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Teacher fund ends quarter $783M higher

Return ranked in top 5% of U.S., system board told by Michael R. Wickline | June 8, 2021 at 2:00 a.m.

The Arkansas Teacher Retirement System's investments increased last quarter by $783 million in value to total $20.2 billion, an investment consultant reported Monday.

The system's investment return of 5% in the quarter that ended March 31 ranked among the top 5% of the nation's public pension systems, Aon Hewitt Investment Consulting said in a report to the system's board of trustees. The system started the quarter valued at $19.4 billion.

The Teacher Retirement System has earned strong investment returns, said Katie Comstock of the Aon Hewitt firm.

The system's investment return in the one-year period that ended March 31 is 38.8%, ranking in the top 13% of the nation's public pension systems, after increasing in value from $15.1 billion, the investment consultant reported.

A year ago, the consultant reported that the system's investments fell from $18.3 million to $15.1 billion in the first quarter of calendar year 2020, at the outset of the covid-19 pandemic.

The system's return over the past 10 years averaged 9.1% a year to rank among the top 6% of public pension systems. The system's target investment return is 7.5% a year.

Since March 31, the system's investments have increased in value to about $20.6 billion, system Executive Director Clint Rhoden said after the trustees' meeting. Fiscal 2021 ends June 30 for the system.

The Teacher Retirement System is state government's largest retirement system with more than 120,000 working and retired members.

In other action Monday, the trustees authorized a total of up to $150 million in investments in real estate and infrastructure funds, but delayed final action on a proposal to put up to $30 million in a debt fund that will focus on the litigation finance market.

They also voted to revise the system's investment policy in response to a request from state lawmakers on the Legislative Joint Auditing Committee's state agencies committee.

LAST QUARTER

In the quarter that ended March 31, the system's stock market investments earned a return of 6.3% to end up valued at $11.9 billion, while bond investments recorded a minus 1.4% return to reach $2.6 billion, according to Aon Hewitt.

The system's private equity investments posted a return of 7.5% last quarter to total $2.5 billion, while its real estate investments earned a return of 1.5% to reach $1.3 billion, the consultant reported.

The system's opportunistic investments last quarter earned a return of 2.3% to end up valued at $929 million, the consultant reported.

The system's timber investments posted a return of 3.3% last quarter to reach $296 million; infrastructure investments returned 5.9% to total $273 million; and agriculture investments returned 0.5% to end up valued at $206 million, the investment consultant reported.

As of June 30, the system's unfunded liabilities totaled $4.34 billion with a projected payoff period of 27 years, according to system actuary Gabriel, Roeder, Smith & Co.

Unfunded liabilities are the amount by which a system's liabilities exceed the actuarial value of its assets. Actuaries often compare the projected payoff period for unfunded liabilities to a mortgage on a home.

In fiscal 2020, employers paid $475 million into the system, while working members who pay into the system contributed $151.6 million.

In fiscal 2021 that ends June 30, employers pay 14.5% of payroll into the system, while working members contribute 6.5% of their salaries.

In fiscal 2022 starting July 1, these rates will increase to 14.75%, and to 6.75%, respectively.

The employer rate was 14% of payroll in fiscal 2019 and is scheduled to increase to 15% in fiscal 2023. The employee rate was 6% in fiscal 2019 and is slated increase to 7% in fiscal 2023. These changes are among several measures the trustees approved in November 2017 to raise money and cut costs over seven years in response to reducing the target investment return from 8% to 7.5% a year.

NEW INVESTMENTS

The trustees decided not to take final action Monday on a proposed investment of up to $30 million in a debt fund that will focus on the litigation finance market, after trustee Johnny Key, who is the state's education commissioner, questioned whether the investment would run afoul of a state law enacted in 2015.

The system's private equity consultant, Franklin Park, recommended this investment in Chicago-based Kerberos Capital Management's Kerberos Capital Fund III.

The fund is being formed to make senior secured recourse loans to law firms that generate success-fee-based revenue by "litigating mass tort, class action and personal injury claims," Franklin Park said in a written report to the system's trustees. The fund will target an internal rate of return of 18%.

Micheal Bacine of Franklin Park said Kerberos Capital Management is trying to raise $300 million to $400 million for its Kerberos Capital Fund III with a first closing in June.

A divided investment committee comprised of trustees on Monday morning recommended the full board approve the proposed $30 million investment.

During the full board's meeting later Monday, Key questioned whether the investment could potentially violate Act 915 of 2015 that regulates consumer lawsuit lending.

Board Chairman Danny Knight said that after due diligence was performed to check whether the investment would conflict with state law, the trustees potentially could consider it later.

In other action, the trustees authorized up to $50 million investments in each of the following funds:

• New York-based Kohlberg Kravis Roberts & Co.'s KR Diversified Core Infrastructure Fund. The fund will seek to invest across utilities, power and renewable; telecommunications; transportation; social infrastructure; and energy transition sectors.

• Washington, D.C.-based Carlyle Investment Management's Carlyle Realty Partners IX Fund, an opportunistic real estate fund investing in new development, heavy renovation and redevelopment of mixed commercial property types.

• Santa Monica, Calif.-based GLP Capital Partners's GLP Capital Partners IV Fund, an industrial and logistics real estate fund investing in assets across major distribution markets.

INVESTMENT POLICY

The trustees voted to change the system's investment policy to bar the system from approving "any material changes" in any direct investment without first receiving written advice/recommendation from a third-party investment consultant and, if needed, outside legal counsel, as well as receiving written approval from the trustees' investment committee and the full board of trustees.

System officials said they have required an investment consultant's recommendation and full board approval for an initial direct investment and the system's management has informed the board's chairman of any plans to restructure the initial direct investment. The full board was informed later.

Arkansas Legislative Audit said the system did not obtain a review and recommendation from the investment consultant or board approval for the system reinvesting $58 million, in conjunction with multiple parties, to execute a promissory note to Big River Steel totaling $290 million in May 2019, and for the conversion of $48 million in loans to Highland Pellets to equity in June 2020.

The trustees also voted to authorize the system to issue a request for qualifications from investment consultants to review and make recommendations about the system's proposed direct investments and ongoing monitoring and management of these investments.

The trustees' action on Monday came after the Legislative Joint Auditing Committee's committee on state agencies on Thursday voted for the second consecutive month to defer action on the Arkansas Legislative Audit's latest audit for the system.

Knight said, "I think we have come to the conclusion that we got a problem," so the trustees are changing the system's investment policy in "a hurried fashion."

He said some state lawmakers didn't like it when he told them Thursday that he hoped the board would change its policy by December.

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