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with below-top-quartile managers, between the fees and
the liquidity issues, you’re better off not doing that. We will
selectively add commitments in the alternative space to the
extent we believe that there are strong managers.
JOI: Can you speak in general about how your asset
allocations may have shifted in the last few years?
Have there been any major changes?
Shah: Within the broader major asset classes, it has not
changed much. It’s been pretty standard as far as the equity,
fixed income and alternatives mix. We are underallocated in
alternatives and real estate. In the past few years, they did a real
estate surge, and we’re getting a little bit closer to the target.
JOI: Is the eurozone crisis affecting how you approach
your international allocation?
Shah: The international equity rebalancing that we completed
did get funded around that time, but net/net, our
allocation to international equity was the same. Some of
the money moved from international growth to international
value, but from a portfolio perspective, we were not
any more or less than we were before in terms of overall
international allocation. We expect to stay at our current
19 percent. During our manager reviews though, we do
JOI: How do you interpret Warren Buffett’s recent
decision to stop insuring several billion dollars’ worth
of municipal debt? Does that seem like a bearish or a
bullish move as far as municipalities are concerned?
Shah: I’m not really changing anything in the portfolio
based on that. I didn’t think in terms of compartmentalizing
it as a bullish/bearish move. Our active managers may
use that information and work on the portfolio slightly
differently within their investment guidelines. It’s really
the macro environment you have to keep an eye on.
JOI: IMRF is well-funded, especially compared with
some other Illinois pension funds. Can you talk
about how your strategies or how your structure may
have made that possible?
Shah: Our members and employers have contributed
the required contributions when they were due, and I
think there’s no substitute for that. If you don’t pay your
bills today, it’s just more expensive tomorrow. And if you
look across the country, the public pension plans that are
in stronger positions are the ones that are getting their
contributions on an annual basis. I came from New York
State Teachers before I joined IMRF, and they are also in
a similar position with strong funding for that very reason.
Why is that important? It comes back to the investment
program itself. You asked earlier if we had to
change our allocation in a major way in recent years.
No. If you’re in a strong funding position, you can then
be thoughtful about your strategic plan and your asset
allocations, and spend time executing on that plan, the
Our members and employers have contributed the required contributions
when they were due, and I think there’s no substitute for that.
If you don’t pay your bills today, it’s just more expensive tomorrow.
talk in-depth about how they’re handling it, what they are
doing—especially with active managers who are taking a
subset of the opportunities. It does come into play at the
individual manager strategy level, but at the portfolio level,
our allocation’s the same.
JOI: There’s been a lot of talk about different municipalities
filing for bankruptcy, and it looks like it’s happening
more often. Does this affect the way you do your job,
or what your concerns are when you’re thinking about
meeting your goals and how the portfolio is invested?
Shah: We think of it in terms of risk factors: Every investment
has its inherent risk. But we do believe that it’s part of the risk
we expect our fixed-income managers to take into account.
In our reviews with the managers, nothing major has come
up as a discussion point as far as a poor performance attributed
to some bankruptcy. We believe it’s being properly
managed, and it’s a risk factor we expect to be accounted for.
strategies, all that work that’s involved in managing a
portfolio. You can spend all your energy doing that. I
think that a strong investment program, without the
foundation of strong funding, is hard to execute.
If you’re not getting that contribution, that means you’re
basically borrowing from the fund to pay a payment, and the
fund is short. Now you have less to invest, because the fund
is smaller. You have to have a much higher return than your
actuarial rate of return because you have a smaller base than
what you should have had. It just compounds that problem.
JOI: If by some chance, IMRF becomes underfunded,
how would the difference be made up?
Shah: Every employer has a unique contribution rate.
Every employer has their own separate account, so we
know what their assets and liabilities are. Our actuaries
calculate what they need to contribute, and then IMRF collects
the payment from the employers. Our employees also
contribute a fixed percentage of their pay each month to
help cover the cost of their benefit.
The way a defined benefit pension works is when someone
retires, we have every single dollar we need to pay that
person their benefits for the rest of their life. We also have a
separate reserve for retired members, and that’s always 100
percent funded. That’s sort of unique to IMRF.
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November / December 2012