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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, February 8, 2018

PSPRS to members: Keep calm and don't think about annualized returns

As we discussed in the last post, we will not know for about another two months if PSPRS' investment strategy will show the success of its more conservative approach.  (The Russell 3000 dropped about 3.65% today and is down 8.33% for the month of February 2018.)  However, PSPRS will not wait that long to see evidence.  They came out with a press release on February 6, 2018 which boasts that "the current PSPRS portfolio is 72 percent less volatile than the Standard & Poor (S & P) 500 Index."  This kind of public relations is what you buy with the $95,000 a year taxpayers shell out to PSPRS spokesman Christian Palmer and the $72,000 paid to an outside consultant.

As PSPRS is wont to do, they only present half the picture.  While controlling volatility is part of the picture, PSPRS still has to balance this with maximizing returns.  The time frame PSPRS used to graph its volatility ran from May 2008 to November 2017.  This period starts with the market crash in 2008 and runs to the latest investment returns PSPRS reported.  I wanted to compare PSPRS' returns with those of the PSPRS Cancer Insurance Plan (CIP), Arizona State Retirement System (ASRS), the Standard & Poor (S&P) 500 Index, and a Vanguard 3 Fund Portfolio that Ben Carlson uses to measure endowment performance at his blog, A Wealth of Common Sense.  This Vanguard 3 Fund Portfolio is a  mix of 53% US stocks, 27% foreign stocks, and 20% bonds.  The time period for the following table is for the period ending June 30, 2017, which is necessary for consistency purposes.  Here are the annualized rates of return for the various portfolios over one, three, five, and 10 years:

1-year 3-year 5-year 10-year
PSPRS 11.85% 5.27% 7.95% 3.98%
CIP 10.12% 4.34% 7.64% 5.36%
ASRS 13.90% 5.70% 9.60% 5.60%
S&P 500 16.80% 7.72% 12.96% 4.86%
Vanguard 14.90% 7.00% 8.30% 6.50%

PSPRS' annualized returns over the 10-year period is lower than all the other funds.  It might be fairer to look at the 5-year returns since PSPRS had not fully implemented its strategy ten years ago.  During the 5-year period, PSPRS still lags all but its own CIP, a fund that consists of 50% US and foreign stocks, 45% bonds, and 5% commodities.  ASRS bested PSPRS by 1.65% over the five year period, and the S&P 500 bested PSPRS by 5%.  A 5% annual return on a $9 billion portfolio would earn nearly $2.5 billion over five years, so while the S&P 500 was more volatile, it also earned a significantly higher return for that added risk.

If we include reinvested dividends in the 5-year period that ended June 30, 2017, the S&P 500 earned 15.28%.  This extra annualized return of 7.33% would have earned PSPRS an additional $3.82 billion.  We all know that there is a correlation between risk and reward, but it is deceptive of PSPRS to point only to the volatility of the S&P 500 without acknowledging that the S&P 500 had nearly double the return of PSPRS' portfolio.  Even the less impressive additional 0.88% annualized return over ten years would have earned PSPRS an additional $824 million.  With reinvested dividends, the S&P 500 had an annualized 10-year rate of 7.10%.  This additional 3.12% per year would have earned PSPRS an additional $3.24 billion over ten years.  Unfortunately, there are no volatility numbers for the other portfolio.  Regardless, it is clear that the volatility/return tradeoff has been favorable for the S&P 500, but PSPRS does not want members to see this full, honest picture

While PSPRS likes to make absurdist claims on incomplete and cherry-picked information, we should not do that as well.  It is not realistic to solely compare PSPRS against the S&P 500, as no pension or endowment would ever be 100% invested in a single market index, or even the Vanguard 3 fund portfolio.  A fairer comparison would be against another pension fund like ASRS that deals with the same risk/reward conundrum.  Over the five and ten year periods, ASRS has bested PSPRS by 1.65% and 1.62%, respectively.  The extra 1.65% would have earned PSPRS an additional $767 million over five years; the extra 1.62% would have earned an additional $1.57 billion over ten years.

Despite the whining and excuses of PSPRS Board of Trustees Chairman Brian Tobin and PSPRS Chief Investment Officer (CIO) Ryan Parham, ASRS has consistently outperformed PSPRS while operating in the same market conditions.  Yet Mr. Parham, who was paid $268,000 in 2016, is the second highest paid in employee in the Arizona state government (Note: this does not include Arizona university system employees).  Who was the highest paid Arizona state government employee?  Why it was Paul Matson, the Director of ASRS, who made $285,230 in 2016.  For some perspective, Karl Polen, the CIO of ASRS, made $201,420 in 2016, while Jared Smout, PSPRS Administrator, made $210,000 in 2016.

So Mr. Matson, who has successfully run ASRS for 15 years, makes only $17,230 more than Mr. Parham.  Even more perplexing is how Mr. Parham is paid $57,000 more per year than ASRS' CIO.  The combined salary of Mr. Matson and Mr. Polen is $486,650.  The combined salary of Mr. Smout and Mr. Parham is $478,000.  Looking at the millions and billions in higher ASRS earnings, I think that the $8,650 more paid to Mr. Matson and Mr. Polen is the bargain of the century.

The difference in performance and management between ASRS and PSPRS is stark, and while ASRS continues along its steady path of stronger earnings, PSPRS has to blow smoke.  Until PSPRS has some evidence to show us that their strategy is working, they might do something useful for members, like getting their software working properly so members can get retirement estimates.  I think seven months is enough time for members to wait for this to be fixed.


  1. Glad your back. Voice of reason. Could you explain the check retirees received and the updated PBI. Again PSPRS has explained nothing to us retirees. thats

    1. Thank you. I copied this from the PDF page 211 of the November 2017 Board of Trustees meeting materials:
      As a result of losing the Hall-Parker cases, PSPRS was required to grant PBIs to a group of retirees who had previously not qualified, and had to recalculate the amount of “excess” investment earnings used to pay PBIs. After we paid those retroactive PBIs, our actuary recalculated the amount of excess investment earnings going back to 2012 using the old formula (since the new formula was found to be unconstitutional) and discovered additional excess investment earnings in each of the plans. Those excess earnings affect PBIs that were paid out in 2013 and 2014 for PSPRS and CORP and 2015 for EORP. The actuary also calculated the amount of PBI that will be issued to CORP and EORP retirees as of 7/1/17. The following PBIs will be paid out, hopefully in December:
      The PBI paid out effective 7/1/13 is increased from $121.19 to $137.82
      The PBI paid out effective 7/1/14 is increased from $ 65.20 to $104.91
      The PBI paid out effective 7/1/13 is increased from 0.55% to 1.26%
      The PBI paid out effective 7/1/14 is increased from 1.59% to 3.21%
      The PBI paid out effective 7/1/15 is increased from 1.77% to 1.90%
      In accordance with Senate Bill 1428, a PBI will not be paid out to PSPRS members effective 7/1/17. The PBI was replaced with a COLA, and the first COLA will be paid out effective 7/1/18. CORP retirees will receive a PBI of 1.76% effective 7/1/17. EORP retirees will receive a PBI of 3.15% effective 7/1/17.

  2. Why can't they fix the retirement estimate? It used to say, will be fixed in August, then will be up in September, then at a later date.... They don't care about us


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