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Wednesday, January 20, 2016

PSPRS investment returns through November 2015

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 for November 2015, the fifth month of the current fiscal year (FY), with the fiscal year end 2014 and 2015 returns included for comparison:

Report PSPRS PSPRS Russell 3000 Russell 3000
Date Month End Fiscal YTD Month End Fiscal YTD
6/30/2014 0.78% 13.82% 2.51% 25.22%
6/30/2015 -0.73% 4.21% -1.67% 7.29%

7/31/2015 0.13% 0.13% 1.67% 1.67%
8/30/2015 -1.43% -1.31% -6.04% -4.47%
9/30/2015 -1.02% -2.31% -2.91% -7.25%
10/31/2015 1.95% -0.36% 7.33% 0.08%
11/30/2015 0.37% 0.09% 0.55% 0.63%

There is usually about a two-month lag in PSPRS reporting its investment returns.  PSPRS's Board of Trustees did not have a regular meeting in December 2015 nor did they include October 2015 returns in this month's meeting materials, so the returns for the month of October are extrapolated from the September and November returns.  The pattern continues with PSPRS returns.  When the Russell 3000 is negative, PSPRS' losses are less, but when the Russell 3000 gains, PSPRS lags those positive returns.  PSPRS is always happy to remind everyone how well their investment strategy manages volatility.  However, volatility works both on the upside and the downside.  It is great that PSPRS suffered only 23.67% and 35.00% of the losses in August and September, respectively, but PSPRS captured only 26.60% of the gain in October. 

Once again, I do not see how PSPRS can ever earn its expected rate of return, except when there is a bull market showing double-digit gains.  As of November PSPRS has only earned 14.29% of  Russell 3000's 0.63%.  The pattern in the past two fiscal years has been for PSPRS to earn between 55% to 60% of the Russell 3000.  If PSPRS consistently earned 60% of the Russell 3000, the Russell 3000 would need to average 12.5% returns for PSPRS to consistently earn its ERR of 7.5%. As of yesterday (January 19, 2016), the Russell 3000 is down 8.59% in 2016 with what appears to be another big loss coming today.  Is this the start of another financial downturn?  Who knows?  Though I think it is probably safe to assume that PSPRS is going to see a loss for the year, and no COLA's will be paid to retirees next fiscal year.

* Returns, gross of fees, are used because PSPRS usually does not report returns, net of fees paid to outside agencies, except on the final report of the fiscal year.  Returns, gross of fees, are used in the table for consistency.  The past two years fees have reduced the final annual reported return by about a half percent.  Returns, net of fees, were 13.28% and 3.68% for fiscal years 2014 and 2015, respectively.

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