be less than the boom in 1982 and 1991.

The Bottom Line: Subdued economic cycles and stronger financial systems will push out the next recession and limit its severity. We think this bull market has room to run.


Exhibit 2: Record-breaking expansion length, but not magnitude

Even with five more years of growth, total output will still be shy of 80s and 90s expansions.

Click chart to view larger image.

Inflation Is Not Going Anywhere
Inflation is “stuck” and has remained below most central banks’ targets of 2% for the last decade and should stay that way for some time. In fact, U.S. inflation has fallen behind the Fed’s 2% target by 5.8% cumulatively, over the last decade (see Exhibit 3).

We believe a modest trade war would have less of an impact on long-term inflation than many fear, while a large trade war would actually lower inflation because of its damage to confidence and, ultimately, to demand.

The Bottom Line: Low inflation should keep yields down, meaning pension plans may need to consider increasing allocations to high yield, private credit or dividend yielding equities to meet plan distribution objectives.

EXHIBIT 3: Cumulative Inflation Shortfalls Over the Last Decade 
Click chart to view larger image.

Final Thought: Be Creative with Risk
Public fund and Taft-Hartley plans will need to be astute and creative with their risk budgets over the next five-years in order to hit return targets. We believe slow growth will persist and fuel high single-digit returns in equities globally, with only slight valuation contraction in developed market returns and valuation expansion in emerging markets.
Overall these remain attractive core risk assets to potentially garner a return “boost,” with greater liquidity and transparency, to complement your private investments.

Exhibit 4: High level equity return building blocks
Click chart to view larger image.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Northern Trust Asset Management or TEXPERS. 

Jim McDonald
About the Author:
Jim McDonald is the Chief Investment Strategist for Northern Trust, which includes Northern Trust Asset Management and its $971.6 billion in assets under management ($110 billion of which is managed across 200 public funds and Taft-Hartley plans), as of Sept. 30, 2018. McDonald chairs the Northern Trust Tactical Asset Allocation Committee, and is a co-portfolio manager of the Northern Global Tactical Asset Allocation Fund. In addition, he is a member of the Investment Policy Committee, and trustee of the 50 South Capital Alpha Strategies and Equity Long/Short Strategies Hedge Funds. He received a BBA from the University of Michigan and an MBA degree with high distinction from Babson College.


Monday, October 15, 2018


PRB: Pooled Assets Legislation Not 

Likely in 2019 Session



by Joe Gimenez, Guest Writer

Texas Pension Review Board Chairman Josh McGee backed down from committing to a legislative effort to enable or require asset pooling for small pension systems. His comments, made at the tail end of the Oct. 4 PRB meeting, recognized concerns from TEXPERS Board President Paul Brown and board member David Stacy. 

“The Board… fully agrees that this is a first step that is trying to highlight the issue and hopefully get to a point where we do the appropriate investigation and resource that investigation properly to get to an actual solution,” McGee said. “I personally do not anticipate any big movement other than additional study in this [2019 legislative] session. But we want to get to a place where we are actually looking at it and devising a potential solution.”  

McGee took the unusual step of making those comments after Brown and Stacy expressed concern in public comments about the first draft of the asset pooling study unveiled earlier in the meeting.

“TEXPERS represents 80 of the 90-something plans that come under your purview, and 40-something of those are the small TLFFRA funds,” Brown says. “There was an excellent opportunity just a couple of days ago in Temple to have this kind of conversation with the small (TLFFRA) funds… That organization is represented by a foundation. It has its own board. I would encourage that (PRB) staff; the board at least have a conversation with that Foundation’s Board regarding their input and getting their opinion on what their thoughts are in regard to this (asset pooling initiative).”

TLFRRA funds are the 42 systems governed by the Texas Local Fire Fighters Retirement Act. Any asset pooling initiative would likely include many of those, but there are also small systems for police and other public employees as well. The PRB study did not define whether asset pooling would occur by choice of the systems or mandated by the state.

Stacy also encouraged collaboration between the PRB and the smaller pension funds. 

