Of the pension fund's total allocation to global equities, just over 74% is internally managed. The growth of that internal management capability has been organic relative to the team that’s been in place and its expertise, said McGarrity.
McGarrity has been CIO of the $63.7 billion Denver-based pension fund since March 2017 when she replaced the retiring Jennifer Paquette. Aside from a brief, six-month sojourn at William Blair & Co. as a global equity product specialist, she was a six-year veteran at PERA, serving as deputy CIO from 2013 to 2016 and a senior investment officer from 2010 to 2013. Before then, McGarrity had spent nearly four years as the CIO of the Denver Public Schools Retirement System, which was folded into Colorado PERA at the end of 2009.
“A lot of us have been in PERA for a long time, and we have really built that expertise internally,” said McGarrity. Colorado PERA started managing public domestic equities internally in 1985.
“Then over the years we have added some internally managed portfolios," she said. PERA started managing global equities internally in 2008.
“It was essentially recognizing that we had a demonstrated expertise on the U.S. side and a process that worked and with the internal infrastructure, we could leverage that on the global side,” said McGarrity.
“So we think where it makes sense, we want to manage assets internally,” she said. “In areas of the market that may be perceived as less efficient — for example, emerging markets and small cap — for us, it doesn’t make sense to really do that internally. We would have to put a lot of resources into running that actively, and even passively to be honest, because those markets are constrained and restricted.”
For the fiscal year ended Dec. 31, PERA's global equity portfolio returned a gross 23.8%, above its custom benchmark return of 21.9% for the period, while fixed income — which is all actively managed internally — returned 6.2%, above its benchmark return of 5.5%. The global equity portfolio has outperformed its benchmark over the five- and 10-year periods, while fixed income has outperformed over the past three, five and 10 years.
Asset-liability study
Colorado PERA is undergoing an asset-liability study this year for the first time since 2019, and while the study is not expected to conclude until September, McGarrity said it appears the board is leaning toward some moves.
“The way that we’re headed in the last meeting was essentially taking some weight out of global equities and putting it into real estate and private equity, which is a more incremental move,” she said.
“We’re talking about a percent and a half in each of those,” she said, “And then maybe a little bit of a restructure of the alternatives portfolio.” PERA's alternatives portfolio (outside of private equity and real estate) consists of private credit, real assets, and global macro and multistrategy hedge funds, as well as "tactical opportunities stemming from market dislocations or regulatory change," according to its website.
Any increase in the targets to private equity, real estate and alternatives will be limited, McGarrity said.
“We are slightly underweight relative to peers,” she said, “and that is a result of not only our internal management capability and demonstrated added value there, but also our liquidity profile may be a little more than some of our peers. We are a very mature fund with a net outflow in excess of 2% per year.”
In addition, PERA has had funding challenges and reported a funding ratio of 66.2% as of Dec. 31 in its latest actuarial valuation.
“As people think about rebalancing portfolios and asset allocation and liquidity events, most people think of black sky scenarios and modeling our ability to continue to pay benefits,” said McGarrity. “I think there's more to it than that. It's our ability to rebalance the portfolio and get back into those risky assets according to the strategic asset allocation, which we've put in place for the long term to deliver the long-term rate of return assumption.”
PERA’s long-term rate of return assumption is currently 7.25%.
“So in the event of a significant market event where you’re liquidating both equities and fixed income — because you can’t liquidate your illiquid investments or you have to take a significant haircut to liquidate them — your ability to get back to your strategic asset allocation can be challenged. I think we saw some of that in March of 2020,” she said.
“So we are trying to walk that line of having exposure to those beneficial asset classes while still maintaining exposure to liquid beneficial asset classes and delivering our long-term rate of return,” said McGarrity.
