Teacher retirement fund down $625M in 2 months

Thanks in large part to a drop in the stock market, the Arkansas Teacher Retirement System's investments dropped by $625 million in value to $14.35 billion in July and August, an investment consultant said Monday in a preliminary report.

But what isn't reflected in the preliminary report is that private equity and real estate investments increased in value in those two months, and the system's investment total for this period will be "modestly better," Katie Comstock of Aon Hewitt Investment Consulting of Chicago told the system's board of trustees.

Another factor reducing the system's funds is typical for this time of year, a retirement official said -- a drop in contributions.

The Teacher Retirement System is state government's largest retirement system with more than 100,000 working and retired members.

During fiscal 2015, the system's investments increased by $385 million in value to $14.975 billion as they posted a 5.2 percent investment return to rank among the top 2 percent of public pension systems, Aon Hewitt said in its final report on fiscal 2015, which ended June 30.

But stock markets have experienced a downturn since then.

The system's stock portfolio declined from $8.94 billion on June 30 to $8.40 billion on Aug. 31 and the return on stocks was a minus 5.8 percent in those two months, Aon Hewitt said in a report to the trustees. The value of the system's bond investments remained at $2.35 billion during the same period, the firm reported.

"Despite some strong economic data out of the U.S. and Europe, concerns out of China were really affecting markets across the globe," Comstock said. "U.S. treasuries provided somewhat of a safe haven, but were mostly flat."

Updated results are not available for the system's real estate, timber, agriculture, infrastructure and private equity investments because they are valued on a quarterly basis, the Aon Hewitt report said.

The system's value declined more than it would have otherwise during the first two months of fiscal 2016 because the system received "very few contributions [from employers and employees], so we are pulling out a lot more of the value of our trust fund in paying benefits because ... in summertime, there are very few workers," said System Executive Director George Hopkins. "Sometimes, we'll have a $150 million net outflow in this time frame."

The trustees later authorized nearly $300 million in new investments to further diversify its investment portfolio:

• Up to $110 million, including an initial investment of $75 million, in Bermuda-based Aeolus Capital Management's Aeolus Property Catastrophe Keystone PF Fund, L.P. The fund is a reinsurance fund specializing in property catastrophe insurance coverage, the system's staff said.

"There is a risk of losses and we are hoping it doesn't happen at the same time as a market crash," said P.J. Kelly of Aon Hewitt. "You get a higher return for taking that risk."

Hopkins said the company is good at deciding what risks to take and where.

• Up to $50 million in New York-based Trian Fund Management L.P.'s Trian Partners L.P. and up to $100 million in Trian Fund Management L.P.'s Trian Co-Investment Opportunities Fund L.P. A co-investment occurs when the system invests directly in a company alongside a fund manager.

Trian's investment strategy focuses on buying large stakes in high quality yet undervalued or under-performing public companies and working with management in a collaborative manner to improve their performance and drive earnings growth, Aon Hewitt said.

• Up to $30 million in JLF Equity Investors IV LP, a private equity buyout fund managed by New York-based J.F. Lehman & Co. that invests in the defense, aerospace and maritime industries and related businesses. John Lehman, who was secretary of the Navy under President Reagan, helped form the company.

The trustees also learned the system's farm manager, Halderman Real Assets Management, has purchased a 2,207-acre farm for about $11.3 million in Wexford and Grand Traverse counties in Michigan.

The farm consists of well-rained loam and sandy soils ideal for a variety of crops including carrots, potatoes, peppers, onions, cucumbers and edible beans in addition to grain crops such as corn and soybeans, the system's staff report said.

School districts and other system employers paid $409.9 million into the system, while their employees contributed $126.9 million in fiscal 2015, Hopkins said. System employers pay the equivalent of 14 percent of their employees' salaries into the system, while many of their employees pay 6 percent of their pay.

The system's actuaries, Gabriel, Roeder, Smith & Co. of Southfield, Mich., won't complete a full report on fiscal 2015 until later this year.

In fiscal 2014, the system included 70,225 working members with an average age of 44.7 years, an average service of 10.2 years and an average salary of $35,673, Gabriel reported last year. The system also included 38,478 retired members with retirement benefits totaling $822 million (an average annual pension of $21,362), the actuarial firm reported.

The system's unfunded liabilities fell from $4.4 billion with a 70-year payoff period in June 2013 to $3.9 billion with a 39-year payoff period in June 2014, according to Gabriel. Actuaries often compare unfunded liabilities to mortgages on homes. Unfunded liabilities are the amount by which the system's liabilities exceed an actuarial value of the system's assets.

Metro on 10/06/2015

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