“Over 10 years ago the office of Firefighters Pension Commission brought this up as a viable possibility, but unfortunately the office staff did not have the bandwidth to take on the technical, structural, and legal issues that this raised,” Stacy says. “I would like for the Board to recognize that if this is truly to be a good possibility … it warrants trying to work out the details in order that all parties can see it as such.”

Earlier in the meeting, PRB staff had unveiled its first draft of “Asset Pooling for Small Pension Systems.” The PRB modeled the potential impact of investment management pooling and also investment management and administration pooling. The models suggested that the systems might have seen a 29 percent increase, or $32 million, in total assets between 2007 and 2016 primarily related to lower fees and administrative costs. The 16 pension funds which each had less than $12 million in assets had the highest average expenses compared to 17 systems with assets less than $32 million and more than $12 million.

The PRB’s actuary member, Marcia Dush, commented that asset pooling might not achieve economies of scale for investment purposes without at least $300-$500 million in combined funds. To reach that number, 35 pension systems with the least amount of assets would be needed in a pooling effort. See Chart 1 below with those systems whose assets would combine to $535 million if they were mandated to be part of a pooling effort. The PRB has not discussed such a mandate, nor is it included in the report. The list below seeks only to identify the smallest systems which could combine to reach the scale needed according to Dush.  

Chart 1.
Small pension funds needed to reach $500 million in combined assets to achieve economies of scale for fee and cost reductions

Killeen Firemen's Relief & Retirement Fund

$35,342,830
Corpus Christi Regional Transportation Authority
$32,583,077
Texarkana Firemen's Relief & Retirement Fund
$31,777,180
Capital MTA Retirement Plan for Bargaining Unit Employees
$29,535,196
Harlingen Firemen's Relief & Retirement Fund
$28,747,083
Guadalupe-Blanco River Authority
$26,632,375
The Woodlands Firefighters' Retirement System
$26,188,804
Capital MTA Retirement Plan for Administrative Employees
$23,811,865
Conroe Fire Fighters' Retirement Fund
$22,529,049
Cleburne Firemen's Relief & Retirement Fund
$21,323,149
Northwest Texas Healthcare System Retirement Plan
$19,960,895
Galveston Employees' Retirement Plan for Police
$19,784,817
Brazos River Authority Retirement Plan
$18,726,771
Denison Firemen's Relief & Retirement Fund
$15,721,368
Travis County ESD #6 Firefighter's Relief & Retirement Fund
$15,043,500
Texas City Firemen's Relief & Retirement Fund
$14,412,584
Lufkin Firemen's Relief & Retirement Fund
$14,335,797
Waxahachie Firemen's Relief & Retirement Fund
$14,201,159
Greenville Firemen's Relief & Retirement Fund
$12,728,162
Galveston Wharves Pension Plan
$11,895,228
Big Spring Firemen's Relief & Retirement Fund
$10,387,399
Colorado River Municipal Water District Defined Benefit Retirement Plan & Trust
$9,660,662
University Park Firemen's Relief & Retirement Fund
$9,448,371
Weslaco Firemen's Relief & Retirement Fund
$9,186,148
Corsicana Firemen's Relief & Retirement Fund
$8,344,317
Orange Firemen's Relief & Retirement Fund
$8,154,598
Sweetwater Firemen's Relief & Retirement Fund
$7,826,879
Marshall Firemen's Relief & Retirement Fund
$7,712,228
Plainview Firemen's Relief & Retirement Fund
$5,427,943
Paris Firefighters' Relief & Retirement Fund
$4,764,272
Atlanta Firemen's Relief & Retirement Fund
$3,744,867
Brownwood Firemen's Relief & Retirement Fund
$3,617,575
San Benito Firemen Relief & Retirement Fund
$2,987,515
Arlington Employees Deferred Income Plan
$2,727,969
Refugio County Memorial Hospital District Retirement Plan
$2,051,124


About the Author: 
Joe Gimenez is a public relations professional who specializes in pension fund communications. He has assisted TEXPERS and several Texas pension funds in crisis situations and public affairs.