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In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Thursday, September 22, 2016

PSPRS investment returns through July 2016 (with further evidence that PSPRS' investment strategy is failing)

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through July 2016, the first month of the current fiscal year (FY), with the FY end 2014, 2015, and 2016 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%
6/30/2016 -0.32% 1.06% 0.21% 2.14%

7/31/2016 1.62% 1.62% 3.97% 3.97%

There is usually about a two-month lag in PSPRS reporting its investment returns.

First off, we should note that PSPRS' final return for FY 2016 was 0.63%, meaning that they paid 0.43% in fees, so they did not pay more in overall investment fees than they earned, though PSPRS did pay more in fees than they earned in four of the ten asset classes .  Also, for comparison, the Arizona State Retirement System (ASRS), at a 0.50% annual return, earned even less than PSPRS in FY 2016.  However, ASRS is still handily beating PSPRS over the long run in annualized returns:

1 year  3 year 5  Year 10 Year
PSPRS 0.63% 5.71% 5.40% 4.45%
PSPRS CIP 1.79% 6.24% 5.49% 5.69%
ASRS 0.50% 7.10% 7.10% 6.00%

This again brings back to the central issue with PSPRS.  PSPRS has better comparative returns only when overall market returns are low, and as PSPRS' investment staff theorizes, when returns are negative.  As can be seen in the comparison with ASRS, this performance will not be successful in the long-term, unless PSPRS drops its expected rate of return (ERR).  PSPRS dropped their ERR 0.10% again for the current FY from 7.5% to 7.4%.  ASRS is still maintaining a 8.0% ERR.  If we look at the past three years, PSPRS earned 13.28%, 3.68%, and 0.63% over FY 2014, 2015, and 2016, respectively.  ASRS earned 18.6%, 3.2%, and 0.50% over the same there respective FY's.  That additional 5.3% earned in FY 2014 makes a big difference in the three-year annualized return, more than making up for the lower returns ASRS had in the next two FY's.

 If we look at the three, five, and ten year annualized returns, we see that PSPRS earned 51.30%, 46.55%, and 60.13% of the Russell 3000's three, five, and ten year annualized returns, respectively.  Over the same periods, ASRS earned 63.79%, 61.20%, and 81.08% of the Russell 3000's annualized returns, respectively.  Keep in mind that the ten year annualized period includes the worst of the market downturn in 2008-09, so includes both ends of the market spectrum.  ASRS clearly has a better investment policy than PSPRS.  More telling is that even PSPRS' Cancer Insurance Plan (CIP), which has a simple portfolio that invests roughly 50% in equities, 45% in bonds, and 5% in commodities, earned more than PSPRS over the same annualized periods.  PSPRS does not have to look enviously at ASRS for a sign that something is amiss with its investment strategy; they need only look within their own offices at the CIP.

At some point in time, PSPRS will have to start earning returns that more closely approach the broader market or lower its ERR.  Can someone at PSPRS please tell PSPRS Chief Investment Officer Ryan Parham that Proposition 124 passed back in the spring and COLA's are now limited to 2% or the regional consumer price index and will be included in contributions as part of the normal cost?  Mr. Parham doesn't need to lowball returns any longer and can now invest in a manner that will produce the higher returns he boasted PSPRS was capable of earning.  Is it too much to ask that PSPRS earn its ERR over the long run, especially if they actually try to do so, or are they just waiting for inflation to do the job for them?

 * 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% in FY 2014, 3.68% in FY 2015, and 0.63% in FY 2016.

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