investment returns | Pension360

Strong Global Equities Performance Drives Ontario Pension Return

The Ontario Public Service Pension Plan (PSPP) returned 12.5 percent overall in 2013. But a new report from the Ontario Pension Board, which handles investments for the fund, gives more details on the performance of individual asset classes.

Strong global equities performance (37 percent return) drove the fund’s returns in 2013. Reported by Pensions & Investments:

In the pension fund’s annual report released Thursday by the Ontario Pension Board, which administers the defined benefit plan, global equities returned 37% last year, while Canadian equities returned 18%, compared with 35.9% for the MSCI World (Canadian dollar) and 13% for the S&P/TSX Composite indexes.

Real estate returned 12.9% vs. its custom benchmark’s 9.7% return; infrastructure, 12% vs. 0.9% for its custom benchmark; emerging markets equities, 5% vs. the MSCI Emerging Markets (Canadian dollar) index’s 4.3%; and Canadian fixed income, 1.8% vs. -1.2% for the DEX Universe Bond index.

Private equity, which returned 17.8%, was the only asset class to underperform its benchmark, which was 30.2%.

The pension fund’s asset allocation as of Dec. 31 was 28.2% fixed income, 23.7% developed markets equities, 15.5% emerging markets equities, 14% real estate, 8% cash and short-term investments, 7.6% Canadian equities, 2.5% infrastructure and 0.5% private equity.

The plan improved its funded status from 94 percent to 96 percent, according to the report.

The fund handles $18.9 billion of assets.

Report: Maryland Fund Lost Billions Due To Underperformance

The Maryland State and Retirement Pension System returned 14.4 percent last fiscal year – a return that the Chief Investment Officer praised as “strong” and that doubled the fund’s expected rate of return of 7.75 percent.

But a new report from the Maryland Public Policy Institute claims that the returns weren’t good enough From the Maryland Reporter:

In a report, Jeffrey Hooke and John Walters of the Maryland Public Policy Institute say the failure to match the 17.3% return on investment made by over half the public state pension funds cost the state over $1 billion. As they have in the past, they also complained about the high fees paid to outside managers of some of the funds used by the State Retirement and Pension System, which covers 244,000 active and retired state employees and teachers and their beneficiaries

“As the table shows, the underperformance trend is not only continuing but worsening as the percentage divide widens,” said Hooke and Walters. “Part of problem may be due to the fund’s large exposure to alternative investments, such as hedge funds and private equity funds, that have tended to perform worse in recent years than traditional investments such as publicly traded stocks and bonds.”

A spokesman for the Maryland pension fund offered his response to the report:

[Spokesman] Michael Golden said the institute’s report was “flawed,” “not supported by facts,” and mischaracterized the agency’s investment performance.

“These returns have resulted in greater progress toward full funding of the system that was projected last year,” Golden said. The five-year return on investment was 11.68%, while the target for the fund is 7.7%.

[…]

Golden admitted that Maryland’s investment performance is “unimpressive” compared to other state funds.

“However, the reason for this ranking is not due to active management and fees,” Golden said. “After the financial crises of 2008-2009, the board determined that the fund had too much exposure to public equities, which historically has been one of the riskiest, most volatile asset classes, and wanted a more balanced and diversified portfolio.”

See the chart at the top of this post for a comparison between the returns of Maryland’s pension fund versus the Wilshire’s Trust Universe Comparison Service (TUCS), a widely accepted benchmark for institutional assets.

Moody’s: Strong Returns Can’t Keep Up With Obligations

Moody’s released a strongly-worded report today on the state of public pension funds in the U.S. The report claimed that strong investment returns haven’t improved the funding gap facing pension systems, because unfunded liabilities have grown even more than assets.

From Bloomberg:

The 25 largest U.S. public pensions face about $2 trillion in unfunded liabilities, showing that investment returns can’t keep up with ballooning obligations, according to Moody’s Investors Service.

The 25 biggest systems by assets averaged a 7.45 percent return from 2004 to 2013, close to the expected 7.65 percent rate, Moody’s said in a report released today. Yet the New York-based credit rater’s calculation of liabilities tripled in the eight years through 2012, according to the report.

“Despite the robust investment returns since 2004, annual growth in unfunded pension liabilities has outstripped these returns,” Moody’s said. “This growth is due to inadequate pension contributions, stemming from a variety of actuarial and funding practices, as well as the sheer growth of pension liabilities as benefit accruals accelerate with the passage of time, salary increases and additional years of service.”

