Jeff Kempker, CEBS, CRC
One of the comments we hear often from members is, “I wish I could make my personal retirement investment account more like LAGERS’ portfolio since it has done so well.” This seems to be worth looking into since individuals investing for their retirement should be focused on the long term just as LAGERS does. While there are some key differences between your personal investment account and LAGERS portfolio, there may be some simple things you can do to use some of the same strategies utilized by the professionals who manage LAGERS’ assets.
I recently sat down with LAGERS’ Chief Investment Officer, Brian Collett, to get his take on this topic. Obviously his comments are not intended for personal investment advice. Asset allocation decisions are made by each individual based on many factors. This conversation is more of a discussion to address the question, “Can I make my portfolio more like LAGERS’?”
J: What makes LAGERS’ portfolio different than my personal retirement investment portfolio?
B: I’ll assume LAGERS’ $6.4 billion portfolio is larger than your personal portfolio?
J: That would be a correct assumption.
B: OK. Well, size does help. Let’s talk about fees first. We are able to negotiate fees with every one of our money managers. We do not just go out and invest in a mutual fund and accept whatever fee that is given to us. Part of our manager selection process is deciding if they are charging a fee we want to accept and our goal is to move every one of our managers to a performance-based fee. What I mean by that is, if they don’t out-perform, we don’t pay them. So performance is key for us.
Another aspect where size matters is that LAGERS gets opportunities that the individual might not. For example, if a company needs $100 million for a project, it would rather deal with 20 individuals investing $5 million each than one thousand individuals investing a much smaller amount. So LAGERS is able to entertain those opportunities whereas individuals like yourself and myself just don’t get access to.
J: What can an individual do then, if anything, to create a portfolio that mirrors LAGERS’?
B: I wouldn’t use the word ‘mirror,’ but I do think an individual can ‘track’ what LAGERS does by doing some very simple things. If you look at LAGERS’ portfolio, we are roughly 50% equities (stocks), 25% in fixed income (bonds), and 25% in real assets (real estate, commodities). If you were follow this asset allocation in your personal account, you would track, maybe not perfectly, but you would track LAGERS’ portfolio. If you contribute regularly, in that ratio of 50, 25, and 25, and rebalance to get back to those ratios annually, you would track our portfolio very closely.
J: Talk a little about the contributions going into the individuals accounts.
B: The beautiful thing about contributing regularly is you are moving [your asset allocation] back to the target of 50, 25, and 25. For example, I could contribute every month at those ratios and revisit it every quarter. I might have to move things around and rebalance annually and I say might because there may be years when you don’t have to do any rebalancing. So that regular contribution really helps you buy low and sell high.
J: Let’s talk about that a little bit. A few weeks ago on August 24, 2015, it was reported that trading was seven times higher than normal suggesting that individual investors were freaking out and pulling their money from stocks and putting it into safe investments like bonds. How does LAGERS react to those types of events?
B: One particular day, week, month, year, doesn’t cause us to react. I might watch it on TV, but really, LAGERS isn’t a participant in that way. We are long term investors so we believe over the long haul we are going to get it right. So LAGERS isn’t a day trader, week trader, or even a year trader. We are more cycle traders.
J: What are some of the mistakes that individuals make over and over again when saving for their retirement?
B: I think a lot of people think that some external event should cause you to do something different. No individual should be moving their portfolio based on what’s happening externally. Think about what’s happening in your life and your family and build a portfolio based on that. Now if your personal situation changes, i.e. family, kids, retirement, whatever, then you might need to change your portfolio.
You don’t build a house based on the weather at the time you are building, you build a house that can hold up in any weather. If my house is well-built, I don’t change it as the weather changes. There are people who build poorly, and they may have to change their house based on external events. It’s the same with LAGERS portfolio and your individual portfolio.
Jeff Kempker, Manager of Member Services