Investment Principles & Beliefs
Principles Guiding MOSERS' Investment Activity
The MOSERS Board of Trustees, charged with the responsibility for investing the assets of the system in a manner consistent with fiduciary standards, has adopted the following three fundamental principles which comprise MOSERS’ investment philosophy and guide asset allocation and investment decisions.
- Preserve the long-term corpus of the fund
- Maximize total return within prudent risk parameters
- Act in the exclusive interest of the members of the system
The Board, staff, and external investment consultant all work together to ensure that every action taken serves the long-term interests of the members.
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:
- Diversification is critical because the future is unknown. MOSERS’ investment portfolio has been built upon the premise that very little is known about what the future holds and, as a result, the portfolio is structured to combat a variety of economic outcomes.
As a result, the portfolio will have significant diversification to provide risk reduction in a variety of markets. The chart above reflects the various economic environments and the types of investments that should be expected to perform well in those environments.
- Every investment should be examined in the context of the two distinct return components – beta and alpha. Beta is the return which is expected to be earned by investing passively within a specific asset class. Exposures to beta can be purchased very cheaply and, over long periods of time, it is expected that returns from beta 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. For every winner, there is a loser on the other side. Historically, MOSERS’ portfolio has been heavily weighted towards investments that provided mainly beta returns.
As reflected in the chart above, several alpha-generating strategies are in place remain within the portfolio today.
- Asset classes will be in and out of favor at different times and they all tend to be cyclical, thus flexibility is key. This belief acknowledges that economies are cyclical; thus, it is only logical that certain investments will fare better than others depending upon the current economic environment. In order to make a “good” investment, the price one pays for an investment must be considered. No investment offers the birthright of a high return. In order to capitalize on potential opportunities that may arise due to asset classes being “cheap” or “expensive” relative to their historical norms, the board has granted the CIO the ability to make strategic sub‑asset class allocation decisions subject to predefined ranges.
- Prudent asset management must first focus on an understanding and balancing of risk. While it is easy to focus attention on expected investment returns, understanding the fundamental economic drivers of risk taken to generate those returns, should come first. As a result, balancing risk will produce stronger risk-adjusted returns, thus more stability if the contribution rate for the employer.