Memphis pension board considers higher-risk, higher-reward investment strategy

Aug. 05--The Memphis pension board is considering selling hundreds of millions of dollars' worth of U.S. stocks and bonds and making edgier investments, including in private equity, hedge funds, more real estate and more stocks and bonds from other countries.

The strategy, recommended by investment advisory firm Segal Rogerscasey, was introduced to the pension board last week by pension investment manager Sam Johnson and city Finance Director Brian Collins.

It increases loss risk but could lead to bigger rewards.

Collins said the board's investment committee had been reviewing the changes for two years and that investments in international securities would help the fund achieve its target 7.5 percent return. "So much of the high single-digit and double-digit growth is outside our borders," Collins said.

The pension board decided Thursday to delay a vote on the investment strategy until at least its next meeting, scheduled for Aug. 28. The board did vote to allow the City Council to consider a proposal to raise the proportion of real estate investment from 5 percent of the pension portfolio to 10 percent.

The investment strategy could impact the stability of the $2.2 billion pension fund, which has become the central problem of city finances. The city owes more money to retirees than it has on hand, and in recent years has contributed less to the fund than experts recommended. The city now faces a new state law that pressures it to make the full annual contribution by 2020.

The pressure to increase contributions to the fund has influenced recent decisions in city government, including the City Council's controversial vote on June 17 to cut most subsidies to retiree health care.

Contributions from the city and from workers allow the pension fund to buy stocks, bonds and real estate. When those investments do well, the fund needs less taxpayer money.

Low interest rates on bonds have made it difficult for public pension managers to achieve their target rates of investment return, said Don Fuerst, senior pension fellow at the American Academy of Actuaries. If leaders lower the investment return assumptions -- say, from 8 percent to 7 percent -- they have to put more money into their funds, and they typically don't want to do this. So instead, many public pension funds are investing more aggressively.

The strategy might work, Fuerst said, but there's a risk. "If they don't accomplish those returns, it would mean the need for sharply higher contributions, or possibly the type of situation you've seen in Detroit, where you've seen benefit cutbacks."

Fuerst also pointed to another drawback of private equity and hedge funds: They typically charge much larger fees than other types of investments.

Collins defended the use of these investments during the pension board meeting. He said private equity investments can actually decrease risk for a portfolio as big as the city's. Under the plan he presented, the pension fund would invest 4.4 percent of its portfolio in private equity companies, which often specialize in buying troubled companies, turning them around and reselling them for a profit.

And the pension would invest 4.2 percent of its holdings in hedge funds, private investment groups run by money managers who pursue a wide range of strategies.

The city would sell some U.S. stocks and bonds, reducing their combined percentage of the portfolio from 73 percent to 49.7 percent. The market value of the pension fund stood at $2.2 billion as of June, meaning that this change alone would involve roughly $500 million.

The pension fund would increase its holdings of foreign stocks from 22 percent of the portfolio to 31.7 percent. The fund would also invest 13.4 percent of the portfolio in bonds issued outside the U.S.

CITY COUNCIL PREVIEW

Tuesday's Memphis City Council agenda is a full one. Here are some highlights.

Committee meetings

8 a.m. Council members will hear details of alternative coverage for city retirees who are scheduled to lose health insurance subsidies starting Jan. 1. And for the second time, members of the public can pitch the council with their ideas for improving city finances and avoiding the subsidy cut.

10 a.m. Council members will hear a presentation about the proposed city takeover of the Donnelley J. Hill State Office Building.

12:30 p.m. Discussion of the Graceland Tourism Development Zone.

1:30 p.m. The Economic Development Growth Engine, EDGE, will give a presentation defending PILOT tax breaks for businesses, which have come under fire recently from unions and others. In the same committee meeting, council members will hear a discussion on alternative Medicare supplement coverage for retirees.

Regular meeting

3:30 p.m. Among items on the agenda are an ordinance establishing a residential parking permit program near Overton Square and a resolution to create a "safety net" fund for some city retirees scheduled to lose subsidies.

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