In a difficult market, the New Mexico Educational Retirement Board eked out a small advance for the fiscal year ending June 30, up 1%, following the prior year’s spectacular showing of 28.7%, the fund’s strongest advance in 36 years.

For the most recent fiscal year, the $15.5 billion pension program beat its benchmark, which lost 2.8%. This gauge is an amalgam of several indexes, including the S&P 500, MSCI Emerging Markets and the Bloomberg Agg. For the troubled April-June quarter, the New Mexico plan bested its benchmark, with both negative: minus 4.6% and 6.0%.

The plan’s asset allocation hasn’t changed in three years, according to CIO Bob Jacksha. For example, the program is underweight in public equities and core bonds compared with its targets. On the other hand, it is overweight in private equity, opportunistic credit and real estate. Over the past 10 years, the fund has beaten its benchmark—8.5% annually against the benchmark’s 7.7%.

Jacksha says he and his staff will review the asset allocation later this year with the organization’s board of trustees. “If there are any changes, I would expect them to be minor,” he says. The largest group in the portfolio is public equity at 24%, followed closely by private equity at 23%.

The biggest gainers and losers—which Jacksha calls “studs and duds”—were private real estate, ahead 35.1%, and PE, up 21.9%, while EM equity lost 27.2% and non-U.S. developed market equity was down 18.2%. 

The latest funded ratio was 62.8% as of mid-year 2021, an improvement from 60.4% in 2020. Later in the calendar year, the fund’s actuarial report will determine where it sits for fiscal year 2022. The state legislature modestly increased contributions to the fund, which may be a factor this time.

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The San Diego City Employees’ Retirement System has named Carina Coleman as its new CIO. She will oversee the pension fund’s $10.9 billion investment portfolio, and succeeds Liza Crisafi, who retired at the end of July after 15 years at SDCERS.

According to the SDCERS release announcing the appointment, Coleman has managed multi-billion-dollar retirement plan investments of varying risk profiles among multiple asset classes, and has experience creating investment policy, constructing portfolios to meet return and risk objectives, conducting investment manager due diligence and analyzing risk and performance. She is also a former SDCERS board president.

Coleman joins SDCERS from Sempra Energy, an energy infrastructure company, where she worked for more than 12 years, nearly nine of which she spent as director of pension and trust investments. At Sempra, she was responsible for managing the company’s qualified and non-qualified retirement plans as well as other trust assets worth more than $8 billion. She was also responsible for developing and implementing investment policies and strategies and overseeing investment staff.

Prior to Sempra, she was a manager at Disney for five years, and before that she started her career as a research associate at financial planner Bradford & Marzec, according to her LinkedIn profile.

“Carina brings technical expertise, strong business acumen, practical CIO experience, detailed knowledge of SDCERS’ investment program policies, good relationships with key SDCERS business partners, and, importantly, a leadership and soft skill set which is in close alignment with SDCERS’ core values,” SDCERS CEO Gregg Rademacher said in a statement.

Coleman earned her MBA in finance from the Wharton School of Business and is a CFA and Chartered Alternative Investment Analyst Charterholder. She also holds an M.A. in international studies from the University of Pennsylvania and a B.A. in economics/international area studies and German studies from the University of California, Los Angeles.

Coleman will start August 18; until then, Senior Investment Officer Jamie Hamrick will serve as interim CIO. SDCERS hired professional recruiting firm EFL & Associates to assist in the search to fill the CIO position.

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The aggregate funded percentage for multiemployer defined benefit plans fell sharply to 80% from 91% during the first half of the year, according to actuarial and consulting firm Milliman, whose analysis estimates that the typical multiemployer investment portfolio lost 12.3% during that time.

Milliman’s mid-year Multiemployer Pension Funding Study says the aggregate market value of the assets of more than 1,200 multiemployer plans fell by $75 billion to $617 billion as of June 30, from $692 billion at the start of the year. And with the accrued benefit liability of those plans increasing by $10 billion during that time to $771 billion, their total funding shortfall more than doubled—to $154 billion from $69 billion in the first half of 2022.

