Public pension fund investment performance has picked up in FY 2017, according to Loop Capital Markets, which estimated the average portfolio return for public pension plans during this period. Since investment earnings, on average, accounted for 63 percent of public pension sources of revenue from 1986 through 2015, 16 market returns are the most important factor affecting pension assets.
Since smoothing of investment returns was eliminated with GASB Statement No. 67, Financial Reporting for Pension Plans, and Statement No. 68, Accounting and Financial Reporting for Pensions--an Amendment of GASB Statement No. 27., the full impact of investment earnings is reflected in the fiscal year in which they occur. To estimate a typical pension fund return in FY 2017, Loop Capital calculated total returns for various asset classes using representative broad market indexes.
The following table shows (1) returns for broad market indexes that represent different asset classes and (2) estimated gross portfolio returns for a pension plan with an average asset allocation.
The firm's estimated average public pension portfolio return matched the actual return for the California Public Employees' Retirement System (CalPERS) portfolio in FY 2015, 2.4 percent. CalPERS' FY 2016 portfolio return was 0.6 percent, compared to Loop Capital's estimate of 0.4 percent average return. "It is not surprising that the return for such a large, efficiently managed, well-diversified portfolio would generally approximate broad market returns," according to the firm's article. In addition, these results suggest that the firm's estimate of average public pension portfolio return so far in FY 2017 is reasonable.
The review of portfolio returns over the last three years offers several interesting observations:
* Equities were the best-performing asset overall, especially in FY 2017. More than 80 percent of total S&P 500 return so far in FY 2017 was achieved since the presidential election.
* Alternative assets had the worst returns, which recently...