Chief investment officer, Amy McGarrity, has been at the $65B Colorado PERA Fund on and off since 2010. She rose through the ranks as an equity analyst and a portfolio manager. She achieved her CFA charter in 2011, and it made quite a difference. In 2017 she took the CIO seat, and she’s still COO. She has been executive director, she has handled a merger, and as she is now changing allocations and navigating challenges to beneficiaries like longevity, inflation, and higher wages.
Christine Giordano: It’s definitely fun to have you on this podcast. Now, as you have been taking [61% of] your investments in-house and now you’ve applied that investment team to the unitization project, which is aimed at giving participants in your defined contribution plan: broader, cheaper, and better performing options, I was wondering how you do that? You’re applying your investment team to your 401(k), as well as the pension fund. How is that going?
Amy McGarrity: It’s going great. It’s been a project that I have wanted to do for many years, and it’s a slow process. There are some peer funds across the country that are already unitizing, and so we’ve learned a lot from those peers over time. In essence, as you mentioned, we have a very compelling institutional investment capability that we use to manage the defined benefit plan so that we can really leverage that for our defined contribution plan participants.
We have oversight of about $7 billion in defined contribution assets. We think that our competitive institutional quality investment management is a natural option for those plans as well. We started a couple of years ago by unitizing the fixed income asset class. We manage 100% of our defined benefit assets internally actively with PERA staff, and so are able to leverage those through unitization so that we can then have that as an investment option for our defined contribution plan participants. Essentially creating a single mutual fund type of option and having the owners be–
Let’s say for example, 98% the defined benefit plan, 2% the defined contribution plan. This unitized product is daily valued, so it does allow participants to transact every day like they would a normal mutual fund or a normal 401(k) defined contribution plan offering, but yet have access to our high-quality, low-cost internal management. Our aim is to then leverage that unitized approach across all of our asset classes. We do manage equities for the defined contribution plan already, but in separate accounts. We have mirror image funds of, let’s say, for example, our US large cap fund. We have a defined benefit one and a defined contribution one.
Under the new construct, those will be collapsed into a single fund, just like I discussed with the fixed income portfolio. Eventually, hopefully if we think it’s feasible, we will have all of our asset classes unitized. We could have a single option where a participant could just choose to invest in the PERA portfolio or we could potentially even create target retirement date funds with changing asset allocations depending on a person’s retirement time horizon.
Much more to come. Christine, as we continue to explore these options, you can imagine there are some impediments or concerns about liquidity associated with some of those private market opportunities. There’s a lot of research left to be done, but we’re pushing forward on at least the public markets portfolios at this time, and really excited about those opportunities for our defined contribution plan participants.
Giordano: How do you benchmark that and what have returns been like for you?
McGarrity: The PERA board has an external consultant on the defined benefit and the defined contribution plans. They’re different currently. That group recommends benchmarks for the board to oversee how we’re managing the portfolios. In essence, the benchmarks for those portfolios are really the same as the benchmarks that we employ on the defined benefit side. A US large cap portfolio would need to outperform, over the long term, a comparable US large cap benchmark. Really the benchmarking process is no different than it is on the defined benefit side of the house.
Giordano: For others who would love to apply their investment teams that are working on the pension plan to the 401(k) plan, what advice would you give them on trying it?
McGarrity: I think that it is an interesting proposition, and I think it is maybe an increasing part of our futures as investment teams within defined benefit pension plans. To the extent that your defined benefit plan is mature and they may be adding more and more defined contribution access to current defined benefit plan members, it’s an important part of our growth as an investment management team.
I would offer that they look into it and explore it to the extent it makes sense to them and they have board support for this type of opportunity. I think that investment management is a very leverageable operation, and so to the extent you can add assets and it makes sense if you’re managing them internally, it’s just a creative to our members and stakeholders over time.
Giordano: Makes sense. On January 17th, you had an actuarial revision. It showed that there’s so much influencing pensions these days. Some of the things that are wonderful for workers make your job a bit more complex, like workers getting higher wages, living longer. Can you talk about some of the revisions that you take into account and how that factors into the whole equation and some of the challenges?