The $85 billion increase in the funding shortfall in the first half slashed 11 percentage points off the aggregate funded ratio for the plans. And, per Milliman, the 12.3% investment loss is actually closer to 16%, because the plans expected to return 3.4% despite this being only half of their average assumed annual return of 6.8% per year.

The study based its estimated investment loss on a simplified portfolio composed of 27.8% U.S. fixed income, 21.9% U.S. stocks, 10.8% global equity, 10.7% international stocks, 10.1% private equity, 9.7% alternative investments, 6.8% real estate equity, 1.2% global or international fixed income and 1.0% cash.

Despite the sharp drop in funding for most multiemployer plans, the report notes that funding levels remained relatively flat for plans in critical and declining status, thanks to the $6.7 billion paid out in the first half of the year from the Pension Benefit Guaranty Corporation’s Special Financial Assistance Program.

The Milliman study says that without the SFA’s financial aid, the funded percentage for the plans in critical and declining status would have been about 25%. It also says the PBGC estimates the median total SFA payout will be about $82 billion by 2027, and that if all estimated SFA was included in the market value of assets, the aggregate funded percentage would have remained 91% as of June 30.

“The key factor impacting the future funded percentage of critical and declining plans will be the amount of SFA they receive and how that is managed over time,” Nina Lantz, a principal at Milliman and co-author of the study, said in a statement. “The total impact of SFA on multiemployer pensions will depend on a variety of factors including the timing of the SFA payments, potential changes in plan liability measurements, and future investment returns.”

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Estimated changes to defined benefit plans’ funded status in July were generally modest, with most analysts citing improvements. A Mercer estimate says the aggregate funding level of pension plans sponsored by S&P 1500 companies increased by 2% in July 2022 to 102%, as a result of an increase in equity markets partially offset by a decrease in discount rates.

According to October Three’s model, pension funds enjoyed a strong month in July due to rising stock markets. Led by U.S. markets, stocks enjoyed their best month of the year, and the firm’s report notes that a diversified stock portfolio gained 8% in July but remained down almost 15% so far during 2022. The traditional 60/40 portfolio gained more than 5% during July but was 13% lower for the year, while the conservative 20/80 portfolio added 4% in July and is also down 13% through the first seven months of 2022.

Interest rates fell for the first time this year, producing the best month of the year for bonds. Corporate bond yields fell 0.25% during July, but rates were still 1.5% higher than at the end of 2021.  As a result, pension liabilities increased 3% to 4% in July but remained lower by 13% to 19% for the year, with long-duration plans seeing the largest declines. A diversified bond portfolio added 2% to 3% during July but was still down 10% to 17% for the year, with long duration and corporate bonds performing worst.

Equity markets had a strong recovery over the month, with global equities and the S&P 500 gaining 7.0% and 9.2%, respectively. Plan discount rates are estimated to have decreased roughly 35 basis points over the month, with the Treasury component decreasing 23 basis points and the credit component tightening 12 basis points. Positive equity performance overcame the increase in liabilities, resulting in a 1.0% increase in funding ratios over the month.

Insight Investment’s model shows that funded status improved by 0.2 percentage points, to 98.3% in July from 98.1% in June. Discount rates reversed course and began to decline for the first time this year, increasing the value of both pension liabilities and fixed-income assets. Strong returns on equity and fixed income helped to offset the jump in liability, keeping funded status stable.  

Sweta Vaidya, head of solution design, North America at Insight Investment, offered a cautionary note. “Two important pieces of news last week on the Fed’s commitment to bringing inflation back to the 2% target and the second-quarter GDP numbers give us a strong signal for a bumpy road ahead,” said Vaidya in a commentary on July funded status. “Pension investors have an opportunity to seek to ‘recession-proof’ their plans by riding rates higher and locking in those gains before the going gets tougher.”

