Thomas Toth, managing director at Wilshire Advisors, said in a phone interview that across the firm's client base, public pension plans with more of a traditional asset allocation focused on public equities and fixed income performed better than those with higher allocations to alternatives.
"For the first time since maybe the financial crisis, private equity returns are negative for the fiscal year," Toth said. For the year ended June 30, the Cambridge Associates LLC U.S. Private Equity index returned -1.5%. Real estate also suffered negative returns, with the NCREIF Fund Index-Open End Diversified Core Equity returning a net -10.7% for the period.
Also, alternatives will likely drag down returns for the upcoming fiscal year ending June 30, 2024, as well, said Jay Kloepfer, executive vice president and director of the capital markets research group at Callan, said in a phone interview.
"Private equity and real estate are still in the process of writing down asset values, and this activity will carry into the third and fourth quarters of 2023. The delayed write-down for private assets showed up in force in the first half of 2023 and the fiscal year ending June," Kloepfer said.
"There's a lot of variation there, and at the same time we've seen a very strong rally in public equities, particularly in U.S. equities driven by the megacap tech names," said Wilshire's Toth. He added that exposure to that area of the market has been extraordinarily beneficial for clients.
The top-performing public pension plan also benefited from exposure to large-cap names.
Louisiana State Employees' Retirement System, Baton Rouge, chalked up the highest reported return — 11.7% — among the pension funds that have been tracked by P&I as of Sept. 12.
By asset class, LASERS' total equities posted a gross return of 17.4% for the fiscal year, while total fixed income returned 7.7% and total alternatives returned a net 4.3%. The performance summary said the return for fixed income was a mix of gross-of-fee and net-of-fee portfolios.
"LASERS benefited from strong returns throughout the plan," said Bobby Beale, chief investment officer of the $13.3 billion pension fund, in an email. "Notably, our internally managed Nasdaq 100 index returned 33% for the fiscal year. This index comprises 7% of the plan. We also benefited from strong performance of our global multisector fixed-income opportunistic investments, which comprise the vast majority of our 20% fixed-income exposure. This portfolio returned over 8% for the fiscal year. Finally, emerging market debt performed well, returning 10% for the plan."
LASERS' target allocation for equities totals 52%.
Oklahoma Public Employees Retirement System, Oklahoma City, posted the second-highest return among the plans tracked. The $11.1 billion pension fund chalked up a gross return of 10.9%, above its policy benchmark return of 10.5%.
As of June 30, the actual allocation was 41.8% U.S. equity, 29.6% U.S. fixed income, 28.2% international equity, 0.3% cash and 0.1% real estate, and its target allocation is 40% U.S. equity, 32% U.S. fixed income and 28% international equity.
"OPERS does not participate in private markets," said Joseph A. Fox, executive director, in an email. "Therefore, the mark-to-market performance of capital markets certainly stood in contrast to results from the prior fiscal year."
OPERS had the lowest return among tracked public pension plans for the fiscal year ended June 30, 2022, with a gross return of -14.5%.
Fox said the domestic equities rally drove OPERS' nominal performance for the most recent fiscal year.
"In addition, a modest overweight to U.S. equities and specific manager performance in the small-cap-oriented portion of the portfolio propelled performance relative to the policy. The performance of non-U.S. equity markets also contributed favorably to nominal returns for the period," Fox said.
"While the total return of the fixed-income market was better than the prior fiscal year, the fixed-income allocation still detracted from nominal performance of the overall portfolio for the period," he said. "However, favorable active results relative to benchmarks partially offset the lagging performance of the asset class."
OPERS' lack of exposure to private markets is unusual for a plan with more than $10 billion in assets and far more typical of smaller pension plans.
Callan's Kloepfer said plans with less than $100 million in assets were the biggest winners for the most recent fiscal year, with the highest median return among the plans they've measured at 10%, while the median for the previous year was -10%.
He said Callan calculated how plans measured up for the two years ended June 30 given the extreme differences between the two periods.
"We pulled up the data for the two years ended June of this year, so for the small plans, they are still down 2%, for the very large it's 1% and for the large it's very close to zero," Kloepfer said. "This is the benefit of the diversification that these bigger plans have pursued."
On the other end of the spectrum, Indiana Public Retirement System's $39.6 billion defined benefit plan posted a preliminary net return of 2.2% for the fiscal year ended June 30, the lowest among plans tracked by P&I.
While public equities was the top performer for Indianapolis-based INPRS' DB plan with a net return of 16.7% (above its benchmark return of 16.1%), the plan's actual allocation to public equities was only 19.6% as of June 30.
Among the DB plan's asset classes, risk parity had the highest actual allocation at 20.5% as of June 30 and that posted a net return of -2.6%, well below its benchmark return of 9.9%.
INPRS had raised its target allocation to risk parity to 20% from 12% in early 2021.
The pension plan had posted a net return of -6.6% for the fiscal year ended June 30, 2022.
INPRS spokesman Dimitri Kyser could not immediately provide comment.
Meanwhile, the two largest U.S. public pension funds, CalPERS and CalSTRS, returned 5.8% and 6.3%, respectively, for the fiscal year ended June 30. Both were below the P&I median return of 7.6%.
The $463.6 billion Sacramento-based California Public Employees' Retirement System's best-performing asset class for the one-year period was public equity with a 14.1% net return, equal to its benchmark. That was followed by the pension fund's new asset class of private debt with a 6.5% net return, above its 3.7% benchmark. The pension fund added a 5% target to private debt last year, while private equity and real assets had negative net returns with -2.9% and -3.1% respectively, although they did outperform their respective benchmarks of -5.9% and -4%. CalPERS' targets to private equity and real assets are 15% and 13%, respectively.
The $321.3 billion West Sacramento-based California State Teachers' Retirement System's return was also driven by public equities, which returned a net 16.7%, while private equity and real estate returned -0.9% and -0.5%, respectively. CalSTRS' actual asset mix as of June 30 was 40.3% public equity, 16.1% real estate, 15.5% private equity, 10.1% fixed income, 8.8% risk mitigating strategies, 6.1% inflation sensitive, 1.4% innovative strategies, 1.5% liquidity and the rest in strategic overlay.
Wilshire's Toth said clients have been surprised by the resiliency of risk assets considering the predictions of a recession coming from the Federal Reserve's aggressive efforts to raise interest rates to combat inflation. Many believe, however, that a recession will be coming in the first or second quarter of 2024, he said.
"Clients have been diligent about trying to stay close to their asset allocation targets, rebalancing as those risk assets have run and being attuned to that uncertainty," Toth said.
