Pentegra Defined Benefit Plan for Financial Institutions Investment Program
PENTEGRA’S INVESTMENT PHILOSOPHY
Pentegra’s investment philosophy does not change to reflect the latest trends in the markets—or in marketing. Our primary investment objective is to have assets available to pay current and future benefit liabilities. Our secondary objective is to minimize fluctuations in contribution levels by creating greater cost predictability for clients. The third investment objective is to accomplish this at the lowest possible cost to clients by achieving superior performance results without undue risk, over time.
Plan contributions are invested on a commingled basis in a broadly diversified investment portfolio consisting primarily of fixed income and equity investments. As a $2.2 billion pension fund, our clients benefit in a number of ways:
- Economies of Scale
- Broad Diversification
- Greater Cost Predictability
ACCESS TO WORLD-CLASS MANAGERS
The Fund’s size permits economies of scale in obtaining investment expertise in two ways. Many pension investment managers require sizeable minimum investment allocation (such as $5 to $10 million) before they will do business with a prospective client. Typically, the small- to mid-sized single employer plan cannot meet these minimums. Further, most individual employers cannot match the low fees that we are able to negotiate. The Fund's investment management fees amount to about 0.27% (27 basis points) of assets. Of these 27 basis points, approximately 10 basis points represent “performance based” fees. (Essentially, performance based fees are only charged when the investment manager makes money for the Fund.) The Fund’s investment fees are significantly lower than the average reported by the Frank Russell Company. (In addition to the approximately 27 basis point investment fee, we deduct approximately 37 basis points from plan assets to offset other administrative costs.)
BROAD DIVERSIFICATION
To balance risk and return, we use a number of risk management techniques, the primary technique being diversification. We work with fourteen investment managers, including our internal operation, overseeing twenty-eight sub-portfolios containing over 1000 different issues.
Macro asset classes include domestic equity, international equity, domestic fixed income, venture capital, hedge funds and real estate. Further diversification occurs by having specialized, more focused asset classes. For example, under domestic equity, separate accounts cover large cap, small cap, value and growth disciplines.
The same is true for bonds, where we have investments in corporates, treasuries and mortgage backed securities, as well as long-term and short-term portfolios.
EQUITIES—GROWTH THROUGH DIVIDEND APPRECIATION AND CAPITAL APPRECIATION
Investment in equities provides growth of income through dividend increases and potential capital appreciation. This is needed to offset the impact of inflation upon future salary-based benefit accruals. Historically, equities have provided superior real rates of return (after inflation) over time. For this reason, equities should be included in a long-term pension investment program which has the ability to withstand the interim volatility of the equity market.
The Fund has divided its equities portfolio into a passive core that "tracks" the S&P 500 Stock Index and actively managed portfolios. The Fund has approximately one third of its equity investments in the S&P core because over time it has been difficult for most investment managers to outperform the S&P. The Fund uses several more managers (both passive and active) for the remaining equity portion. Numerous studies have demonstrated that within an asset class, such as equities, diversification of investment management style can reduce risk. Therefore, the Fund seeks managers and asset classes with characteristics which differentiate them from the S&P 500 Index and from each other to reduce risk.
THE UNIQUE CASH FLOW MATCH PORTFOLIO
One of the current elements in the fixed income portfolio is a "Cash Flow Match" portfolio. The Cash Flow Match portfolio is a high-quality bond portfolio structured to match the future cash inflow from coupons and bond maturities against future cash payouts for benefits to the majority of current retirees and beneficiaries.
The remainder of the fixed income portfolio is managed by individual managers selected by the Investment Committee. A portion of this portfolio includes mortgage-backed securities.
INVESTMENT OVERSIGHT
Our Board of Directors oversees the development of Investment Policy for our program. The Board has an Investment Committee of six Board members that meets at least quarterly with Pentegra's President and Chief Investment Officer.
The Investment Committee sets objectives and asset allocation, meets with the Fund’s investment managers, and evaluates performance and opportunities. The Committee receives a monthly review of investments. In addition, the Russell/Mellon Company prepares a quarterly analysis of each investment manager's actual and relative performance, and makes an annual presentation to the full Board. Our Investment Officer is continually in contact with the fund managers, the financial community, and other pension funds and institutional investors.