2012: A Good Vintage for Large US Public Pension Funds

Out of all institutional investing sectors in the US, Wilshire data shows that large public pensions posted the top performance for the calendar year.

(February 4, 2013) – Public pension funds with at least $5 billion in assets under management had a better 2012 than any other class of institutional investor in the United States, according to Wilshire Associates data.

For the 2012 calendar year, large plans had a median return of 13.43%, compared with 12.69% for public funds as a whole, the Santa Monica-based consultancy found. This correlation between size and performance remained consistent over varying time horizons: large public plans’ returns topped those of smaller funds for the final quarter of 2012 as well as over the last ten years.

Large institutional investors fared better than their smaller counterparts across the board, according to Wilshire Managing Director Robert Waid. “All plans with assets greater than $5 billion was the top performing category with a median 2012 return of 13.45%,” Waid said in a statement. “All plan types had a median return of 12.38% making this the fourth year in a row of positive median returns. Three of those four were double digit gains. Nine out of the last ten years all plan types had positive returns … Leading the way, foundations and endowments with assets greater than $500 million had the best 10-year median return at 8.22%.”

The Foundations/endowments category had a weaker performance in 2012 relative to other investor classes, posting 12.17% median returns. Corporate funds, in contrast, returned 12.82% last year.

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The Wilshire report notes that median asset allocation differs significantly among small (less than $1 billion), medium ($1 billion to $5 billion), and large public pension plans. Funds in the last category had more than double the international equity exposure that small plans did in 2012 (22.3% versus 10.6%). Wilshire’s data also indicates that funds with more than $1 billion in assets hold nearly 10% of them in alternatives, while small pensions allocate essentially nothing to that bucket.

Recent research out of the University of Toronto suggests that greater size does work to funds’ advantage with private equity (PE) investments. “Our first finding is that investors with large PE investments perform substantially better in PE than investors with small PE investments,” authors Lukasz Pomorski and Alexander Dyck wrote. “This relationship between investor scale in PE and PE performance is monotonic in PE holdings, robust, and consistent across time and geographies.”

(February 4, 2013) – Yields on United States Treasury bills have dropped overall since the financial crisis of 2008, but canny investors can optimize their allocations to this safe haven by choosing duration wisely.

Five- and seven-year government bonds deliver the optimal risk-adjusted returns, finance professor Charles Corcoran found during his study of yields over the last forty months. The least attractive risk/return tradeoff is on the 30-year treasury, just as it was pre-2008, he asserts.

“Interest rates on treasury bonds of all maturities have dropped significantly in the past seven years,” Corcoran writes in his paper, “Yield Curve Investing: Optimizing Risk-Adjusted Returns,” which was recently published in the Global Journal of Business Research. “With the new, lower interest rate environment, the relative risk versus return tradeoff, as measured by risk-adjusted return, has likewise changed.

Compared with one-year securities, which were the pre-2008 risk/return sweet spot, he found that the five- and seven-year terms now offer a tradeoff: “The steeper yield curve provides incremental returns exceeding the increased duration risk with these maturities. The 30-year bond, while offering the greatest nominal yield for all months when traded, is also subject relatively high interest rate risk, rendering the 30-year a poor value on a risk-adjusted basis.”

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Investors have continued to sink assets into US treasuries despite the low-interest rates, which Corcoran characterizes as a “whisker above zero,” in part due to tightness in the corporate bond market and volatility in global markets overall.

Read the entire paper here.