U.S. states and cities are contending with underfunded worker retirement systems. The 18-month recession that ended in June 2009 wiped out asset values and forced cuts to contributions. Now, liabilities are crowding out spending for services, roads and schools.

For the report, Moody’s gathered data on the 25 largest pension funds in the country, which control about 40 percent of all pension assets in the U.S..

The New York Common Retirement Fund had the best average return over the past 10 years. The fund returned 8.67 percent annually.

Photo by www.SeniorLiving.Org

Report: Maryland Fund’s Below-Median Returns Coincide With Shift to Alternatives

The Maryland State Retirement and Pension System experienced a 14 percent return in the 2013-14 fiscal year. The fund’s then-Chief Investment Officer, Melissa Moye, touted the returns as “strong” – but a new report suggests not only that those returns were below-median level, but also that they were driven by a shift in investment strategy that put more money in alternative investments.

From David Sirota at the International Business Times:

According to [report authors] Walters and Hooke, a former Lehman Brothers executive, that shift [of assets to Wall Street] coincided with below-median returns for Maryland’s public pension system.

“Ironically, as the fund’s relative performance has declined, its Wall Street money management fees have risen,” the report says. “In fiscal year 2014 alone, the Maryland state pension fund paid out roughly $300 million in fees to Wall Street money managers. Over the past 10 years, these money management fees amounted to over $1.5 billion, according to the fund’s annual financial reports. Nevertheless this high-priced advice resulted in 10-year returns that were $3.22 billion (net of fees) below the median.”

If the fund had matched medianreturns for public pension systems across the country, “the state could have awarded 80,000 poor children with $40,000 four-year college scholarships,” Hooke and Walters wrote.

Maryland’s shift into alternative investments happened while the securities and investment industries made more than $292,000 worth of campaign contributions to Democratic Gov. Martin O’Malley, who appoints some members of the Maryland pension system’s board of trustees. Vice News has reported that the Private Equity Growth Capital Group is a financial backer of a 501(c)4 group co-founded by O’Malley. In May, Pensions and Investments magazine reported that the Maryland governor appointed a managing director of an alternative investment firm called The Rock Creek Group to head a state task force on retirement policy.

Meanwhile, the chief investment officer of Maryland’s pension system was recently appointed to a senior position in the U.S. Treasury Department overseeing public pension policy.

“Eliminating active managers, selling alternative investments, and adopting indexing for 90 percent of the state’s portfolio would ensure median performance,” his report concludes. “These actions would also save the state huge amounts in money management fees.”

Hooke has testified in front of lawmakers advocating the increased use of index funds in pension investments – a strategy that would have worked well the last 4 or 5 years, but one that offers little protection against market contractions.

Since 2008, Maryland has more than doubled its investments in private equity, real estate and hedge funds. Those asset classes made up 29 percent of its portfolio in 2013.

Investigating Gina Raimondo’s Ocean State Investment Pool

GoLocalProv today published the results of an investigation into an investment pool – called the Ocean State Investment Pool – set up by Rhode Island Treasurer Gina Raimondo to help towns and cities “maximize investment returns”.

GoLocalProv writes that the fund certainly saw gains – but it also racked up investment expenses:

The investment pool is being run by Pyramis Global Advisors, LLC, a company owned by Fidelity Investments. The firm was paid a fee of $757,701 for fiscal year 2013 to manage what was by the end of the year $545.1 million in assets, according to the annual report for that year. After the fee, the pool generated a net investment income of $698,263, according to the report. (The pool earned a total of $1,450,050 in interest income that year.)

For the first three months of the pool’s existence—from March to June 2012—Fidelity Investments fetched a fee of $199,690, almost as much as the $448,680 in interest earned by the pool, according to the last annual report.

[…]

Pyramis’ fee ranges from .138 percent to .148 percent of the average net assets. The rates for the fiscal years 2012 and 2013 were on the higher end of that range, at .147 and .148 percent, respectively. The rates decrease as assets increase, meaning that the more money that’s in the pool, the lower the cost.

More on the creation and purpose of the Ocean State Investment Pool, from GoLocalProv:

Known as the Ocean State Investment Pool, the program was launched in the spring of 2012. Two years later, just three municipalities have signed up: Bristol, Cranston, and Lincoln. The remaining six governmental members are all state entities and include the state pension fund and the Rhode Island Student Loan Authority, for which the treasurer is a board member. Money from the state general fund also accounts for more than half of the assets in the fund.

