LACERS BOARD UPDATE
By Michael R. Wilkinson, LACERS Commissioner
Email: MikeWilkinson4LACERS@gmail.com
O
ne of the most important decisions coming to the LACERS Board of Administration is how to invest the funds that pay for our pensions and healthcare. This process is called asset allocation, and it is the major factor in how the investments perform, as compared to the decisions on individual investments.
As I write this article, the LACERS Board is considering adjustments to the asset classes with the goal of making a good return while keeping risks such as volatility risk low, the amount that an investment goes up and down over time.
The goal is to produce a long-term rate of return that at least matches our long-term investment return rate assumption of 7 percent per year.
There is not enough space here to go over all the types of investments LACERS uses or considers, but LACERS divides up the investment funds into assets classes such as stocks, bonds, real estate and alternative investments such as private equity.
Each asset class has its own set of characteristics, and there is no perfect asset. We are all looking for that proverbial “free lunch,” that is an investment that provides high financial returns without also delivering high risks such as price volatility. There is no investment that delivers high returns with no risk, but by spreading out our investments among different classes we can reduce risk and still aim to meet our investment goals.
While it is most important to look at the return on the investment and the risk of loss, liquidity is also key to pension investments. Liquid investments are those that can be sold quickly and turned into cash. A pension fund needs liquidity to pay pension rolls, pay administrative costs and pay for new and ongoing investments.
If a pension plan ignores the need for liquidity, it could find itself in a bind in which illiquid investments might need to be sold quickly at a loss rather than retained and sold at a higher price later.
Finally, I want to let you know I am always on the lookout to keep LACERS away from trendy “investments of the day” fads that come and go with wild promises, but no proven long term track records. I am opposed to speculative and high-risk investments such as crypto currencies.