McGarrity: I think most pension plans undergo an actuarial experience study periodically. At PERA, we do ours every four to five years. It results in recommended changes to our underlying actuarial and economic assumptions. While the board did underscore their expectation of a 7 1/4% long-term actuarial rate of return, they did make changes to a number of our actuarial assumptions such that you mentioned, like we’re seeing higher wages than we had anticipated, and potentially different mortality tables.
We expect that some of those changes will result in increasing our expected liabilities of the plan. We’ll know more about that when our evaluation results come in for 2024, because those actuarial assumptions will be applied to our 2024 valuation, which we should see at our June meeting. Depending on the results of that, we could see an increase to our liability projections.
Giordano: I’d love to just touch on your career, because I find it so interesting. You started life as a musician, you headed into finance. You’ve been COO, you’ve been executive director, and you still are COO, sorry. You are CIO, you handled the merger of Denver Public Schools into PERA. What are some of the strongest lessons learned and what are some skills that are needed in each position that people might not expect?
McGarrity: I’m, I guess, hardly the person to offer career advice. I would characterize my career as extremely fortunate. I have been able to take the twists and turns that are afforded to most people in their careers, and fortunately capitalize on them in each aspect. I think I’ve just been extremely lucky. For example, if you can imagine being merged with a much larger pension system, how uneasy that might be and how scared you might be. I was the CIO of Denver Public Schools retirement system. They didn’t really have any place for me at PERA. It’s a little uncertain.
Instead of that being a stopping point in my career, it was really another fork in the road that offered me opportunities that I had never envisioned. I finished my CFA, as you mentioned, in 2011 after the merger. I started co-managing two portfolios in the global equities division at PERA. I became an equity analyst. Opportunities that I could have never imagined, as you said, starting as a piano performance major at the University of Wyoming in 1991.
My career has taken many twists, many turns, and all along the way, I’ve had support and encouragement from so many colleagues, and I consider myself extremely fortunate. Lessons learned along the way include stepping out of my comfort zone and taking those risks. Like I said, I went to the University of Wyoming, then I moved to New Jersey. I worked for a hedge fund. I eventually went and worked in New York City. I don’t know how many people said, “I’ve never met anyone from Wyoming.” Of course, there’s not a lot of us from Wyoming and maybe not a lot in New York City, but these are all opportunities to get to know people and new skills.
I think that’s just an important part of growth is constant growth and trying to continue to push yourself outside of your comfort zone. Over the last couple of years, as I’ve taken on the COO role and done the interim CEO role at PERA for about a year and a half, I learned really the importance of communication and collaboration. I am an investment and numbers person through and through. To put myself in front of all of my colleagues and try to run the organization and testify, of course we testify as CIO’s, but as the CEO, executive director, is a different line of questioning.
There’s a lot more communication and collaboration. I’ve learned a lot about that over the last year and a half, and I have a whole lot more to learn. I can’t underscore the importance of communication, collaboration, transparency, trying to educate people on where you’re headed in order to really create buy-in even if there is some discomfort there. That’s my aim, but that’s a daily process for me. I’m still in the middle of my journey with a lot of lessons left to learn. There’s still a lot to go, Christine.
Giordano: You’re always so humble, Amy. I was curious, what [were] some of your goals for this year?*
McGarrity: You touched on one earlier, that unitization project. That’s been ongoing for a couple of years now and I suspect that it will continue throughout 2025 and not be completed in 2025. Over the weekend, we unitized the equities asset class and now we have some clean-up associated with that project. Then we’ll move forward with some more analysis of the private asset classes. That is a big project in 2025.
In addition, we have the investment systems modernization project where we have a lot of fragmented systems that are somewhat dated that we are trying to collapse into more centralized systems that more than just one asset class can utilize. It will help both the front and the back office and hopefully position the overall department for success a decade from now. Someone 20 years ago invested in the future for my benefit and my team’s benefit. Our aim is to do that today such that our successors can be very successful as we are able to be today.
