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ASRS Risk and Compliance

Every day, we are all exposed to some type of risk, whether it’s from walking down the street, driving to the store, running a business, or investing in the stock market. Risk is multi-dimensional, in that it means different things to different people or organizations, who have differing tolerance for a particular risk.

At the Arizona State Retirement System (ASRS), we pay particular attention to Investment Risk. The risk-reward for various types of investments – stocks, bonds, etc. – are analyzed to determine a mix that produces the optimum return on our total fund for an acceptable level of risk. 

This is in line with our primary objective of ensuring adequate funds to pay current and future benefits to our retired members, members on disability, and beneficiaries, as well as mitigating contribution rate levels and volatility for our members and employers.

Investment Risk

The ASRS accepts investment risk with an expectation to be rewarded by the returns of investing. We take into account the overall economy, business cycles, and capital markets. The growth or slowing of the economy creates risks and opportunities. Inflation for instance is a risk to businesses, which may need time to adjust to changing prices. Economic contractions are another source of risk, especially for businesses which lack the resources to ride out a recession. When investors seek safety during a recession, this causes prices of capital assets to decrease, especially if stressed investors become compelled sellers of assets.  

All of this is a source of opportunity for institutional investors such as the ASRS, who are long-term oriented and have the resources and time horizon to ride out market declines. This is certainly a different risk tolerance than for an individual with a 401(k) account that is nearing retirement age.

Still, the ASRS mitigates investment risk through a well-diversified portfolio across investable asset types, geography, and characteristics that drive returns.  

ASRS staff, in concert with our general investment consultant, conducts an asset/liability study every several years for the purpose of determining an investment allocation that maximizes the expected long-term returns of the fund while minimizing the level and volatility of contribution rates for our employees and employers. This study is presented to the ASRS Board’s Investment Committee and then the full Board for detailed review and discussion. The Board then makes the decision on the final investment mix and performance benchmarks, and charges staff with timely implementation, while allowing staff significant flexibility with respect to short-term or ‘tactical’ re-allocations, investment structures, and investment strategies.

The ASRS is in the final stages of completing such an asset/liability study and expects a new, modestly changed investment allocation later this fall. 

Compliance

The role of compliance in the management of the ASRS investment portfolio is multifaceted and diverse.

At a high level, the compliance function is tasked with ensuring that all investment activities comport with federal laws and regulations, state laws and rules, Board policies, and ASRS’s internal standard operating procedures. As an example, under the U.S Department of Treasury, the Office of Foreign Asset Control (OFAC) administers a list and enforces sanctions against countries and individuals engaging in terrorism or narcotics trafficking. The ASRS compliance function runs continual screens on the various investments to ensure compliance with OFAC, as well as other federal regulations. Similarly, compliance is also charged with monitoring State of Arizona statutes which govern specific investment limits in the management of the ASRS investment fund.  

At the investment portfolio level, the compliance function plays a key role in monitoring ASRS policies and procedures, including those which govern external investment manager and partner selection, tactical positioning, rebalancing, securities litigation, internal portfolio management, including pre-trade and post-trade compliance, and verification of asset management fee calculations, to name a few.

In much the same way that investment risk is inseparable from returns, good risk management is inseparable from compliance.

You can learn more about investments and compliance by visiting the Investments section of the website.


by Michael Viteri, Chief Investment Officer

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