The Ocean State Investment Pool was designed to help cities and towns maximize investment returns on so-called liquid assets—cash that cannot be invested over the long-term because it needs to be used for day-to-day expenses, like payroll.

GoLocalProv reached out to several cities and towns, asking why they had not signed up.

Answers varied. In Warwick, a city official said the investment pool does not meet all the city’s criteria for its liquid investments. William DePasquale, the acting chief of staff for Mayor Scott Avedisian, said that after the 2008 recession the city had a adopted a policy of only making liquid investments that were FDIC-backed. For that reason, he said the investment pool was not considered by the city.

Read the entire investigation here.

Photo by TaxRebate.org.uk

Idaho Fund Increases COLAs, Lowers Contribution Rates After “Banner” Year

For the Public Employee Retirement System of Idaho (PERSI), fiscal year 2013-14 was a historic one. That’s because the fund returned 17.2 percent – not a staggering return (the S&P 500 returned around 30 percent over the same period), but still one of the best performances in the history of the fund.

The pension fund’s board has rewarded its members in light of the news. The reward includes a significant COLA boost for most retirees. From the Idaho Statesman:

The PERSI board approved a cost-of-living increase for retirees that includes the state-required 1 percent increase, an additional 1 percent increase and up to 2 percent more depending upon when pensioners retired.

Employees who retired between July 1, 2010, and July 1, 2014, will get a 2 percent increase.Employees who retired between July 1, 2008, and June 30, 2010, will get a 2.08 percent increase. Employees who retired before July 1, 2008, will get a 4 percent increase.

The increase is contingent upon a likely 2 percent increase in the consumer price index, which is to be released Wednesday. If it’s less than 2 percent, the PERSI COLA may be slightly adjusted.

Both employees and employers are now looking at lower contribution rates, as well. From the Idaho Statesman:

The PERSI board also voted Tuesday to eliminate two future planned contribution rate increases for active employees and the Idaho government agencies that employ them.

This means employees do not have to worry about a reduction in take-home pay, employers will avoid an increase in their PERSI costs and the contribution rates stay at a lower percentage of pay than 15 years ago, PERSI officials said.

[…]

The PERSI board voted to lower firefighter fund contributions from 17.24 percent of payroll to 5 percent because the fund, which has been closed to new members since 1980, has reached 110 percent of its anticipated benefits. That means the 22 firefighter departments will collectively save $7.75 million every year.

PERSI members since 2007 had been limited to 1 percent cost-of-living increases.

Pittsburgh Comprehensive Fund Returns 16 Percent For Year

Pittsburgh’s Comprehensive Municipal Trust Fund reports that it returned 16 percent on its investments from September 1, 2013 to August 31, 2014 (the fund’s fiscal year). Reported by TribLive:

The pension system earned 16 percent on its invested portfolio during the 12 months ending Aug. 31, Executive Director Paul Leger said.

“It’s a very good value,” Leger said. “It’s actually something I tell my friends about.”

Funds for police, firefighters and municipal employees totaled $670 million in August, about 58 percent of the money needed for $1.15 billion in pension obligations for current and future retirees. Invested funds totaled $648 million in December, about 64 percent of their obligations.

The system earned 17.5 percent on investments in 2013, 15.8 percent in 2012, 9.3 percent in 2011, 8.4 percent in 2010 and 11.2 percent in 2009, according to reports from Chicago-based Marquette Associates, the Comprehensive Trust Fund’s investment adviser.

Pennsylvania state law mandates that any local-level pension fund with over $1 billion in obligations is subject to a state takeover if funding levels fall below 50 percent. Pittsburgh’s fund nearly fell below that level in 2010, but it avoided the state takeover scenario by re-directing over $700 million worth of parking taxes into the fund.

Photo credit: “PittsburghSkyline with WarholBridge” by TheZachMorrisExperience. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

Delving Deeper Into New York Fund’s Partnership With Goldman Sachs

New York State Comptroller Thomas P. DiNapoli announced yesterday that New York’s Common Retirement Fund (CRF) plans to give $2 billion to Goldman Sachs for investing in global stocks.

