PSPRS investment returns through April 2020

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through April 2020, the tenth month of fiscal year (FY) 2020, with the past six FY end 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%
6/30/2017	0.22%	12.48%	0.90%	18.51%
6/30/2018	-0.66%	7.76%	0.66%	14.78%
6/30/2019	2.48%	6.05%	7.02%	8.98%
7/31/2019	0.58%	0.58%	1.62%	1.62%
8/30/2019**	-0.77%	-0.19%	-2.04%	-0.58%
9/30/2019	1.32%	1.13%	1.76%	1.16%
10/31/2019	1.14%	2.28%	2.15%	3.34%
11/30/2019	1.27%	3.58%	3.80%	7.27%
12/31/2019	1.56%	5.20%	2.89%	10.37%
1/31/2020**	-0.32%	4.88%	-0.11%	10.25%
2/29/2020	-3.05%	1.83%	-8.19%	1.22%
3/31/2020	-6.17%	-4.46%	-13.75%	-12.70%
4/30/2020	3.54%	-1.07%	13.24%	-1.14%

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

Fiscal year 2020 is mercifully over.  What initially looked like a repeat of 2009 just a few months ago appears to have stabilized, and the market gains of the first six months of the fiscal year will lessen the impact of the second six months.  Based on the FTSE Russell Index Calculator, the FY 2020 return for the the Russell 3000 was 6.53%, with 5.35% earned in May and 2.29% earned in June.  If PSPRS holds to its past pattern, I suspect it will end the year with a return of 3.25% to 4.25%, well below its expected rate of return of 7.3%, which for actuarial purposes means it lost money for the year.

I am sure many of you are noticing the same thing I am.  As of April 30, 2020, there is virtually no difference between PSPRS and the Russell 3000 in FY 2020 returns.  The brain trust that had run PSPRS for many years (Jared Smout, Ryan Parham, Mark Steed, Christian Palmer, Brian Tobin, Will Buvidas, et. al.) have told us for years to trust the process, that the years of lagging returns were the price we all had to pay to protect PSPRS from the next big crisis.  Well, guess what?  The crisis came, and PSPRS did no better than the Russell 3000.

But, but, but their research paper, "Modern Pension Fund Diversification," was in the peer-reviewed academic journal, Journal of Asset Management.  They won awards and had magazine profiles.  Their Chief Investment Officer was honored by Insitutional Investor magazine.  In fact, their whole staff has been honored for their crackerjack performance.  It's not their fault that reality didn't cooperate.

Here's some insight from a man with an actual history of success, Bill Parcells, who said, "You are what your record says you are."  And what is PSPRS' record?  It has an annualized ten-year return of 6.58% versus the Russell 3000's 11.29%.  That extra 4.71% compounded over ten years on a $10 billon portfolio amounts to over $5.8 billion dollars in increased earnings.  Remember also that the 6.58% should be a half-percent less when fees are subtracted, costing PSPRS another $800 million in earnings.  The additional annualized 2.27% Arizona State Retirement System (ASRS) earned compared to PSPRS (10.40% versus 8.16%, net of fees) through FY 2019 would bring and additional $2.5 billion in earnins on that $10 billion portfolio.  Even the PSPRS' Cancer Insurance Policy (CIP) has a FY-to-date return of -0.98%, bettering PSPRS, and an annulized ten-year return of 6.10%, net of fees, virtually identical to PSPRS when we subtract the half-percent in fees from PSPRS' annualizecd ten-year return.  Keep in mind that the CIP is invested much like the average individual investor: 25% in US stocks, 25% in international stocks, 30% in fixed income, 10% in inflation-protected bonds, 5% in gold, and 5% in cash.

There is simply no metric under which we can call PSPRS' investment strategy a success.  It fails against the Russell 3000, ASRS, and its own CIP.  The strategy is a loser, and any of its remaining proponents should be demoted or forced out of PSPRS.  I note all this with a hope that new PSPRS Administrator Michael Townsend  and the new Board of Trustees Chairman and vice-Chariman are going to change things.  The rotten root of PSPRS, Jared Smout, is long gone, and the bumbling leadership of past public safety Trustees should no longer be a hindrance to real reform.

You won't hear this from PSPRS' spokesman Christian Palmer, but PSPRS has another accolade.  According to Center for Retirement Research at Boston College (CRR), PSPRS has the distinction of being one of the 20 lowest-funded pension in the US.  According to the CRR's May 2020 brief "2020 Update: Market Decline Worsens the Outlook for Public Plans," PSPRS is the 16th worst-funded pension in the US at 47.2%.  The paper goes into detail about what the potential effect on these 20 pensions if the market does not recover quickly.  While PSPRS is better off than the others listed with positive cash flow and the third-highest asset to benefit ratio, this is cold comfort when we consider that this PSPRS' situation after a 10-year long bull market.

