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Tuesday, May 26, 2020

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%

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.