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Friday, August 28, 2015

PSPRS investment returns through June 2015 (the all-important end of the fiscal year)

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 for June 2015, the end of the current fiscal year (FY), with the June 2014 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%

7/31/2014 -0.67% -0.67% -1.97% -1.97%
8/31/2014 1.73% 1.05% 4.20% 2.14%
9/30/2014 -1.53% -0.49% -2.08% 0.01%
10/31/2014 0.40% -0.09% 2.75% 2.76%
11/30/2014 0.92% 0.82% 2.42% 5.25%
12/31/2014 -0.18% 0.64% 0.00% 5.25%
1/31/2015 0.01% 0.65% -2.78% 2.32%
2/28/2015 1.91% 2.58% 5.79% 8.25%
3/31/2015 0.83% 3.42% -1.02% 7.15%
4/30/2015 0.95% 4.40% 0.45% 7.63%
5/31/2015 0.54% (est) 4.94% (est) 1.38% 9.01% (est)
6/30/2015 -0.73% 4.21% -1.67% 7.29%

There is usually about a two-month lag in PSPRS reporting its investment returns.  The PSPRS Board of Trustees did not have a July meeting so I do not have exact numbers for May 2015 and estimated the returns based on April and June.  PSPRS returns reverted back to their normal pattern in May and June with gains lagging when the Russell 3000 is positive and limiting its losses when the Russell 3000 is negative.  As can be seen, PSPRS did not even meet its expected rate of return (ERR) of 7.85% much less the COLA threshold, which, as was discussed earlier here, means no COLA will be paid in the current FY.  The returns, net of fees, will probably be around 3.70% for the fiscal year.

For the fiscal year, all but two of PSPRS' asset classes showed a positive return, but of the positive returners, only the private equity class met or bested the ERR with a 14.05% FY return.  The non-US equity and real assets with -4.58% and -3.55% FY returns, respectively, are the two asset classes with losses for the FY.  PSPRS FY returns are a very mixed bag.  Looking at two years of PSPRS' risk-averse strategy, PSPRS' FY 2014 return was 54.79% of the Russell 3000, while PSPRS' FY 2015 return (estimated net of fees at 3.70%) was 50.75% of the Russell 3000.  If PSPRS' risk-averse strategy can only range between 50-55% of the Russell 3000 each year, it will be really tough for it to ever meet its ERR.  Even at the new 7.50% rate and getting to 55%, the Russell 3000 would have to return 13.64% just to meet the ERR.  Of course, this is limited data, but it is all we have to go on.

The Russell 3000 showed a 1.67% gain for July 2015, but as of August 27, 2015, the Russell 3000 has a monthly loss of -5.48%.  Who knows what could happen by the end of today and on the 31st?  It has been so volatile this month that almost nothing would surprise me.   Regardless, PSPRS likes to highlight the stress tests it has done on its portfolio as proof of how well-designed the portfolio is, so this month they may get a real, live stressor against which to check the design of the portfolio.

* 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.  The past two years fees have reduced the final annual reported return by about one-half of a percent.

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