The partnership is the first of its kind of the CRF. Aaron Elstein, who runs the In The Markets blog, weighed in on the partnership in a column on Wednesday:

“This innovative partnership gives the New York State Common Retirement Fund full access to world-class global equity investment opportunities and the nimbleness to take advantage of them on a timely basis,” DiNapoli said.

The innovative thing is that the pension fund hasn’t hired Goldman before. As for “access to world-class global equity investment opportunities,” it seems worth noting that mutual funds bearing the Goldman Sachs name have collectively returned 12.43% over the past five years, according to Morningstar, which is average for their category. In 2010 and 2011 the funds underperformed their category and in 2012 and 2013 outperformed. This year, their total return of 4.7% is exactly in line with the category. Maybe the global equity investment opportunities from Goldman aren’t really the ones to which you’d want special access. (A spokesman for the comptroller’s office later said Goldman can’t pitch in-house funds to the pension fund.)

Certainly the New York state pension fund will be offered investments that Goldman doesn’t make available to mutual fund customers. We know that because the press release said the pension fund and Goldman “will initially focus on dynamic manager selection opportunities in global equities to enhance returns in the Fund’s equity portfolio.” That doesn’t sound like such a bargain, either.

“Dynamic manager selection opportunities” is gibberish that in its tortured way means Goldman will introduce the pension fund to money managers who aim to outperform the market.

Elstein goes on to dissect the rest of yesterday’s press release from DiNapoli and also touches on the drawbacks of actively managing investments. Read the whole column here.

Funding Status of Largest Plans Falls in August

The funded ratios of the largest pension plans in the country collectively fell during the month of August, according to a Milliman report. Reported by Pensions & Investments:

The funded status of the 100 largest U.S. corporate pension plans fell to 84% in August, down from 84.8% in July, said the latest Milliman 100 Pension Funding index.

[…]

During the same period, investments returned 1.92%, the second best monthly return of the year, Mr. Wadia said, surpassed only by February’s 2.3% return. Assets rose to $1.47 trillion in August from $1.45 trillion in July.

If the pension funds achieve a median 7.4% annual return and the discount rate remains at the current 3.89%, the funded status would increase to 84.9% by the year’s end, still a 3.4-percentage point drop from 88.3% in December 2013, according to Milliman.

“The reason (the funded status) hasn’t fallen more (year-to-date) is because of positive asset growth,” Mr. Wadia said. Assets have returned 7.5% year to date Aug. 31.

The largest corporate defined-benefit plans, on the other hand, improved in August, as funded status improved from 88.3 percent to 88.4 percent.

CalSTRS Weighs Worst-Case Scenarios in Latest Meeting

CalSTRS' Projected Funded Ratio. Credit: Chief Investment Officer and PCA — Credit: Chief Investment Officer and PCA

California’s pension reforms are designed to fully fund CalSTRS in the next 35 years. But that timeline assumes the fund will meet or exceed its assumed rate of return – 7.5 percent – year in and year out.

But what if CalSTRS doesn’t meet its investment return targets?

That was the topic of the fund’s most recent investment board meeting. Reported by Chief Investment Officer:

CIO Chris Ailman posed that question [of failing to meet return expectations] during the fund’s September 5 investment board meeting. A number of top asset managers and economists have predicted market returns below historic averages for the coming years, and CalSTRS has chosen to confront that possibility head-on.

Economic growth risk is the foremost factor determining asset returns, according to Pension Consulting Alliance (PCA), CalSTRS’ primary investment adviser. Weak growth brought on by cyclical recessions, another financial crisis, or geopolitical events pose the largest threat to the fund’s short-term returns. In turn, these draw-down events present the likeliest path to sub-7.5% returns over the long term and, taken to an extreme, plan insolvency.

“Mitigating short-term drawdown risk may improve the likelihood that the long-term pension reform measures will succeed,” PCA said in its presentation. But CalSTRS faces a “key tradeoff” in hedging. “Addressing major crisis risks could push the long-term expected rate of return lower,” the consultancy continued.

During the discussion, PCA Founder Allan Emkin, Ailman, and others expressed trepidation over equities’ long bull run and lofty valuations. According to research by Investment Officer Josh Diedesch, the US stock market’s price-to-earnings ratio (20) suggests annual returns below or barely surpassing the 7.5% threshold for the next five years.

As Ailman put it during his opening CIO report, the “US bull market is getting long in the tooth.”

The topic will be broached again at the next board meeting, according to Chief Investment Officer.

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