That’s our aim and that’s on the investment side. Certainly organizationally, PERA is undergoing pretty significant change. We have a new executive director and we’re undergoing a pension system modernization project, which is just a huge multi-year project. The overall organization is experiencing change in addition to the investment departments. There’s a lot going on. I can use those new communication skills to their fullest extent.
Giordano: What is the modernization project?
McGarrity: We have an internally developed pension administration system. This is the system that essentially prints the checks, it calculates the retirement amounts, it calculates the benefits, et cetera. It houses all of our member data. It’s 40 years old. We have some information from CEM that it is the oldest system in the country. We are undergoing the project to update it, to modernize it. To not necessarily start over, but parts of it, we’re going to be starting over.
It’s written in a code that we can’t really recruit and retain people to write it anymore because it’s that old. There’s a lot of rescaling, upscaling, new things happening at PERA along those lines. That project kicked off mostly last year and it will continue for probably ever at least five years, or so I would think.
Giordano: Makes sense. You’ve also had some changes to your strategic asset allocations. Can you review those with me?
McGarrity: Yes. Like most of our peers, our consultant sees expectations for private asset classes from a returns volatility and correlation perspective to be attractive. We underwent our most recent asset liability study in 2024 and the recommendation was incremental increases to private equity and real estate, and those being funded from global equities of 1.5% each, so 10% now a target to private equity, 10% to real estate. The alternatives buckets is really focusing now on private credit and real assets. We are revamping that portfolio a bit, removing the hedge fund allocation which was pretty small anyway, and then really focusing on those two underlying sub-asset classes of real assets and private credit.
Giordano: In what part of private credit?
McGarrity: It’s a combination of direct lending and a splash of opportunistic credit most likely. Pretty generic direct lending type of exposure is what we’re looking for overall, but maybe some opportunistic as well.
Giordano: You manage 65% of your portfolio in-house?
McGarrity: That’s right. We manage 100% of our fixed income internally actively. Then about 70% of our global equities are managed internally, and that’s a combination of active and passive. The rest of global equities is externally managed. Then our private asset classes, we use advisors or GPs depending on the asset class.
Giordano: Your best performing asset classes and why and what made a difference there?
McGarrity: All of our asset classes are great and strong performers over different time periods. I would say for our most recent audited financials which are 2023 global equities outperformed that year. Broadly speaking, we have a very high-quality perspective on our global equity portfolio. Our internal portfolios are really high quality in terms of their philosophy, long-term holding periods et cetera. We do have some complementary diversifying approaches which are a little bit more value-oriented, but overall the asset class has a high-quality bias and that has served us well over multiple time horizons.
Certainly if there’s a value rally, we will likely underperform, but over the long time period, that has been a really good bias for us in general. Over long time periods, I would say private equity and real estate have both performed very strongly for us. We have really strong experience in both of those asset classes. I think we’ve been managing private equity since 1980s, so a lot of experience there, a dedicated team that has a lot of tenure also within our real estate division as well.
I would characterize our real estate portfolio as core and value-add. We have some limited opportunistic exposure but core with a plus there. Our differentiator there is we do a lot of direct allocation. While we have advisors that help us, we are actually allocating directly and buying portfolios. I think this helps us with the buy and sell decision. It helps get us direct exposure where we want it. We are more actively invested there with our expert team working in partnership with those advisors in order to drive outcomes. That does result in lower fees and potentially more long-term perspective, which is how we win, is by thinking long term.
Giordano: Your long-term perspective for real estate really seems to pan out. What areas of concentration are you most finding reward?
McGarrity: Real estate is an illiquid asset class, so it’s difficult for us to be tactical in our allocations. However, the team has positioned the portfolio over the last several years to really benefit in this current environment. No one would’ve predicted the pandemic, but the resulting impact on the office market has been pretty substantial, and we are underweight office, we’re overweight industrial, and that has served us quite well. Those strategic tilts within the portfolio have helped us perform well.
