Retirement fund posts slight quarterly decline but outperforms benchmark; consultants recommend asset-liability study

John Kallen of Callan and Jim O'Connor reviewed capital markets and the Police and Fire Retirement Fund's portfolio at the Lexington Fayette Urban County Government meeting on May 14, 2025. The fund declined about 0.6% for the quarter ending March 31, 2025, but outperformed its policy benchmark by roughly 10 basis points on a gross-of-fees basis.

Kallen framed the market backdrop as volatile: the S&P 500 fell 4.3% in the first quarter, the Russell 2000 dropped about 9.5%, and U.S. fixed income and non-U.S. equities rebounded in May. Kallen said the S&P had recovered about 5.2% through the Monday in May presented to the board. He noted the Federal Reserve was standing pat on rates and that tariff pronouncements injected added uncertainty to markets.

The consultants emphasized that fixed income has moved from a pure diversification role to a contributor to returns given current yields. Callan's 10-year projected return for the portfolio was presented at roughly 7.12%.

O'Connor reviewed the fund's asset allocation and manager performance through March 31, 2025. He said domestic equity was overweight its long‑term target and continued to be a source of funds to pay benefits. Non‑U.S. equity was about 1.4 percentage points below target, domestic fixed income was roughly in line, and real estate and real assets were slightly underweight. O'Connor reported that the total fund finished the quarter at about $963,000,000 (quarter finish figure reported on the March-period performance slides). He also said the fund has outperformed its benchmark over one-, three-, five-, 10- and 25-year horizons in the materials presented.

Manager performance highlighted in the packet included outperformance from several U.S. equity and fixed-income managers. Dodge & Cox was cited as a bright spot among large-cap value managers. Non-U.S. managers were mixed: Acadian and Capital Group outperformed while Baillie Gifford underperformed in the quarter presented. McKay Shields (high yield) and the fund's Treasury-heavy core managers also posted positive returns for the periods shown.

O'Connor gave an update on the LaSalle property fund. The board previously committed $7 million to that strategy; approximately $5.6 million of that commitment was called and invested in May. He said additional follow-on commitments were expected but that the timing and magnitude of future capital calls remained uncertain; the next capital call was expected in July, with details to be determined.

Kallen recommended the board proceed with the asset‑liability study in two phases: first, work with a subcommittee to examine fundamentals and candidate asset classes and then, in a follow-up phase, present preliminary asset mixes and any recommended structural changes to the board in August. He said the team also plans a focused review of the fund's non‑U.S. equity sleeve and potential manager or structural changes to be returned to the board in August.

The presenters repeatedly counseled a long-term, strategic allocation approach and disciplined rebalancing, noting that short-term market moves can make it costly to attempt market timing.

The presentation closed with board questions and no formal investment actions taken on May 14; consultants were asked to convene subcommittee meetings and return with the asset-liability study and recommendations in coming months.