PERS Investment Meltdown Requires More Than Business-As-Usual Approach
The Oregon Investment Council’s plodding, business-as-usual approach to the four-year meltdown of the Oregon Public Employees Retirement Fund, combined with its failure to give the crisis more than passing acknowledgement, not only does little to expedite getting things back on track, but also sows doubt that this Council is up to the job.
It does not take much financial expertise to see that advisors and staff made some big mistakes in 2020 and 2021 by failing to rebalance the portfolio to reduce its over-allocation to private equity. This failure perfectly positioned the portfolio for trouble when interest rates spiked. Private equity distributions froze up, creating a cash crunch and forcing large drawdowns of its public equity holdings just as the bull market was getting started. And that’s about where things stand today, with managers still waiting for private equity to stop damaging this portfolio.
We could take a little more sympathy for investment managers if we could point to other institutions that suffered the same fate. But we can’t. The Oregon Public Retirement Fund was an outlier in its large private equity allocation, and now it is an outlier in the sub-par performance caused by that allocation.
With the Council stuck in this wait and see strategy, there is likely more pain ahead for this portfolio and for the struggling pension system that it supports. But that shouldn’t stop the Council from making plans for the day when private equity once again starts making significant distributions.
The Council faces two challenges. The first is rebalancing the portfolio to the Council’s own benchmarks. This means a significant reduction in private equity holdings and a significant increase in public equity, bringing the portfolio closer to its peers.
The second challenge is a philosophical one. With the private equity sector facing mounting questions about its future as a source of outperformance, the Council has some soul-searching to do in deciding future allocations, especially in light of the sector’s role in the portfolio’s four-year meltdown.
Finally, the Council could build confidence if it clearly showed it not only understands the causes and severity of this meltdown but also intends to act with a sense of urgency to get performance back up to where it once again contributes positively to the PERS system.
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