Pension funds with a high proportion of stocks in their portfolios relative to other asset classes are expected to post higher returns for the latest fiscal year, according to a new Markov Processes International analysis.
Equity exposure drove allocator performance in 2023 and is expected to have done the same for public pension funds during fiscal year 2024. MPI expects that the average pension with more than $20 billion in assets will post an annual return of 11.3 percent.
“Some interesting patterns reemerged to echo FY2023, including the drag on returns from private markets (private equity and real estate) and the overwhelming power that exposure, or lack thereof, to mega-cap domestic stocks had on the largest public pension portfolios,” said Michael Markov, the firm’s founder, in a statement.
Public pension funds annually publish their performance between July and October. Each fund has different return expectations based on funded status and risk appetite. Even though long-term numbers mean more for the health of these organizations, public pensions make headlines when they report their annual returns.
The California Public Employees’ Retirement System and the Pennsylvania Public School Employees Retirement System published their annual returns last week. CalPERS returned 9.3 percent net of fees as of June 30 (the valuation of its book of private assets is as of March 31, 2024). PSERS reported an 8.1 percent annual return through March 31.
MPI projected that CalPERS would return 10.1 percent for fiscal year 2024 and that PSERS would return 8.2 percent. MPI estimated performance by running pension funds’ historical return streams through its proprietary quantitative model, the Dynamic Style Analysis, to determine each pension’s factor exposures. The performance numbers are gross of most management fees and operational expenses.
MPI uses data from Cambridge Associates and Preqin to estimate private equity and real estate returns. These organizations, like public pension funds, report private asset returns on a lag, which is mirrored in MPI’s data.
It’s important to note that these estimates do not account for portfolio adjustments and asset class reallocations made during the past fiscal year. CalPERS has been shifting its allocation strategy over the past year, which could account for the differential between MPI’s predictions and its actual returns. MPI also reports its predictions gross of fees and expenses, while CalPERS reports net of fees.
MPI estimates that the Georgia Teachers Retirement System will have the highest annual return for fiscal year 2024, projecting 16.3 percent. MPI expects the Kentucky Teachers Retirement System to return 16.1 percent.
This is the result of their allocations: Georgia has nearly 70 percent of its portfolio invested in public equities, the highest among the pension funds MPI analyzed. Kentucky’s allocation to public equities is the third highest, at 60.4 percent.
Contextualizing these returns, though, is important. MPI’s analysis showed that Georgia’s ten-year annualized return through fiscal year 2023 is estimated to be 7.9 percent, just below the 8 percent average of pensions in the peer group. Meanwhile, Arizona State Retirement System, which had one of the highest private equity allocations through fiscal year 2023, posted a ten-year return at 8.5 percent, which is above the average.
“We look forward to tracking FY2024 results and using our quantitative techniques to explore the potential sources of any significant disparities between projections and actual results, including the impacts of funding uncalled capital commitments, and to nurture the public dialogue on institutional investing,” Markov said.
