March 16, 2007 — The Government Employees Retirement System's investment portfolio has continued to grow, pulling in approximately $854.5 million for the agency since 1997, according to one of GERS' financial advisors who spoke during this week's open forum for investors.
However, that number has been tempered by the fact that GERS, due to a decrease in employee contributions, has had to liquidate about $428.6 million of its assets to pay for retiree benefits and other expenses, leaving a net cash flow of nearly $436 million.
While GERS' investment portfolio currently stands at $1.2 billion (that figure as of Dec. 31, 2006), the agency's board members said Friday that they are still keeping a watchful eye on a burgeoning unfunded liability, which totals in excess of $1 billion.
Over the past three days, the GERS Board of Trustees held an open forum for its investors to give updates on how the portfolio performed over the past year and outline future investment strategies.
Wrapping up on Friday afternoon, one of GERS' financial advisors, Gino Reina, gave the board his take on the investors' presentations, offered advice on how to balance the portfolio and highlighted the portfolio's progress over the past 10 years.
In order to measure the portfolio's growth, the rate of return on GERS' investments, such as stocks and bonds, are compared against a number of benchmarks set by market indices designed to measure the average rate of return on investments made in specific financial sectors.
Reina said that over a five-year period, GERS showed a "remarkable" 8.66 percent rate of return on its investments, beating out equity benchmarks set by the S&P 500 Index (which shows a 7 percent rate of return over the same five-year period) and the Russell 1000 Value Index, which shows a 6.2 percent rate of return. During the five years, that means GERS pulled in approximately $485 million in investment earnings, for a net cash flow of $127.4 million.
During the same period, the portfolio was able to outperform GERS' own policy index, which sets a 7.47 rate of return on investments.
Reina explained that in 2006, growth stocks (investments made in rapidly growing companies expected to yield a high rate of return) were the lowest performing asset class, while value stocks (investments made in companies whose shares may be selling for less than they are worth) generally met or exceeded market benchmarks.
Over the past year, portfolio returns on the growth side have been impacted by a number of factors, including an unstable stock market, high interest rates and the fact that a number of high-quality companies — specifically in the health care and technology sectors — are going through a transitional process.
For 2006, the rate of return on the entire portfolio (10.35 percent) did not meet the 12.11 percent benchmark set by GERS' policy index. Reina said earnings were reduced by investments made by Oberweis Asset Management and Bjurman, Barry & Associates, financial firms seeking to invest in small or micro-cap companies — entities with less stock, debt and overall earnings.
On Monday, representatives from Oberweis said that 65 percent of the investments the company has made on GERS' behalf lie within the health care, technology and retail sectors — the three "worst-performing" aspects of the market in 2006. Coupled with a "skittish" stock market, Oberweis' investments yielded a 5.3 percent rate of return — 2.1 percent less than the benchmark set by the Russell 2000 Growth Index.
However, Brian Lee, head of marketing and client service at Oberweis, explained that the portfolio's performance has improved in the past few months, showing a rate of return well above the Russell benchmark of 10 percent.
"We're confident in the long term we can generate the kind of 'outperformance' that you're used to," Lee added.
Currently, GERS is working with 13 other financial teams: AllianceBernstein, AmeriCap Advisors, Atticus Fund, Brandywine Asset Management, Fisher Investments, LSV Asset Management, MDL Capital Management, NWQ Investment Management Company, Oechsle International Advisors, Pacific Investment Management Co., State Street Global and Trusco Capital Management and Union Heritage Capital Management.
While Reina said he generally had few concerns about the companies' presentations, he did suggest that board members continue to monitor the progress of Trusco Capital Management, whose investment personnel is scheduled to change over the next year.
Reina also recommended that the board look at rebalancing its portfolio, which is currently more weighted (about 60 percent) toward stocks.
Since the board did not have a quorum on Friday, members could not act on Reina's suggestions. However, they will be discussing the matters during next month's board meeting.
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