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Wednesday, October 8, 2014

Is PSPRS getting value for the investment fees it pays?

PSPRS posted to its website the meeting materials for its Board of Trustees Meeting for September 24-25, 2014.  Included in these materials are the performance figures, net of fees, for the fiscal year that ended on June 30, 2014.  We had previously looked at returns, gross of fees, in this post.  The following table shows the various asset classes, their benchmark returns, returns gross and net of fees, and the percentage of fees paid on each asset class.



Bench Gross Net
Asset Class
Mark Of Fees Of Fees Fees
US Equity 
25.22% 22.32% 21.90% 0.42%
Non-US Equity
21.75% 20.59% 20.35% 0.24%
Private Equity
26.22% 28.18% 26.60% 1.58%
Fixed Income
7.39% 6.29% 6.21% 0.08%
Credit Opportunities
8.59% 11.85% 11.31% 0.54%
Absolute Return
2.05% 9.86% 8.28% 1.58%
GTAA
3.23% 7.57% 7.51% 0.06%
Real Assets
4.08% 9.86% 8.85% 1.01%
Real Estate
11.21% -0.62% -1.26% 0.64%
Risk Parity
12.07% 10.04% 9.71% 0.33%
Short-term Invest.
0.05% 0.34% 0.27% 0.07%
PSPRS Total Fund
13.82% 13.82% 13.28% 0.54%

As can be seen, fees range from a high of 158 basis points (1.58%) to a low of 6 basis points (0.06%).  A basis point (bp) represents 1/100th of one percent and is a more convenient way to write about interest rates.  I was interested to see if PSPRS was getting its money's worth when it comes to some its alternative investments, which I would classify as those that are most familiar like equity (stocks), fixed income (bonds), short-term investments (cash and equivalents), and real estate.  Following are definitions of those alternative investments from the April 2014 article, Modern Pension Fund Diversification*, which has among its co-authors several PSPRS staff members:
  •  Private Equity (Introduced in July, 2008): Investments in equity or debt (with equity participation) in commingled assets that are generally not traded on public exchanges and usually illiquid in nature. 
  • Credit Opportunities (Introduced in July, 2008): Investments in corporate credit including bank loans, high yield debt, convertible securities, “distressed” corporate debt, mezzanine loans, structured products (such as CLOs and MBS), and other credit-sensitive instruments that may or may not be publicly listed. 
  • Real Assets (Introduced in April, 2009): Investments in energy, core capital assets, special situations, natural resources, infrastructure, commodities, and marketable securities. 
  • Global Tactical Asset Allocation (GTAA) (Introduced in March, 2010): Encompasses strategies that trade across highly diversified and liquid markets utilizing distinct processes to execute their broadly global trading strategies. Strategies within this sub-portfolio include Global Tactical Asset Allocation, Commodity Trading Advisor (CTA), Global Macro, and Multi Asset Strategies. 
  • Absolute Return (Introduced in November, 2010): Consists of management by general partners that do not adhere to specific benchmarks and whose strategies do not neatly fit within another asset classes. 
  • Risk Parity (Introduced in July, 2012): Allocation of capital among major asset classes such as equity, nominal bonds (such as the US Treasuries), inflation linked bonds (such as TIPS), and commodities, based on expected volatility, to capture risk premiums across asset classes.
PSPRS' commitments to these alternative investments range between over $1 billion dedicated to private equity to $282 million dedicated to risk parity.  All total these alternative investments make up 45.32% of PSPRS' total portfolio.  These alternative investments are part of PSPRS' risk/return -balanced investment strategy.

I was curious to see if PSPRS was getting a good return on these alternative investments.  Five of the six classes surpassed their benchmarks with only risk parity missing its benchmark by 236 bps.  Five of the six, including risk parity, surpassed PSPRS' expected rate of return (ERR) of 7.85%, while only GTAA performed below the ERR, though it beat its benchmark by 428 bps.

Among traditional asset classes, only short-term investments surpassed its benchmark by 22 bps.  Total equity (U.S. and non-U.S.), fixed income, and real estate underperformed by 248 bps, 118 bps, and 1247 bps, respectively.  Only total equity beat the ERR, earning 21.20% for the year.

The past year was an incredibly prosperous year so let's push the returns out to a longer period.  Ten years is not helpful since PSPRS had no alternative investments at that time, and at five years out, PSPRS had not yet invested in absolute return, GTAA, or risk parity.  Three years includes all the alternative categories except risk parity so we will have to use the three-year period for some perspective.  The following table shows data for the past three fiscal years.




Bench Gross Net
Asset Class
Mark Of Fees Of Fees Fees
US Equity 
16.46% 14.08% 13.85% 0.23%
Non-US Equity
5.73% 5.70% 5.54% 0.16%
Private Equity
17.46% 16.40% 14.46% 1.94%
Fixed Income
2.57% 4.76% 4.62% 0.14%
Credit Opportunities
7.70% 8.44% 7.89% 0.55%
Absolute Return
2.07% 10.81% 9.54% 1.27%
GTAA
3.33% 4.84% 4.78% 0.06%
Real Assets
3.84% 5.35% 4.24% 1.11%
Real Estate
11.32% 2.08% 1.54% 0.54%
Risk Parity
N/A N/A N/A N/A
Short-term Invest.
0.07% 0.00% -0.05% 0.05%
PSPRS Total Fund
8.84% 8.15% 7.65% 0.50%

It is clear that the three-year returns are not as impressive as the one-year returns.  However, we can still see that among the alternative investments credit opportunities, absolute return, GTAA, and real assets surpassed their benchmarks with two of them beating the ERR of 7.85%.  Private equity missed its benchmark by 300 bps, but it still beat the ERR by 661 bps.  The only traditional investment to surpass its benchmark was fixed income by 205 bps.  Total equity, real estate, and short-term investments underperformed by 142 bps, 978 bps, and 12 bps, respectively.  Total equity at 10.36% was the only traditional investment to beat the ERR.

Unfortunately, three years does not give us a long enough period to analyze.  So far, though, it seems that PSPRS is getting value for the fees it is paying with benchmarks being met in all but the private equity class (and risk parity for a single year).  However, over three years, private equity still beat the returns on U.S., non-U.S., and total equity, in spite of its nearly 2% fee.  Risk parity did not beat the equity returns but still returned more than the ERR with a relatively low fee of 0.33%.  We will need several more years of data to better analyze this, including some down market years, to see if PSPRS is truly getting its money's worth.




*Anderson, Marty and Chen, Shan and Hacking, James and Lundin, Mark and Maleckaite, Vaida and Parham, Ryan and Steed, Mark and Lieberman, Marc and Martin, Allan, Modern Pension Fund Diversification (April 18, 2014). Available at SSRN: http://ssrn.com/abstract=2426593 or http://dx.doi.org/10.2139/ssrn.2426593

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