Pension funds run by Council of Institutional Investors members returned an annualized 11.4% for the five years ended Dec. 31, outperforming multiasset-class indexes.
The results of the first-ever survey showed member pension funds outdistanced a blended market index made up of 50% of the Wilshire 5000, 35% of the Lehman Brothers Aggregate Bond Index, 10% of the Morgan Stanley Capital International Europe Australasia Far East Index and 5% of the NCREIF Property Index.
The blended index returned an annualized 11%; a composite of balanced mutual funds returned an annualized 10.4%. The Wilshire 5000 alone, however, returned an annualized 14.9%, and the Standard & Poor's 500 Stock Index, 15.2%.
The composite asset mix of member pension funds was 46% domestic equities, 29% domestic fixed income, 11% international/global equities, 3% international/global bonds, 4% real estate, 2% venture capital, 2% cash and 3% other investments.
The survey studied investment returns and asset allocation of 86 public, corporate and union pension funds with assets totaling more $1.1 trillion. On a five-year basis ended Dec. 31, it looked at 63 funds, worth $1 trillion.
Some 84% of the 63 funds posted five-year total returns that outperformed balanced mutualfunds, as reported by Morningstar Inc., Chicago. Some 64% outperformed the blended index.
Kenneth Codlin, chief investment officer for the State Universities Retirement System of Illinois, Champaign, analyzed the survey data. He observed total returns were correlated to decisions about equity allocation.
Each additional 10% allocation to equities added an average 0.5% in total fund returns.
Mr. Codlin said he was surprised by the strength of the pension funds' performance.
"Most of the largest funds in the country were included in the survey, so the findings provide a good picture of how they are doing," Mr. Codlin said. The survey results also are important in light of the ongoing debate over whether defined benefit plans or defined contribution plans are better choices.
"Since the mutual fund returns were around 1% less than those in defined benefit programs, it shows defined benefit plans can be advantageous," Mr. Codlin said.
Consultants say the council's first survey results were in line with other surveys.
"The expense ratio of mutual funds is much higher than that of mega pension funds in this survey, which is why they underperformed," said Stephen Nesbitt, senior vice president Wilshire Associates Inc., Santa Monica, Calif. But the pension funds' overall performance results were similar to those of other recent surveys of large pension funds such as the Trust Universe Comparison Service, Mr. Nesbitt said.
Louis Finney, director, capital markets research at Mercer Investment Consulting Inc., New York, observed there could be a "selection bias" to the survey since 23 of the 84 funds studied didn't report their five-year results.
"Maybe they were embarrassed about their numbers. It's the kind of thing we worry about when doing surveys and try to adjust for," he said.
Both consultants approved of the benchmarks used by the council. For equities, the Wilshire 5000 makes sense, Mr. Finney said, since it best represents the U.S. domestic equity market.
In allocating assets, corporate funds took more aggressive positions, investing more in domestic and global stocks, international bonds and venture capital and less in domestic fixed income than the public and union funds, the survey found. Union funds tended to invest very little in international stocks and bonds, but more in cash and short-term investments. Public funds in the survey put more assets in fixed-income than the corporate and union respondents.
The survey studied 54 public funds with $977 billion in assets; 19 corporate funds with $101 billion in assets; and 13 union funds with $14 billion in assets. But only 63 of the 86 respondents provided five years of quarterly data.
Virtually all participating funds include domestic stocks, bonds and cash in their investment programs and a majority use international stocks, real estate and venture capital, the survey found.
Around one-third invested in emerging markets, compared with 10 years ago, when almost no fund would have invested in that category, Mr. Codlin observed.
While the survey studied funds whose assets ranged from $20 million to more than $100 billion, the funds invested with a similar degree of diversification. One major difference was that funds with less than $1 billion invest less in fixed income and global stocks than their larger brethren.
The degree of diversification is noteworthy, Mr. Codlin said. "There seemed to be a universal acceptance of diversification. Pension funds don't limit themselves to domestic stocks and bonds anymore. Even though some of the investments were in high-risk categories, the funds were able to add return without adding risk by blending in a small amount of the riskier investments."
Comparisons of equity returns and volatility over five years showed CII member funds on average produced better returns with slightly less volatility than the average growth stock mutual fund; a similar return with more volatility than the Wilshire 5000 index of common stocks; and more return with less volatility than the Wilshire 4500 smaller company stock index.
Mercer's Mr. Finney noted council members achieved 40 basis points in extra return by taking 20 basis points in greater risk, when compared with the blended market index.
Council executives were surprised by the strong response rate, with 86 of its 100 members participating in the survey. The survey was conducted at the request of members, and now there are plans to do one annually, said Ann Yerger, director of research services at the Washington-based Council of Institutional Investors.
"There seems to be a real interest in obtaining this kind of information from an objective, neutral group," she said.
