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Thursday, August 25, 2016

PSPRS investment returns through June 2016, or how PSPRS made more for Wall Street than it did for PSPRS members and Arizona taxpayers

The following table shows PSPRS' investment returns, gross of fees, versus the Russell 3000 through June 2016, the final month of the current fiscal year (FY), with the FY 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%
12/31/2015 -0.95% -0.86% -2.05% -1.43%
1/31/2016 -1.41% -2.26% -5.42% -7.00%
2/29/2016* -0.35% -2.61% -0.52% -7.52%
3/31/2016 3.45% 0.84% 7.04% -0.48%
4/30/2016 0.64% 1.49% 0.62% 0.14%
5/31/2016 -0.11% 1.39% 1.79% 1.93%
6/30/2016 -0.32% 1.06% 0.21% 2.14%

PSPRS did not provide monthly investment returns for October 2015 or February 2016, and returns for those months are estimates based on the prior and following months' returns. There is usually about a two-month lag in PSPRS reporting its investment returns.

PSPRS has reverted back to form for the FY end, ending with a final FY return, gross of fees, of 1.06% versus 2.14% for the Russell 3000.  The last post about PSPRS returns covered the returns through April 2016, and at that time, PSPRS was actually showing a higher return than the Russell 3000.  PSPRS did not have a July 2016 Board of Trustees meeting, so the May and June 2016 returns were included in the August 2016 meeting materials.  Since April PSPRS has lost about a third of a percent while the Russell 3000 gained two percent.

PSPRS earned 49.53% of the Russell 3000 in FY 2016.  For FY 2014 and FY 2014, PSPRS earned 54.80% and 57.75% of the Russell 3000, respectively.  For the three and five year periods, PSPRS earned 55.97% and 50.86% of the Russell 3000, respectively.  PSPRS has shown a pattern of earning just 50-60% of the Russell 3000 since PSPRS implemented its "nationally recognized" investment strategy, though it looks like PSPRS is working its way toward only a 50-55% range.  With a 7.40% expected rate of return (ERR), the Russell 3000 would have to average between 13.50% and 15% annual returns in order for PSPRS to earn that 7.40% ERR.

If we look at individual asset classes, only the private equity class earned at or above the ERR with FY 2016 earnings of 12.41%.  The next highest earner was private credit at 4.23%.  Of the ten major categories, seven had positive returns while three had negative returns.  Seven of the ten categories did not achieve their target benchmarks.  PSPRS missed the fund target benchmark of 1.98% by 0.92%.  What I found most interesting was the real estate category.  At the end of April, it had a healthy FY year-to-date return of 7.95%, but it ended the FY with a return of only 1.69%.  Real estate lost 1.87% in May and a whopping 4.00% in June.  Much of PSPRS returns for FY 2016 were driven by just two categories, private equity and real estate--two asset classes that are difficult to value since they are not easily liquidated.  It leaves us wondering how real estate dropped so much over such a short time.  Barring a major economic crisis that would affect all asset classes, we would expect real estate to be very stable and not subject to such monthly volatility.

The cherry on top of all this is that these FY 2016 returns are gross of fees.  PSPRS usually pays about a half-percent in aggregate investment fees, which means that, net of fees, PSPRS will have earned more for its investment "advisors" than it did for PSPRS members and Arizona taxpayers.  A lesson from Randolph and Mortimer Duke might be in order here for PSPRS' investment staff.  In anticipation of the excuses that will soon be coming for PSPRS Board of Trustees Chairman Brian Tobin, Administrator Jared Smout, and Chief Investment Officer Ryan Parham about why PSPRS had such bad returns, the next post will go little more into PSPRS' returns.

 * 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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