Investment
Overview
The investments of the System represent contributions from members and employers, accumulated and invested over members’ working lifetimes. On average, the returns on these investments provide the vast majority (about 60 percent) of any benefit paid. As such they play a critical role in the System’s successful operations. Assets are invested in a manner that is expected, on average and over time, to produce sufficient growth and income to fulfill the System's actuarial assumption of 8 percent. The decision on how to invest the assets, then, is a function of meeting this assumption with as little variability and risk as possible.
Asset Allocation
Potential investments are grouped by asset class. Each asset class represents an opportunity for return and risk. Risk is measured as the variability of the expected return. The strategic decision on which and how much of each asset class to hold is considered primarily through an asset/liability analysis. Conducted approximately every three years, an asset/liability analysis uses statistical and actuarial methods to project the future growth path of both assets and liabilities. Future expected asset values are represented by various potential investment portfolios (including the current portfolio). Future benefits represent the System's liabilities and are estimated using future potential growth in members and member's wages. The objective of the asset/liability analysis is to determine the asset allocation that, when combined with future contributions, most effectively and efficiently supports the future payment of benefits.The System's current long-term target asset allocation is 30 percent domestic equities, 29 percent international equities, 15 percent fixed income, 8 percent real return, 12 percent real estate, 5 percent alternative (private) investments and 1 percent cash.
Portfolio Management
Once the strategic asset allocation decision has been made, the Board and staff implement the policy using a combination of investment styles and strategies. These styles and strategies range from passive investing (investing designed to replicate a benchmark, such as the Russell 1000) to actively selecting investments based on a proprietary formula or process. Each strategy represents a distinct set of opportunities and risks relative to the strategic decision to invest in the asset class. The System utilizes more than 30 external managers to implement its current strategy. The System also employs external investment consulting firms to assist the Board and staff. KPERS internal investment staff consists of seven individuals, including five investment officers and two investment analysts. The Chief Investment Officer is charged with the overall management and coordination of the portfolio and acts as the primary investment liaison with the Board and Legislature.
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