On a lighter note is this June 4, 2020 story you might have missed by Vince Barone in the New York Post, "Last person to receive pension from American Civil War dead at 90."  While Irene Triplett received only $73.13 a month, that monthly benefit for a war that ended 155 years ago shows the long-term costs of a pension system.  You can read more about her and her family in this May 9,2014 article in the Wall Street Journal by Michael M. Phillips.

To all PSPRS members, please look out for yourselves and each other.

* 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.  Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, 11.85% in FY 2017, 7.07% in FY 2018, and 5.50% in FY 2019.

** No monthly returns were reported for these months.  PSPRS returns for these months were estimated using the preceding and following months' returns. The FTSE Russell Index Calculator was used to obtain Russell 3000 returns for these months.

PSPRS investment returns through March 2020

The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through March 2020, the ninth month of fiscal year (FY) 2020, with the past six FY end 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%
6/30/2017	0.22%	12.48%	0.90%	18.51%
6/30/2018	-0.66%	7.76%	0.66%	14.78%
6/30/2019	2.48%	6.05%	7.02%	8.98%
7/31/2019	0.58%	0.58%	1.62%	1.62%
8/30/2019**	-0.77%	-0.19%	-2.04%	-0.58%
9/30/2019	1.32%	1.13%	1.76%	1.16%
10/31/2019	1.14%	2.28%	2.15%	3.34%
11/30/2019	1.27%	3.58%	3.80%	7.27%
12/31/2019	1.56%	5.20%	2.89%	10.37%
1/31/2020**	-0.32%	4.88%	-0.11%	10.25%
2/29/2020	-3.05%	1.83%	-8.19%	1.22%
3/31/2020	-6.17%	-4.46%	-13.75%	-12.70%

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

It is past time to look again at PSPRS' investment returns, if only because the Wuhan coronavirus pandemic has finally afforded PSPRS a real crisis to test its vaunted investment strategy.  As we can see, February and March 2020 the Russell 3000 suffered losses that were more than double that of PSPRS.  The markets had an extremely volatile period for a few weeks in which the Dow Jones Industrial Average (DJIA) was experiencing some daily changes of over 1,000 points.

The market seems to have stabilized and indices have steadily risen since the end of March.  As of May 26, 2020, the Russell 3000 has shifted into positive territory with a FY 2020 return of 2.42%, meaning it has recouped a significant portion of the losses incurred in February and March but is still down from where it was at the end of January.

I will be interested to see what April and May 2020 returns are for PSPRS.  While it is great that PSPRS limited its losses in February and March 2020, PSPRS' return as of January 31, 2020 was less than half of the Russell 3000. This has always been the problem for PSPRS.  It simply does not capture enough of the market upside to justify its downside protection.  If the markets continue to recover, all this downside protection will be meaningless if PSPRS again lags other indices when the markets rise.

PSPRS tends to earn, net of fees, about 50-60% of the Russell 3000 each FY: FY14 52.65%, FY15 50.05%, FY16 29.40%; FY17 64.02%, FY18 47.83%, and FY19 61.25%.  For PSPRS to achieve its assumed rate of return (ARR) of 7.30%, the Russell 3000 will need to have average returns of 12.17-14.60%.  In the past six FY's, this has happened only half the time with PSPRS achieving its ARR only two out of the six years.

In comparison, the Arizona State Retirement System (ASRS) achieved its ARR in three of the last six FY's, and this table of FY-end returns, net of fees, shows us the numbers that really matter:

Fiscal Year	PSPRS	ASRS
2014	13.28%	18.60%
2015	3.68%	3.20%
2016	0.63%	0.60%
2017	11.85%	13.90%
2018	7.07%	9.40%
2019	5.50%	6.60%
Annualized
3-year	8.09%	9.90%
5-year	5.67%	6.60%
10-year	8.14%	10.40%

During the years of higher returns, ASRS earned significantly more than PSPRS, while ASRS essentially equaled or slightly lagged PSPRS in years of lower returns.  This difference is even more stark when we look at annualized returns, where ASRS has higher returns in each period, including a whopping 2.26% per year more than PSPRS over the past ten years.  Those  extra points of return in good years are extremely important for the long-term term health of a pension

Looking at ASRS' latest investment returns through March 25, 2020, ASRS is down around 6% for FY 2020, about 1% behind PSPRS, net of fees, but based on past results, it is likely that ASRS will greatly outperform PSPRS as the markets continue to recover and grow.

Of course we still have the rest of the fiscal year to see what will happen, but I still see no reason to change my opinion that PSPRS would be much better off if it turned its investment portfolio over to the more successful team of investment professionals at ASRS.