Giordano: Just reflecting on your career and all the things that are changing in ways that investors aren’t always accustomed to, I know your team has a lot of nice longevity to it, so they’ve seen some bumps in the road. Obviously with interest rates and inflation and geopolitics creating a new world, what’s been working for you?
McGarrity: This is a hard question for me. I am such a strategic investor that it’s difficult for me to say one thing versus another has tactically worked well for us. As I mentioned earlier, I’m still a global equity portfolio manager, so I certainly have views on the market, and we do express those views in our holdings. From a total fund perspective, I do believe that we win by being allocated to all of the asset classes over time. They each serve a purpose that’s very critical to our long-term success. I think that that has served us well in a variety of market environments.
I often cite the pandemic in that our strategic asset allocation and the ranges within which we operate resulted in us having to rebalance the portfolio in March of 2020 by selling bonds and buying equities. We bought $1 billion worth of equities at, I believe, the bottom of the market in 2020, and then the market went on to rally. I can’t time the market, so strategic asset allocation to me is critical. Now we have some unintended or intended because the portfolio managers want them, that’s in the portfolio, whether it’s allocations to the Magnificent 7, or let’s say a duration call within the fixed income portfolio, each asset class definitely has a bias that is hopefully working.
I think we’re all experiencing, so far in 2025, a pretty significant increase in market volatility based on the uncertainties in the new administration. Whether it’s tariffs that will potentially increase inflation or reductions in government spending, or deportations of some lower-cost labor in the immigrant population and the ensuing impact on markets, it’s TBD, Christine. More now than ever, it’s a testament to that strategic asset allocation and being in the market to participate in it. Over the long term, we do believe that the market will go up and that exposure will serve us well, but in the meantime, we’re holding on for this wild ride so far in 2025
Giordano: Having such experience with global equities and heading the team directly, what are some of your important themes or important areas that you’re focusing on for the years ahead?
McGarrity: I think it still remains that concept that we need to remain diversified at the asset class level. While we are in-house stock pickers and portfolio managers, the asset class that’s going to drive the overall performance of the total fund, which is ultimately job one, each asset class is in place to deliver a certain beta, and plus hopefully some positive alpha. It’s constructing that asset class to at least deliver the beta and hopefully the alpha over the long term. While we have market views and can express them, job number one is to deliver that long-term 7 1/4% return so that our liabilities can be paid off in time for the legislation that’s in place, which is 2047. That’s the goal, and that remains our North Star.
Giordano: Given the automatic adjustments associated with your fund, how are your retirees dealing with this elevated inflationary environment at Colorado PERA?
McGarrity: To people who don’t know what Christine is talking about, in 2018, the legislature put into place some legislation that ensures that we are fully funded by 2047, which was at that time a 30-year funding horizon. To accomplish that, there are automatic levers in place that were intended to create a shared sacrifice amongst the stakeholders, the employers, the employees, and the retirees. To the extent that we are not on track to be fully funded by 2047, that automatic adjustment kicks in, employer and employee, their contributions have to increase, and the retirees’ annual increase goes down.
We had, in the original legislation, four of those levers to trigger. We’ve already triggered two, we have two left. To the extent that we aren’t on a path to full funding by 2047, then those levers will kick in again. What that means is our retirees are currently limited at an annual increase of 1%, which as we all know, is much less than recent inflation that may have been sufficient during really low inflationary environments that we’ve experienced over the past decades, but recent timeframes we’ve seen increases in inflation, and our retirees because they’re not getting increases that are keeping up with inflation, are really significantly impacted.
In some cases, they can’t go back to work, and so their standard of living has decreased considerably. There is a lot of discussion at the legislature in Colorado of how to help these people. There’s some discussion of offering state tax credits that are means tested. These measures haven’t passed yet, but they are up for discussion again during this legislative session. One thing, though, that just happened at a federal level, that is really beneficial for many of our retirees, is the repeal of the WEP and GPO, the windfall elimination provision, and the government pension offset that was recently signed by President Biden in January.
