PennSERS Investments Lose More Than 16% During First Three Quarters

The Pennsylvania State Employees’ Retirement System reported a 5.04% loss for the third quarter and a 16.13% loss for the year through September 30, lowering the pension fund’s market value to $32.5 billion from $34.5 billion through the second quarter and $39.9 billion at the start of the year.

Despite the losses, the performance exceeded that of its benchmark portfolio, which lost 5.08% during the quarter and was down 16.39% year to date.

Emerging markets equity was PennSERS’ worst performing asset class for both the third quarter and the year to date as of September 30, tumbling 10.22% and 29.74%, respectively, during those periods. International developed markets equity lost 8.79% during the quarter and 26.78% through Q3, followed by private equity, which lost 5.86% during the quarter and was down 4.74% over the first nine months of the year.

The portfolio’s Treasury inflation-protected securities dropped 5.6% during the quarter, bringing its nine-month loss to 14.85%, while its U.S. equity investments declined 4.35% for the quarter as its total loss for the year grew to 24.51%. Real estate investments closed the quarter with a 1.59% loss but were up 4.56% year to date.

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Legacy private credit and cash were the only assets that did not decline during the quarter, rising 0.63% and 0.51%, respectively, and increasing 6.57% and 0.70%, respectively, during the first three quarters. All returns are reported net of fees, while private equity and real estate returns are reported on a quarter lag and are adjusted for cash flows.

PennSERS reported three- and five-year annualized returns of 4.89% and 5.09%, respectively, compared with its benchmark’s return of 5.40% and 5.89%, respectively, during the same time periods. Over the longer term, the pension fund reported investment returns of 6.53%, 4.28%, 7.53% and 6.53%, respectively over the past 10, 15, 20 and 25 years. The pension fund underperformed during each of those time periods, as its benchmark returned 7.20%, 5.58%, 8.32% and 6.99% respectively, over the past 10, 15, 20 and 25 years.

“SERS is a long-term investor with the mission of paying pension benefits for the lifetime of our members,” Joe Torta, the executive director of PennSERS, said in a statement. “Our members can be assured that the fund is fully invested and well-positioned to benefit as markets recover.”

The pension fund’s asset allocation, as of September 30, was 29.9% in U.S. equity, 21.1% in fixed income, 19.9% in private equity, 11.6% in international developed markets equity, 8.7% in real estate, 3.2% in emerging markets equity, 3.0% in inflation protection, 1.3% in cash, 1.2% in legacy private credit and 0.1% in legacy hedge funds. [Source]

The pension fund’s board also approved a $100 million investment in the Hellman & Friedman Capital Partners XI fund within its private equity asset class.

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Tags: Hellman & Friedman Capital Partners, Joe Torta, Pennsylvania State Employees Retirement System (SERS), Pension Funds, third quarter

No doubt the slowing of inflation growth in November was good news, with the Consumer Price Index decelerating to a 7.1% annual pace from 7.7% for October. (The new reading was lower than economists’ projection of 7.3% for November.)

The stock market loved the news, with the S&P 500 closing up 0.73%, amid hopes that the Federal Reserve’s rate-hiking campaign is peaking or soon will. But the market may be setting itself up for an unpleasant surprise, by LPL Financial’s estimation.

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There’s a big divergence between what investors, namely those in the futures market, expect and Fed members’ projections, as seen in the so-called dot plots of members’ predictions. The last one, at the end of September, showed an average 4.4% on the federal funds rate, and 4.6% by the end of 2023. (The Fed will issue a new one Wednesday.)

But the futures market believes, as of Tuesday, that the benchmark rate will end this year at slightly below the Fed’s number and stay there next year, notes Lawrence Gillum, fixed income strategist for LPL, in a research paper. He anticipates that the December dot plots will show the rate topping out at around 5% at some point next year.

All this could mean another Charlie Brown-and-the-football moment for stocks, if Fed Chair Jerome Powell sounds hawkish on Wednesday. “Markets have rallied three times this year on the expectation of a more accommodative Fed,” Gillum writes. Those rallies ended “when expectations for Fed moderation proved too early.”

But at least the stock market had a joyous time Tuesday, CPI day, although the closing price was far down from the morning surge, as investors realized they may have gotten ahead of themselves.

On December CPI days since 1999, a surprisingly lower-than-projected inflation number resulted in an average S&P 500 gain of 0.13%, according to Bespoke Investment Group. Nothing special. So consider Tuesday’s performance a gift, if only one that’s briefly enjoyed.