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Investment Beliefs

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MOSERS' internal investment staff and external asset consultant have arrived at investment beliefs, which are the foundation for implementation of the investment portfolio to achieve the board’s objectives. These beliefs help to form the basis of every decision made within MOSERS’ portfolio. They are the fundamental concepts underlying the MOSERS’ investment program. These beliefs are as follows:

  • Portfolio construction should focus first on the allocation and balancing of risk; it is the allocation of risk that drives portfolio returns. While investment returns receive a lot of public attention, understanding and balancing risks across asset classes improves the consistency of returns for a given level of risk and thus provides more stability in the contribution rate for the employer. Returns are the end product, where risks are the ingredients.

  • Diversification is critical because the future is unknown. Reliable diversification requires a fundamental understanding of the economic drivers of risk and return. MOSERS’ policy portfolio has been built upon the premise that very little is known about what the future holds.  Therefore it is rational to construct a portfolio that is believed to combat various economic conditions.

  • Every investment should be examined in the context of its potential return from beta (market return) and alpha (value added return); while separation is not always possible, every effort should be made to distinguish the two distinct return components. Beta is the return which is expected to be earned by investing passively within a specific asset class or compensated risk premium. Exposures to beta can be purchased cheaply, and over long periods of time, the beta return should be positive and coincide with the risk associated with a given asset class. In contrast, alpha is the return generated through a manager’s ability to select particular investments that perform better than the asset class as a whole. Alpha is a zero-sum game.

    Regardless of the source of the return, it is important to construct the portfolio based on a conscious decision to include a certain amount of beta exposure in the portfolio and a certain amount of alpha exposure.  By consciously selecting this balance within the portfolio, staff is better able to manage the risks of the portfolio while ensuring the RRO is achieved.

  • Flexibility to opportunistically alter the portfolio away from risk-balanced when markets are driven to extremes as result of short-term economic cycles is an important portfolio management tool.  As a result of the cyclical nature of the economy, asset classes or investment strategies may be more or less attractive relative to others in given time frames, thus marginal flexibility in the allocation policy provides the system with the opportunity to capitalize on this cyclicality within prudent risk constraints. Under circumstances where the valuations of a particular asset class are compelling, it may make sense to modify the portfolio’s allocation at the margins in order to capitalize on attractively valued opportunities without exposing the fund to additional risk.

 

MOSERS
Missouri State Employees' Retirement System
Address: 907 Wildwood Dr., Jefferson City, MO 65102
https://www.mosers.org/images/mosers-logo-bg-375-280.jpg Phone: 800.827.1063 URL: Email: mosers@mosers.org Founded On: September 1, 1957