Oregon makes fees work

Oregon State Treasury, which manages the $77. 3 billion Oregon Public Employee Retirement Fund (OPERF) has continued to achieve top decile returns relative to the Wilshire Trust Universe Comparison Service (TUCS) of public funds, at the same time as de-risking and reconstituting half its giant portfolio, said CIO John Skjervem reviewing 2018 and cumulative investment performance figures at the March investment division meeting.

In recent years Oregon has begun lowering its allocation to private equity, its highest performing asset class, restructuring its public equity portfolio, its second highest performing asset class, and de-risking its fixed income and real estate allocations, all the while maintaining top decile performance over one, three and five years. Significantly Oregon ranks number one over seven, 10-year and 20-year periods.

“Our performance continues to be very good and I think the one, three, five and seven-year numbers are particularly important. We achieved top decile returns simultaneous to de-risking and reconstituting upwards of 50 per cent of the portfolio,” Skjervem said. “This was a period of time where we specifically reduced the allocation to our highest performing asset class, private equity, and reconstituted the structure of our second highest performing allocation, public equity, and then deliberately de-risked fixed income and real estate. Any one of those was substantive enough to impact returns and yet we took them all on simultaneously and still maintained our performance.”

Over the longer-term the fund ranked number one in the TUCS universe for 2018, which Skjervem acknowledged, but he also said that he thinks the changes made to the portfolio will make it “better and more resilient”.

“Top ranking amongst peers is awesome. I don’t want the moment to go by without saying how much I appreciate your work,” said Oregon Investment Council chair, Rukaiyah Adams, to the investment team. Moreover, the results vindicate the fund paying steep fees for private equity and active strategies, rather than indexing, Skjervem said.  “We would be billions of dollars worse off as a state, and as a fund, were we to follow that type of advice,” he said. “We spend millions of dollars on fees and carried interest and active management in the public part of the portfolio, and in exchange we’ve gotten billions. Spending millions to get billions seems like a pretty good deal.”

For the fiscal year ended June 30, 2018 total investment service and manager’s fees paid by OPERF was $680 million.

OPERF has an asset allocation of public equity (37.5 per cent), private equity (17.5 per cent), fixed income  (20 per cent), real estate (12.5 per cent) and alternative investments (12.5 per cent).

The fund’s investment beliefs are clearly reflected in its portfolio allocations – including the beliefs that “the equity risk premium will be rewarded” and that “private market investments can add significant value and represent a core OIC competency”.

Having said that, the Oregon Investment Council is gradually paring back the pension fund’s private equity allocation from an overweight position of 22.1 per cent, which had creeped up from 19.7 per cent in June of 2018, back to its strategic target of 17.5 per cent.

And over the past few years Oregon has made significant changes to both its private equity and real estate portfolios (see Oregon’s real estate revamp.)

“Both teams have taken on large mature portfolios and made substantive changes that take a lot of muscle and time and persistence. So to be here three years later and see the good results is very gratifying,” Skjervem said.

Bringing private equity on a pacing path closer to the strategic allocation and moving from closed end structures to open end structures in real estate has also had implications for the fund’s liquidity profile, he said.

“We have a big allocation to illiquid assets which has been the primary driver of our superlative returns, and the changes in real estate and private equity have led to a gradual improvement in our liquidity profile.”