TheNEPC Pension Monitorpoints out that the July stock rally came despite persistently high readings of inflation and two straight quarters of GDP contraction. The Federal Reserve hiked its benchmark rate by 75-basis points for the second consecutive time as it continues to fight inflation, leading to an inversion in the Treasury curve. Plans allocated according to liability-driven investment strategy likely outpaced total-return plans due to a greater hedge amid falling discount rates for long-term Treasurys and credit spreads. NEPC’s hypothetical pension plans experienced a funded status gain of 0.2 percentage points for the total-return plan compared with 1.1 percentage points for the LDI-focused plan.

NEPC’s report also suggests caution for the period ahead: “We anticipate market volatility and the potential for disruption as the central bank continues to increase short-term rates to battle inflationary pressures. Plan sponsors should remain diligent about monitoring changes in funded status as equities and interest rates are likely to remain volatile. This includes closely watching hedge ratio ranges to avoid becoming overhedged to interest rates as yields increase.”

The July 2022pension briefing from Agilis(formerly River and Mercantile) observes that July changes in funded status would depend heavily on a plan’s specific asset allocation. “With liabilities, fixed income portfolios, and equity markets all up for the month, the change in funded status for pension plan sponsors depends on their specific asset allocation, although we expect most will have improved with investments outperforming the liability increases,” the briefing states.

Aon’strackerreaches the opposite conclusion, finding that S&P 500 aggregate pension funded status decreased modestly during the month of July, from 93.9% to 93.5%. While pension assets rebounded during July, ending the month with a 4.4% return, the month-end 10-year Treasury rate decreased 31 basis points  relative to the June month-end rate, and credit spreads narrowed by 7 bps. This combination resulted in a decrease in the interest rates used to value pension liabilities to 3.96% from 4.34%.

The economic outlook remains unclear, according to Agilis managing director Michael Clark. “Recession or not?” said Clark in a press release. “That’s the big question weighing on many pension plan sponsors’ minds. We’ve had two quarters of negative real GDP (-1.6% and -0.9%) coupled with an inverted Treasury yield curve, but the labor market is still going strong with the employment numbers coming in almost three times better than expected. All of these signs point to the Fed continuing to raise rates as it looks to slow the pace of economic growth and control inflation. Even pension plans that have significantly hedged against rates may not be immune from funded-status volatility if we do end up in a recession, as they’ll deal with potential asset-liability mismatches from downgrades and defaults in their portfolios.”

Quarterly and Annual Data

In spite of the investment markets’ strong results in July, 2022 has been a challenging year. Institutional assets tracked by the Wilshire Trust Universe Comparison Service posted an all-plan median return of negative 9.63% for the second quarter and negative 10.59% for the year ending June 30. U.S. equities, represented by the FT Wilshire 5000 Index, fell 16.77% in the second quarter and 13.19% for the year ending in June. International equities, represented by the MSCI AC World ex U.S., fell 13.73% in the second quarter and 19.42% for the year. U.S. bonds, represented by the Wilshire Bond Index, fell 5.27% in the second quarter and 10.31% for the year.

 “Institutional investors continue to feel the impact of global events as well as inflation in the U.S. economy,” said Amy Garrigues, global head ofInvestment Risk and Analytical Servicesat Northern Trust, in a statement. “Rising global food and energy prices, the ongoing war in Ukraine and China’s inability to curb COVID-19 infection rates have all complicated the hopes for an imminent global recovery. In the U.S., the Federal Reserve accelerated its plan to increase interest rates during the quarter which resulted in a sell-off of stocks from all sectors.”

The Northern Trust U.S. equity program universe median return fell 16.4% for the quarter. The S&P 500 large cap index was down 16.1% during the three-month period. The Fed’s 50 basis point rate increase on May 4 also accelerated selling in the bond market, and the Northern Trust US Fixed Income program universe median return was down 5.0% for the quarter.

