In response to the Pension & Investments' Feb. 3, page 3 article by Arleen Jacobius, “San Diego County hit by performance blip”:
San Diego County Employees' Retirement Association is a long-term investor whose investment portfolio is designed to maximize returns while minimizing the risk of loss in various market climates. The short-term “blip” the article examines can be compared to SDCERA's gross 10-year annualized investment return of 8.5% and a gross 25-year annualized investment return of 9.5% as of Sept. 30, 2013.
Chasing the market and outperforming peer returns and rankings have become less important to SDCERA's current investment strategy as a measure of success. What is more important to the investment strategy is the fund's goal to incur less risk while meeting or exceeding its actuarial assumed rate of return of 7.75%. When SDCERA's portfolio surpasses these goals, the excess returns help recoup previous market losses, without incurring more volatility.
The article debates whether SDCERA's strategy is a risk-parity strategy and then applies its own standard of success to SDCERA in terms of peer rankings while missing a critical point. Any portfolio that lowers its volatility and generates a steady return year to year, such as SDCERA, will result in more volatile peer comparison rankings because of the market's volatility affecting peer returns. The performance of the SDCERA fund during the past two fiscal years reveals this point:
SDCERA's investment strategy generated returns for fiscal years 2012 and 2013 (6.42% and 8.25%, respectively) that either met or came very close to our assumed rate of return and did not experience the more volatile swings of the market. The important attribute to note is that SDCERA is generating much more consistent returns than the fund's peers — higher returns in periods of distress and modest gains during periods of rapid growth. This has reduced the volatility of the portfolio's returns relative to the plan's actuarial assumptions.
In general, SDCERA's portfolio allocation incurs lower risk which would, as expected, mean that in difficult equity markets SDCERA's diversified portfolio will protect assets and perform well, while peer funds will typically find the market more difficult to generate strong returns. Alternatively, in strong equity markets SDCERA's portfolio will perform well and peer funds with heavier equity allocations will perform better.
In fiscal year 2012 (ended June 30, 2012), SDCERA experienced top-quartile performance for the one-year period and ranked in the fourth percentile with a 6.42% gross investment return, according to the Wilshire TUCS report: http://www. sdcera.org/PDF/SDCERA_2012-2Q_ TUCS-PerformanceAndRiskReturn.pdf. SDCERA's lower risk profile protected the fund during this challenging equity market for the period. Public pension peer funds with heavier allocations in equities earned approximately zero to 2% for the same period.
In fiscal year 2013 (ended June 30, 2013), this period had experienced a strong equity market. As expected with SDCERA's strategy, the fund met the investment goal of outperforming its assumed rate of return and portfolio benchmark. SDCERA produced investment returns that met the portfolio's goals, despite having a lower risk profile and a lower ranking compared to public pension fund peers. SDCERA ranked in the 91st percentile with an 8.25% gross return, according to the Wilshire TUCS report: http://www. sdcera.org/PDF/SDCERA_2013-2Q_ TUCS-PerformanceAndRiskReturn.pdf.
When reviewed over a longer three-year period (ended June 30, 2013), the portfolio has generated 11.9% gross returns and ranked in the 36th percentile when compared to public pension fund peers with assets of more than $1 billion, according to the Wilshire TUCS report: http://www.sdcera.org/PDF/SDCERA_2013- 2Q_TUCS-PerformanceAndRiskReturn.pdf.
As evidenced here, SDCERA's focus on a long-term investment strategy has maximized returns and minimized the risk of loss in various market climates. Prudent management of the fund's investment portfolio will help ensure that this performance is a lasting trend capable of withstanding future “blips.”
BRIAN WHITE
CEO, San Diego County Employees'
Retirement Association
San Diego
