Are states getting a raw deal?
A recent study of state pension fund returns finds that they’re paying big money for modest returns. Over the past five years, the average return has been 1 ½ percent per year, while the states have paid fees, on average, of 0.40%, or 40 basis points. That’s hundreds of millions in fees for what appear to be moderate returns.
Some states, like Maryland, paid above average fees for below average performance. Other states, like New Jersey, experienced just the opposite. New Hampshire was pretty close to average on both measures. Are managers in New Jersey smart, or just lucky?
Actually, it’s impossible to tell. The study only reports average returns. It says nothing about how the funds are allocated between asset classes. Over a period that encompasses the worst financial and economic downturn since the Great Depression followed by a tepid recovery with a host of problems including the Euro crisis, a downgrade of US government debt, and significant private deleveraging, we would expect some volatility.
So large cap returns have been essentially flat over the period, small caps have been up 2%, foreign stocks have been down 5%, and US bonds have been up 6½ %. What matters most in this environment is asset allocation, and how funds are rebalanced. Without that kind of information, returns are meaningless.
A little knowledge is a dangerous thing. Without the right context, performance information just misinforms.
Douglas R. Tengdin, CFA