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Fund seeks hedge against falling market
VRS
Friday, June 19, 1998
BY JEFF E. SCHAPIRO
Times-Dispatch Staff Writer
CHANTILLY -- The Virginia Retirement System worries about the day the seemingly runaway bull market stops to catch its breath.
The public employee pension fund, which has swelled to $31 billion from less than $18 billion in four years, attributes its growth largely to the huge run-up in publicly traded stocks.
Broader-than-usual exposure to equities -- 70 percent of total portfolio, vs. a national average of 65 percent, according to the authoritative Greenwich Survey -- further enhanced profits.
This trend, and uncertainty over whether it will continue, is crucial to VRS' ability to provide monthly checks for 84,000 state and local retirees. That's because the fund spends more on pensions annually than it collects in contributions. Investment returns cover the difference, now running about $100 million per year.
At the retirement system's annual conference outside Washington, trustees, staff and their outside advisers have been reviewing investment strategies for the future. They're looking to emerging foreign markets to provide profits akin to those largely gleaned by VRS from the U.S. equities.
No one seemed particularly alarmed by the Asian fiscal crisis. Indeed, investment opportunities outside the Pacific are booming, said Robert Ronus of Los Angeles-based Capital Guardian Trust Co. A half-dozen European markets last year produced returns ranging from about 25 percent to nearly 50 percent.
Overseas stocks now account for 15 percent of the fund's holdings -- up from 10 percent in 1994. U.S. stocks still figure prominently at VRS, comprising 51 percent of portfolio, up from 44 percent four years ago.
"Clearly what's driven the thing has been asset allocation," said trustee Charles B. Walker of Hanover, a corporate executive who recalls VRS' first foray into stocks in the mid-1970s, when its holdings were well under $1 billion and largely confined to tax-free bonds.
The fund's annualized performance for the past two years was 18.1 percent; 15.2 percent since 1994, when sweeping reforms were imposed by the General Assembly in response to the perceived politicization of VRS under former Gov. L. Douglas Wilder.
The figures put VRS in the top 10 among 98 public pension funds, according to a study by Callan Associates. And research by Mellon Trust rated VRS in the top 30 when measured against 225 public and private retirement systems in the United States.
Erwin H. Will Jr., chief investment officer, said yesterday that VRS profits are roughly double what the system would ordinarily expect. In what was viewed as an early valedictory -- Will retires in December -- he suggested that VRS may have to play defense to protect its record gains.
Will said that his "biggest fear" is not that the markets will crater, as they did in 1987, but that stock appreciation rates will slow dramatically in a repeat of a trend that extended from the early 1960s into the opening years of the 1980s.
Trustee James C. Wheat III of Richmond, an investment banker, echoed Will's concerns.
"Don't confuse a bull market withbrains," said Wheat. "You don't want people to think that this thing is going to continue forever."
Will, who will be succeeded by Nancy C. Everett, a longtime VRS investment officer, said the fund -- it is the nation's 30th largest pension system and the 50th largest in the world -- has been bolstered by an emphasis on economy.
Since 1994, VRS has cut the ranks of its for-hire investment managers from 48 to 35. That has generated savings of more than $60 million. Also, the fund is managing more money internally. Nearly $6 billion will be handled in-house this year. The figure was less than $1 billion four years ago.
Both Will and VRS chairman Edwin T. Burton III of Earlysville said that legislative-authored reforms had helped the bottom line.
The assembly removed shackles from the VRS portfolio, freeing it to invest as its pleases. That allowed the fund, which by law could designate no more than 60 percent of its assets for stocks, to move to 70 percent and reap an even bigger windfall from the explosion in equities.
"You're bound to be talking about a couple of billion dollars at least," said Burton.