PSERS administrators’ bragging plan is ‘number one’, staff warn of risks ahead

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“We’re number one,” Jason Davis, administrator of the Pennsylvania Public Schools Employee Retirement System, sang after a report on the company’s $75 billion investment plan was released to the public. screen during Friday’s public meeting.

Davis, a high school teacher from western Pennsylvania who serves as vice chairman of the system’s investment committee, was one of several administrators who applauded a report by consultant Aon showing that PSERS returned +1, 14% in the first quarter of 2022, placing it among the top 1% of state pension plans. On average, public pension plans lost -3.58% as the stock market fell in the three months from Jan. 1 to March 31, according to Aon.

PSERS’ strong quarter relative to other plans also drove average returns for 12-month and 3-year periods to the top for all state pension funds, and even boosted 10-year returns. , which had fallen behind, in the top half of all plans for this longer period.

But when questioned by administrators, PSERS staff warned members that the PSERS results do not include valuation changes since January 1 for private and real estate investments, which make up an unusually large share of the PSERS portfolio.

Unlike publicly traded stock prices, PSERS’ best performing assets – private equity and private real estate – were measured, not for changes in their valuation at the start of 2022, but for the end of 2021. , ahead of the biggest drop in stock prices and rising interest. rates drove down asset valuations in all markets.

“Part of this apparent ‘strong performance of PSERS in the first quarter’ has to do with the delay,” acknowledged Claire Shaughnessy, partner at Aon Investments USA, the consultant that measures the value of PSERS assets. “I expect next quarter you will see some of the negativity pass.”

“If you see Tesla and [other leading stocks] down, private companies are also going to see these markdowns,” she added.

The PSERS and other funds have long delayed reporting private assets by a quarter, citing the challenge of gathering information, although officials said they hoped to cite more recent data in the future. State Representative Frank Ryan, R., Lebanon, a former critic of private asset valuations and fees, asked if the PSERS couldn’t use “a more stable methodology” to value assets at their current prices or more recent, rather than using the last year’s figures from when stock prices continued to rise.

“You’re right, for the second quarter there will be even more downside,” as PSERS finally reports the impact of falling investment values ​​in the first quarter, agrees Darren Foreman, head of capital investments -investment for the PSERS.

Still, Foreman hoped private equity values ​​wouldn’t decline as much as the stock market: While the S&P is down 20% in recent months, private equity “we think it could be down 14%” , for a lower loss, at least until stock markets recover – when that may be.

To avoid larger losses, “we have focused on hiring private equity funds that have sustainable and supportable investment strategies,” Foreman added, avoiding private energy equity funds. and chemicals whose values ​​may be more likely to collapse.

The PSERS has been under investigation by federal prosecutors based in Philadelphia since March 2021, after admitting to adopting a report that exaggerated investment returns from 2011 to 2020 using Aon data. The plan is also being investigated by the U.S. Securities and Exchange Commission, which wants to see if giveaways from some of its hundreds of outside fund managers have affected investment decisions. No one has been charged with wrongdoing. The PSERS changed some monitoring practices after its own reviews by external consultants.

Two of Davis’ fellow teachers on the board were quick to call quarterly returns vindication of PSERS policy over the past decade under leaders who left the system last year. , to invest more in Wall Street’s high-fee private equity. and real estate funds, instead of publicly traded stocks.

This policy has enriched hundreds of private equity and real estate fund managers who invested Pennsylvania pension money, but also caused the PSERS to miss the long bull market that began in 2009.

Defenders of the policy said it was designed for times like this, when stock values ​​plunge rather than rise, and other assets haven’t been cut as sharply.

“It’s finally working and we’ve been waiting for it for a long time,” said administrator Mel Vogler, retiree representative on the board. She added that she did not want to see a reversal of the board’s more recent policy of selling off hedge funds and other low-yielding investments and slowly increasing its stock holdings.

Trustee Sue Lemmo, an art teacher in Curwensville, Pennsylvania, said recent assessments show teachers are able to successfully oversee their own investments. “This wallet does what it was designed to do,” she said.

“It’s a bit of a boring approach, and we’ve been criticized a lot in the press,” acknowledged councilor Eric DiTullio, who represents school board members. “We were the least risky,” and now the returns in a bear market have justified this approach, he added.

This low-risk claim had already been skewed by Secretary of State for the Bank, Richard Vague, who noted that the volatility number used by PSERS and its consultants as a raw measure of risk was itself artificially low, because Private asset values, unlike stocks, are not reviewed daily. ; under such a broad definition, private assets would still be “low risk,” even if returns are poor and some private investments lose some or all of their value.

Vague did not comment on risk metrics at Thursday’s investment meeting, but did note that the current economic environment is “putting downward pressure on all assets.”

While valuations of privately managed assets from last year accounted for most of PSERS’ claimed gains in the first quarter of 2022, staff said it was also doing well with internally managed investments. PSERS staff, which are less expensive than many funds managed by external professionals.

The PSERS also benefited from its investments in gold and other commodities, which rose in value, particularly after Russia’s invasion of Ukraine in February.

Another asset class that particularly boosted PSERS returns was oil and gas, through “Master Limited Partnerships,” an asset class that the board had voted to wipe out over the past few years. next few years, after managers collected high fees but earned low returns when gas and oil were cheap during the Trump and Obama administrations.

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