As county governments assume a share of the financial responsibility for the Maryland Teacher’s Pension, they have a greater interest in the way that the system’s funds are invested. This article provides a brief overview of the current investment strategy and its management.

Asset Allocation

The Maryland State Retirement and Pension System (MSRPS) diversifies its portfolio among a variety of asset allocations and sets targets for each. These target allocations, as captured in the MSRPS’ Quarterly Investment Update, show a substantial percentage in public equity (36%), and the remaining investments in fixed income (10%), real return (15%), real estate (10%), private equity (10%), credit/debt strategies (10%) and absolute return (7%).

According to the Quarterly Investment Update, real return investments are expected to exceed the rate of inflation over an economic cycle.  Examples of real return investments include treasury inflation-protected securities (TIPS), global inflation linked bonds, commodities, infrastructure, timber and other natural resources. Absolute investments are expected to deliver returns greater than zero in any market condition. Examples of absolute return investments include global macro and multi-strategy hedge funds. The following chart depicts the long-term policy allocations of the System’s investments.

As reported by the Trust Universe Comparison Service (TUCS), referenced in the Department of Legislative Services’ Annual State Retirement and Pension System’s Investment Overview, the system’s fiscal 2011 investment performance placed it in the bottom half for public pension funds with at least $25 billion in assets. This was a decline from 2010, when the system was ranked in the top 35%. Performance relative to peer funds is determined primarily by asset allocation. It shifts year to year based on market conditions.

Passive and Active Management

The System’s investment allocations were critiqued in a recent report by the Maryland Public Policy Institute.  The report suggested that the State Pension Fund should move away from alternative investments such as real estate, real return, private equity, and absolute return to reduce risk and save money spent on investment managers.

Not all experts agree with this critique, however.  Governing Magazine presented a different viewpoint, reporting

Pension experts interviewed for this story. . . question the validity of the [Maryland Public Policy] report, which compares investment firm fees with each plan’s net assets. Even with the higher fees, they say additional returns from investment managers outweigh the added cost in the long run, and tossing more money into equity index funds wouldn’t diversify portfolios.

In addition, DLS found the MPPI report’s recommendations “ill advised,” saying

Indexing the entire portfolio would have several negative consequences for the system, including:

• Reducing, not enhancing, diversification
• Eliminating mandates that have historically added value to the portfolio; and
• Potentially placing the system in the risky position of having to liquidate holdings with no guarantee of favorable pricing for those assets.

Alternative investments of real estate and private equity were among the most robust asset classes in the past year, and similar pension funds more invested in them outperformed Maryland, as reported in the Department of Legislative Services Annual State Retirement and Pension System’s Investment Overview.  And, according to the MSRPS, Maryland already utilizes passive management for domestic and international public equity where potential for gains from active management is limited.  Choices between management strategies and investments are determined by those who manage Maryland’s Pension and Retirement System investments.

Investment Management

The Board of Trustees of the Maryland State Retirement and Pension System, the Board’s Investment Committee, and the Retirement Agency’s Chief Investment Officer each have prominent roles in the system’s investments.

As described in the Board of Trustees Governance Charters, “the Board has the full power to invest the assets of the System.”

In carrying out its fiduciary duties with respect to the assets of the System, the Board shall:

a. Consider and act upon recommendations made by the Investment Committee, with respect to: i. The investment programs, and ii. Compliance of the investment programs with Board policies;

b. Adopt an Investment Policy Manual . . .

c. Review compliance with, and the continued appropriateness of, the provisions of the Investment Policy Manual;

d. Monitor the performance of the total fund, each asset category, and each investment manager of the Fund;

e. Review the performance of the General Investment Consultant;

f. Review a study of the relationship between the System’s assets and liabilities performed at least every two years; and

g. Consider appropriate corporate governance actions.

According to the Board of Trustees Governance Charters, the Investment Committee advises the Board and makes recommendations on a variety of investment matters, including management staff, vendors and even particular approaches such as the use of active and passive investment strategies. The Committee makes recommendations to the Board regarding the Chief Investment Officer’s appointment, compensation, leave, financial incentives, or termination. The Committee recommends a General Investment Consultant, Optional Retirement Program vendors, and custodian banks for the System. The Committee also monitors and reviews several specific aspects of the investment program. As described in the Charters,

The Investment Committee shall:

a. Monitor compliance with the Investment Policy Manual and report to the Board as appropriate;

b. Monitor asset allocation strategies utilized in the investment programs;

c. Monitor active and passive and internal and external investment management strategies utilized in the investment programs;

d. Review the performance of each asset class within the investment programs;

e. Review both internal and external investment manager performance;

f. Review staff’s due diligence activities concerning the selection of investment managers and consultants;

g. Review the cost effectiveness of the investment program, including trading efficiency; and

h. Review the performance and independence of the General Investment Consultant.

The Chief Investment Officer has the responsibility for managing and overseeing the investment process. As described in the Investment Policy Manual,

The Chief Investment Officer is delegated the responsibility for managing and overseeing the investment process, including

(i) hiring external investment managers to invest the assets of the several systems,

(ii) selecting and purchasing interests in specific investment vehicles, including limited partnerships, private equity fund investments, and private real estate fund investments,

(iii) ensuring legal review of proposed investments by the Office of the Attorney General and

(iv) monitoring compliance with investment contracts, State law, and both the public market and private market program policies and processes enumerated in this Investment Policy Manual.

For more information on the Maryland State Pension System, see our other posts in this series:

The Financial Health of the Maryland State Pension System 

The County Stake In The State’s Pension

State Pension System – Governance and Oversight