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Performance Objectives and Monitoring Process

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Generating returns net of expenses equaling the RRO of 5.0% plus inflation remains the primary performance objective for the total fund over the long term.

The reason for the long-term focus on this objective is to preclude the temptation to overreact to events in the marketplace that have no relevance in the management of the relationship between the system’s assets and liabilities. The resulting dilemma is the conflicting need to evaluate investment policy implementation decisions over shorter time frames while maintaining the longer-term focus necessary to manage and measure the fund’s performance relative to the RRO. To address this problem, the board evaluates performance relative to policy and strategy benchmarks. This helps to evaluate the board’s broad policy decisions and the staff and external consultant’s implementation decisions. Policy benchmarks measure broad investment opportunities of each sub-asset class in which MOSERS has chosen to invest. The strategy benchmarks represent decisions made by the CIO to strategically deviate from the policy asset allocation for each sub-asset class. The return of the strategy benchmarks are determined based upon the actual weight of the asset class multiplied by the appropriate benchmark.

The policy and strategy benchmarks are used in the following manner to evaluate board and staff decisions:

  • Board Decisions: The value added through board policy decisions is measured by the difference between the total fund policy benchmark return and the RRO. This difference captures the value added by the board through their policy asset allocation decisions relative to the return necessary to fund the system’s liabilities. A policy benchmark return greater than the RRO reflects value added through board decisions. A policy benchmark return less than the RRO reflects losses or shortfalls in performance in funding the liabilities. These policy decisions are measured over long periods of time.
  • CIO and External Consultants’ Decisions: There are two components to decisions made by the CIO and external consultants, which are monitored by the board on an ongoing basis. They are: 1) strategic sub asset class allocation decisions, and 2) implementation decisions.

Strategy decisions are sub-asset class allocation choices made by the CIO with the approval of the external asset consultant and the certification of the executive director to deviate from the policy benchmark weight. The value added through these decisions to overweight or underweight these sub-asset classes is measured by the difference between the strategy benchmark return and the policy benchmark return. This difference captures the value added by the CIO through sub-asset class strategic decisions relative to the board’s broad policy allocation decisions. A strategy benchmark return greater than the policy benchmark return reflects value added through the sub-asset class allocation decisions. A strategy benchmark return less than the policy benchmark return reflects losses to the fund’s performance based upon strategy decisions. Strategy decisions should be measured over all periods of time with majority weight placed on outcomes that have occurred over a market cycle.

Implementation decisions are money manager selection choices made by the CIO with the approval of the appropriate external consultant and the certification of the executive director that the decision was made in accordance within the board’s adopted governance policy. The value added through these decisions is measured by the difference between the actual portfolio return and the strategy benchmark return. This difference captures the value added through these external manager selection decisions. An actual portfolio return greater than the strategy benchmark return reflects value added through these external manager selection decisions. An actual portfolio return less than the strategy benchmark return reflects losses to the fund’s performance based upon implementation decisions. Implementation decisions should be measured over all periods of time with a majority weight placed on outcomes that have occurred over a market cycle.

The board reviews performance information on a quarterly basis to help ensure adequate monitoring of the fund’s overall performance objectives.

 

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