The Northern Trust Corporate (ERISA) universe median return for the second quarter was down 10.9%, while its one-year return was down 14.6%. The U.S. fixed-income asset class remains the largest ERISA plan allocation, at a median allocation of 48.7%. It grew 3.0% during the period because of lower equity valuations; the median allocation for U.S. equity was 19.6%.

For 2022 year-to-date, the aggregate funded ratio for U.S. pension plans in the S&P 500 has decreased to 93.5% from 95.5%, according to the Aon Pension Risk Trackermid-year update. The funded status deficit has increased by $23 billion, which was driven by asset value decreases of $338 billion, offset with liability decreases of $315 billion year-to-date.

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Fordham University has named Geeta Kapadia as CIO of its $1 billion endowment, effective August 22. She succeeds Eric Wood, who had been the university’s CIO since 2011.

Kapadia joins Fordham from the nonprofit Yale New Haven Health System, where she has been associate treasurer for investments since 2009. There she led a team that oversaw the academic medical center’s $5.7 billion in assets and the system’s $3.8 billion in defined contribution retirement assets.

Prior to Yale New Haven, Kapadia was also a senior investment consultant with Mercer Investment Consulting in the U.K. from 2005 to 2008, and in 2004 was an investment analyst and director of marketing for Capital Metrics and Risk Solutions in Pune, India.

Kapadia earned a bachelor’s degree in mathematics from the University of Chicago, a master’s degree in financial markets and trading from the Illinois Institute of Technology and an investment management certificate from the U.K. Society of Investment Professionals. She is a member of the CFA Institute and has served on its disciplinary review committee.

According to Fordham, the CIO collaborates with the board of trustees’ finance and investment committee and Fordham’s senior leaders in the finance area to create the university’s investment strategy.

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Direct indexing is a tricky proposition. A Research Affiliates report gauges the weaknesses of how different portfolio constructions, such as those omitting certain types of stocks from a traditional index, lead to different levels of tracking error and diversification.

The paper further examines how these stock-picking arrangements fare under an array of investing philosophies: a straight-up market cap index, one using fundamental measuring and others focused on value and deep value.

Direct indexing has found favor with institutions that seek to tailor traditional indexes to their own preferences, perhaps orienting them more toward tech or knocking out companies they deem undesirable for political or other reasons. The process seeks to create its own hybrid indexes, because investors form them, as opposed to the usual off-the-shelf index products for the S&P 500, Russell 2000, etc.

One variety of direct indexing is to exclude the so-called sin stocks: in weapons, tobacco and gaming industries. Another shuns fossil fuel stocks, the paper explains. Then there are portfolios constructed according to companies’ carbon intensity, which goes beyond merely snubbing fossil fuel producers. These focus on greenhouse gas outputs from all companies; a steel maker would have larger carbon emissions than a semiconductor outfit, for example.

The firm also measures the performance of four different types of funds that weigh companies by 1) market cap (much like the S&P 500 and other such legacy indexes do); 2) fundamentals (such as value, quality and so forth, an approach Research Affiliates helped pioneer); 3) cheap stocks (value); and 4) even cheaper ones (deep value).

On that scale, deep value has the highest carbon intensity (37.1% of the portfolio is composed of high emitters), trailed by value (30.1%), fundamentals (22.2%) and market cap (15.3%).

Excluding sin stocks doesn’t change portfolio carbon scores much, as weapons makers and the like are a small minority of the investing universe.

Overall tracking error, measuring how much the new portfolio differs from the underlying index, is greatest for the value and deep value ones (7.06% and 9.67%, respectively). The fundamentals have a 3.76% tracking error. The cap-weighted one, which mirrors the indexes, has 0%, of course.

The customization tends to create more concentrated, hence less diversified, collections of stocks. Carbon intensity portfolios are the most concentrated.

The report concludes that “investors need to understand the portfolio characteristics, expected risk, and expected returns of the strategies they are considering. Direct indexing is no exception.”

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