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Thursday, September 4, 2014

How did PSPRS' investments do in the fiscal year that just ended?

PSPRS' consolidated annual financial report (CAFR) is usually not available until November or December, and the consolidated and individual employer actuarial reports are usually not available until September or October.  However, for those interested in seeing how PSPRS' investments did for the fiscal year (FY) that ended June 30, 2014, you can go to PDF page number nine of the August 27, 2014 Board of Trustees Meeting Materials.  Following is a brief synopsis of the investment returns for FY 2013-14.

For the fiscal year, PSPRS' total fund earned 13.82%, gross of fees.  If we subtract 0.50% (last year's amount) for fees paid to outside investment firms, we get an estimated annual return, net of fees, of 13.32%.  This 13.32% annual rate of return beats PSPRS' expected rate of return of 7.85% by nearly 5.5%, and it surpasses the 9.00% threshold for adding money to the Reserve for Future Benefit Increases ("the Reserve").  This means that half of the 4.32% over the 9% threshold will go into the Reserve to be used to pay COLA's in the future.

As we all know the stock market has had an incredible run over the past two years, so let's see how PSPRS' fiscal year returns compare with the Russell 3000.  (Note: in the past I have used the S&P 500 to compare PSPRS' returns against, but the Russell 3000 is what PSPRS uses in its own reports as a benchmark for its US equity portfolio, so henceforth I will use it as a standard benchmark as well.)  The Russell 3000 returned 25.22% for the year ended June 30, 2014, which is nearly 12% higher than PSPRS' 13.32% return!  However, PSPRS has a more diversified investment strategy and currently invests only 16.5% of its assets in US equity and only 14% in non-US equity.  The rest of PSPRS' portfolio is made up of fixed income, real estate, and other alternative investments, each of which has its own benchmark.  Both the US and non-US equity portions missed their benchmarks but each still returned over 20% for the fiscal year.  PSPRS' total fund benchmark was exactly 13.82%, so after fees the total fund will also miss its benchmark.

Readers can look through the returns of all the different types of investments if they like, but it is more difficult to get a sense of their final performance because they all have different fees attached.  Equity and fixed income investments tend to have lower fees, while the alternative investments have higher fees.  For example, last fiscal year total equity (32.26% of total fund) took only 0.18% in fees, real estate (13.36% of total fund) took 0.41% in fees, and private equity (11.30% of total fund) took a rather large 1.53% in fees.  The most glaring thing in the report is the real estate portfolio, which was the only category that lost money.  Real estate had a -0.62% return for the year versus a benchmark return of 11.21%.  PSPRS' real estate investments are the source of so many problems, so I guess we should not be surprised that these investments are still causing problems.  If real estate investments had achieved a return of just half the benchmark, the PSPRS total fund would have met its benchmark for the fiscal year.

We will have more when PSPRS post returns net of fees in the near future.

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