* 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.  Returns, net of fees, were 13.28% in FY 2014, 3.68% in FY 2015, 0.63% in FY 2016, 11.85% in FY 2017, 7.07% in FY 2018, and 5.50% in FY 2019.

** No monthly returns were reported for these months.  PSPRS returns for these months were estimated using the preceding and following months' returns. The FTSE Russell Index Calculator was used to obtain Russell 3000 returns for these months.

But wait, there's more! Six months of PSPRS news in a single post

So where were we . . .

The soap opera that is PSPRS has continued for the past 6 months with Administrator Jared Smout being fired over harassment allegations, and two PSPRS Board Trustees, Will Buvidas and Mike Scheidt, were removed from their leadership positions by the other Board Trustees due to a conflict of interest involving Mr. Smout.  Mr. Buvidas had been the chairman and Mr. Scheidt the vice-chairman of the PSPRS Board of Trustees.  Both men remain Trustees.  They were removed from their positions because they had earned commissions on a home purchase made by Mr. Smout before he was terminated as Administrator; see this article by Craig Harris in the January 23, 2020 Arizona Republic.  The February 4, 2020 Republic has another article by Mr. Harris that details another home purchase involving a PSPRS staff member in which Messrs. Buvidas and Scheidt had a financial interest.  Both men deny any conflict of interest or violation of Board policy.  The Board promises a review of its current conflict of interest policy, but any decision on the two men's continued tenure on the Board will have to be made by the Arizona Governor and Legislature.

Of more interest to many people is the December 2019 CPI-U for the Phoenix-Mesa-Scottsdale region.  As most retirees know, cost of living allowances (COLA) are based on a local consumer price index for all urban consumers (CPI-U) with the COLA being the lower of either 2% or the actual local CPI-U at the end of the previous calendar year.  The Phoenix-Mesa CPI-U for 2019 was 3.4%, so retirees can expect a 2% increase to their individual monthly benefits starting in July 2020.

The Arizona State Retirement System (ASRS) again outperformed PSPRS for the fiscal year that ended June 30, 2019 (FY19).  Net of fees, ASRS earned 6.6% versus PSPRS, which earned 5.45%.  Over the past 10 years, net of fees, ASRS earned an annualized rate of 10.4% versus 8.14% for PSPRS.  PSPRS' Cancer Insurance Policy, using a simple portfolio of 50% equity, 40% bonds, and 10% commodities and short-term investments earned 6.02% in FY19 and had a 10-year annualized return of 8.07%, nearly equaling PSPRS' annualized 10-year rate.  On a $10 billion portfolio, the additional 1.45% ASRS returned would have added $145 million to PSPRS assets in FY19.  In ten years, the additional 2.26% in the annualized rate would have earned over $4 billion more on the initial $10 billion portfolio. 

While we are on the subject of money, Jared Smout continues to cost PSPRS, despite his long-overdue removal as Administrator.  Currently, there are three lawsuits against PSPRS relating to Mr. Smout's behavior while employed at PSPRS.  Who knows how much PSPRS (i.e. taxpayers) will end up having to shell out, but it seems likely that the total will be in the seven-figure range.  PSPRS also recently had a forensic audit done on its internal accounting, which found errors that affected the calculation of employer contributions over the past two years.  Some employers may have overpaid, and some unfortunate employers may have underpaid and will have to make up these shortages in the near future.

Problems with ethics, governance, investing, human resources, and accounting, if PSPRS was a minor league prospect, we would call it a five-tool player.  For years PSPRS has been a laboratory of organizational dysfunction that a business school professor could make a career studying and developing case studies about.  The good news is that things seem to finally be improving, starting with a new Administrator in Michael Townsend, a CPA and former assistant city manager with a track record of success in Coconino County, and it sounds like he actually knows something about pensions!  The removal of two public safety members from Board leadership positions is also a good sign.  The two men who replaced Mr. Buvidas and Mr. Scheidt as Chairman and vice-Chairman, Scott McCarty and Harry Papp, respectively, both have backgrounds in finance, management, and/or investing, areas of expertise that are much more relevant to a pension system than what public safety personnel bring.  It is bad enough that 4/9th of the Board of Trustees is made up of public safety personnel, who will never have the training or experience to understand the complexities of pension accounting, actuarial science, budgeting, or institutional investing, but why in the world would they be leading the Board?  Reversing 20 years of insularity, incompetence, and failure will be tough, so best of luck to Mr. Townsend, Mr. McCarty and Mr. Papp.

And thanks again to journalist Craig Harris, the sine qua non of PSPRS accountability, and the Arizona Republic for looking out for PSPRS members and the state's taxpayers.

Ending on a hopeful note, I could get used to this.