It looks like the Social Security Administration will be able to implement that, hopefully later this year. It will be retroactive to January of 2024, which could increase many of our retirees’ Social Security if they do have enough private sector credits to get Social Security benefits. We are hopeful that that will alleviate some of the pain that our retirees are enduring, but it’s really difficult for state systems to keep up with inflation at this time. We can’t print money like the federal government can or necessarily issue debt to keep up with those increasing costs of living for our retirees, so I think it does underscore, for those of us still working, the need to supplement our savings for with those 401(k) and $457 to the extent we can.
Giordano: You’ve done well in meeting your long-range benchmarks for the 3, 5, and 10 years. Wanted to congratulate you on that.
McGarrity: Thanks, Christine.
Giordano: Of course. We’re all curious, who is Amy McGarrity outside of the office? What are your hobbies? What do you do for fun?
McGarrity: I work a lot, so that is my focus. Aside from working, I have two daughters. My oldest daughter is a sophomore at Indiana University, and she is a chemistry major. She wants to be a pediatrician. My youngest daughter is a senior in high school, so I’m going to be an empty nester in the fall of this year, which is crazy. I have two daughters. My youngest lives with me full-time, so she keeps me very, very busy, which is wonderful. I also like to run and play golf, and I’m trying to learn to be a better skier. There’s really no excuse not skiing, and being from Colorado, is embarrassing, so I’m trying to get better at that as well.
Giordano: I’m guessing you’re outside quite often?
McGarrity: Yes, it’s beautiful. It’s what, February 3rd today, and it’s 70 degrees here in Colorado, so yes. I know, it’s crazy. Don’t tell anyone. Everyone will want to live here.
[laughter]
Verbal Ping Pong
Giordano: Would you mind playing a game of free association with me? It’s like ping pong, where I say something and you say the first thing that comes into mind.
McGarrity: Sure. Let’s do it.
Giordano: Great. Beneficiaries.
McGarrity: Gosh. Sorry. I’m slow at ping pong apparently. Beneficiaries, I think of mom and dad.
Giordano: I’m not supposed to ask surrounding questions, but now I’m curious to know about your mom and dad, if they’re pensioners.
McGarrity: They are. My dad has unfortunately passed. My sister is also a teacher. They live up in Wyoming. Nonetheless, when I think of our retirees, I think of people’s parents and how much we love them and how much we hope for the best for them, and we want to take care of them. That’s kind of the general image that I conjure in my mind. These are critical members of our society who have served our state for many years and deserve a dignified retirement. That’s who I think of.
Giordano: Mining.
McGarrity: Bitcoin.
Giordano: China.
McGarrity: Oof. Social unrest.
Giordano: 2025.
McGarrity: Empty nest.
Giordano: Geopolitics.
McGarrity: Oh gosh. Opportunities. I’m going to be positive.
Giordano: Divestment.
McGarrity: Missed opportunities.
Giordano: Leadership.
McGarrity: An honor.
Giordano: Beautiful. In the spirit of community, this is the last question. What would you entertain if other allocators wanted to pick up the phone and approach you on something?
McGarrity: I would first of all be honored. I don’t speak to too many of my peers. I don’t know if I’m just unfriendly or what, but generally speaking, I love to talk to them. I have so much respect for so many of them that it’s great to collaborate when we have the opportunity to do so. I love talking about the markets and sharing ideas, whether it’s from an asset class perspective or just general market news or stocks. Of course, that’s my area of expertise. I absolutely love to talk about personal and career development and growth. I’ve learned a lot from my colleagues in the past and look forward to opportunities to continue to do that, and to the extent I can ever help any of them, I would be honored to do so.
Giordano: Wonderful. Thank you very much.
McGarrity: Thank you, Christine. It was a pleasure.
Giordano: Pleasure was mine as well. Amy McGarrity, chief investment officer of Colorado PERA.
McGarrity: Thank you.
Note: This interview was recorded earlier this year.
