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A new legislative audit says the Utah Retirement Systems for public employees may be investing too heavily in hedge funds and other "alternative investments" as part of trying too hard to avoid risk.
If the agency had not shifted to such a strategy during the past decade, auditors said, "URS theoretically would have had $1.35 billion in additional assets" based on projections by an outside consultant.
The Legislative Auditor General's Office released the report Tuesday after an unnamed legislator asked it to review URS investment policy and transparency.
While URS generally received positive comments, auditors suggested possible improvements for the agency that oversees 12 retirement plans for 197,000 employees and retirees in state and local governments.
Auditors hired a consultant, Chris Tobe, to study the agency's investment performance. He said it has been about average compared with peer agencies. But it holds more alternative assets and hedge funds than normal, and a change toward them since 2004 may have cost it the $1.3 billion extra in assets.
URS now has about 40 percent of its assets in such investments, up from 16 percent in 2005. Similar agencies average about 25 percent.
The study said URS' pre-2005 mix of investments — with no hedge funds and fewer alternative investments — would have performed better through 2013, and increased holdings by $1.35 billion.
In a written response to the audit, URS said it has followed a conservative strategy designed more to protect its assets during the recent tough economy than to seek the biggest returns possible.
"Those who try to hit home runs in their investment portfolio will often strike out," the agency wrote. "The URS asset allocation is designed to minimize losses in down markets, allowing URS to take advantage of compounding returns."
But auditors suggested that URS review its investment mix "to determine if it is too conservative and focuses too much on mitigating loss during periods of negative equity markets." The agency agreed to consider the consultant's analysis.
The audit also suggested more transparency for the agency, including starting to publicly list the salaries and benefits it pays to employees. It is currently exempt from laws that require most other public agencies to list such data.
The audit said a recent study, commissioned by URS, found that its staff compensation is competitive. It said total compensation with salary and benefits is 14.5 percent above the market, but salary excluding benefits is 3.9 percent lower than the market average.
The audit also said the agency could be more transparent with its administration board meeting notices to the public and should designate a records officer to manage information requests.
"Transparency," the study said, "helps to promote accountability, public confidence, informed participations by stakeholders and acts as a check against the possibility of mismanagement."