Private Equity Powers VRS Returns, Just Missing Assumed Rate

Fund planning on bulking up private investments.

The Virginia Retirement System’s investments returned 6.7% for the fiscal year ended June 30, boosting the fund’s assets under management to $82.3 billion.

However, the fund just missed its 7% assumed rate of return. Chief Investment Officer Ronald D. Schmitz, said he was “pleased with the fund’s level of performance and resilience, especially considering the volatility of domestic and global markets during the past year.”

Schmitz was also proud of the fund’s private equity and fixed income portfolios, which did much of the heavy lifting during the year. Private equity returned 14% and fixed income harvested 8.3%.

The rest of the portfolio had a fair showing.Real assets reaped 7.8%, credit strategies generated 6.8%, and private investment partnerships returned 6.7%. Public equities and multi-asset public strategies, were laggards returning 3.9% and 2.2% respectively.

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The fund plans on adding private investments to weather rough patches in the markets.

“The VRS Board supports the long-term strategic objective of increasing exposure to private markets, which helped offset the more moderate returns in traditional stocks and bonds,” said Board Chairman Mitchell L. Nason.

The Virginia Retirement system’s asset mix as of June 30 was 40.1% public equity, 15.9% fixed income, 14.5% credit strategies, 13.5% real assets, 11.5% private equity, 2.7% multi-asset public strategies, 1.3% private investment partnerships, and 0.5% cash.

The fund returned 7.5% in 2018.

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Climate Change, Trade Collapse, and Cyber Warfare Among Top Investor Risks

Trade war implications are only a piece of the big picture, Thinking Ahead Institute head says.

Climate change, trade collapse, and cyber warfare are among the top risks for investors, according to Willis Towers Watson’s Thinking Ahead Institute.

The organization worries these and 27 other risks are the ones to watch, according to its Extreme Risks 2019 report, which ranks the top 15. Others, such as alien invasion, cosmic threats, or natural catastrophe, did not rank as the organization does not view them as likely to happen as others. The last time the report was published was 2013.

Thinking Ahead fears global temperature change the most as the past six years have seen the world keep emitting more greenhouse gasses “that exacerbates the risk of rising global temperature.” Warming has risen two spots since 2013, when it ranked third. Thinking Ahead’s report says climate change is “looking increasingly likely, suggesting it might need to be considered as a mainstream risk.”

Global trade collapse is another significant investor worry, which the organization says has peaked because of the rise  of protectionism.. The growth of wealth inequality, leading to a decline in living standards for blue-collar workers, is also cause for concern.

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“While Trump and Xi may be in the headlines, we think that there are deep historically-rooted drivers that make large sways of populations antagonistic to the logic of free trade and the movement of jobs to countries with comparative advantage,” Tim Hodgson, the institutes head, told CIO.

As the internet becomes more widely used for everyday tasks, Thinking Ahead also notes that there are growing concerns of it being weaponized, adding to potential cyber risks.

Cyberwarfare scares me witless,” Hodgson said, noting that while it’s “a pain” to have your identity or credit card information stolen, the branch of this threat that he fears the most is a potential nationwide cyber-attack.

Hodgson pointed to recurring annual cyber-attacks that have been occurring in the Ukraine each December for the past several years, taking out the nation’s power grid. “Each year it’s more sophisticated, and each year it takes longer to fix and the power outage hits a wider area and is longer,” he said, adding that the technology running the Ukrainian grid might also be used to run the US grid. “The extreme risk is not really your credit card details being stolen, but actually nation-state cyber warfare.”

To mitigate the risks, Thinking Ahead’s research suggests three hedging strategies: hold cash, as it has held its real value over long historical periods through both inflation and deflation; use derivatives, and hold a negatively-correlated assets.

The organization also suggests investors prioritize the risks and diversify their portfolios.

The full list of the top 15 investor risks is below.

Source: Thinking Ahead Institute

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