In general, benchmarks are used in many areas and according to definition, benchmarks are “something that serves as a standard by which others may be measured or judged.” With regard to investing, individuals are probably familiar with benchmarks like the Russell 1000 or the S&P 500. However these common benchmarks are insufficient for most institutional investors, like PERA, that have complex investment portfolios containing assets not available to individual investors in the retail market. Because portfolios like PERA’s have non-publicly traded assets like real estate and private equity, a custom benchmark is required to measure overall investment performance. This is what’s known as a policy benchmark. The policy benchmark provides a point of comparison when assessing the investment performance of the total fund. PERA’s Board of Trustees compares the policy benchmark return to the fund total return to determine how the PERA investment team performed on a comparative basis over a given time period.
Since 2004, the Board, upon the recommendation of their investment consultant, has adopted a policy benchmark to represent their asset allocation decisions. In addition to offering a reference point, the policy benchmark allows the Board to express its investment goals in concrete terms, providing guidance for staff as well as other stakeholders of the fund. The policy benchmark also establishes the Board’s long-term view regarding investments, which puts into perspective any reaction, or over-reaction, to short-term market conditions.
The Board determines the asset allocation for PERA, which means that the Board broadly defines how the $44 billion in the fund will be invested by asset class. The Board’s Statement of Investment Policy guides this effort. This strategic asset allocation is believed to be the most important factor influencing long-term investment performance and asset volatility. As of December 31, 2016, the PERA policy benchmark is a combination of the benchmarks for 53.5 percent Global Equity; 23.5 percent Fixed Income; 8.5 percent Private Equity; 8.5 percent Real Estate; 5.0 percent Opportunity Fund; and 1.0 percent Cash. (For more information, see the Schedule of Investment Results on page 125 and the Fund Performance Evaluation on pages 127–128 of the Colorado PERA Comprehensive Annual Financial Report.)
Since the adoption of the policy benchmark in 2004, the fund has outperformed this measure, adding millions of dollars to the assets invested on behalf of the PERA membership.
Many public pension funds recently released investment results, having ended their fiscal years on June 30. Colorado PERA’s reporting year ends on December 31, so PERA’s returns cannot be compared to the return of funds that have June fiscal reporting periods. (See this PERA on the Issues post from August 16, “Comparing Apples to Apples: How Rates of Return Can Seemingly Vary from One State to Another” for details.)