US DB Public Pension Returns and Funded Status

The trend is your friend unless it’s heading south, like the downtrend in long-term returns of US #PublicPensions, which negatively impacts their #FundedStatus.

In response to the pandemic, unprecedented monetary and fiscal stimulus have boosted FY2021 returns, but many #pensions need a long-term fix for their age-old problems (click LinkedIn link to read more)

Strong FY2021 Endowment Returns Likely

Strong returns are likely for US institutional investors, like #endowments and #publicpensions, that follow a June 30 fiscal year end. These types of investors tend to have similar performance profiles as a global balanced benchmark like the 70% ACWI/30% US Bond Aggregate index, which posted a strong 26.5% gain over the past 12 months, and the strongest gain since 6/30/1987.  With strong gains in #venturecapital, #SPACs, #cryptocurrencies, US #smallcaps, #REITs and public #equities in general, we could see even stronger results from the top institutional investors.

10-30 yr. US Treasury Returns vs. Stocks

Despite the currently high duration risk, rolling 12-month losses for the 10-30 year US Treasuries index (positive 12-month returns are shown in green, and losses in red) generally pale in comparison to the S&P 500's 12-month losses (shown in gray). 

Different Fiscal Year Ends Can Impact Reported Returns

A 6-month or even 3-month difference in fiscal-year-end reporting could make a big difference in the measurement of investment returns for a 12-month period or longer, even if a perpetual buy-and-hold investor ultimately experiences the same returns. Just look at the returns in the table below for the US 60/40.  That is why I prefer to compare returns for institutions with different fiscal year ends by using rolling, overlapping periods such as in my other LinkedIn post.

Largest US Endowments vs Public Pensions vs Foundations

It's natural to compare returns of US endowments versus public pensions because of their similar asset allocations, target returns, and typical June 30 fiscal year ends.

US foundations also have similar portfolios and performance goals as endowments, but typically use a December 31 fiscal year end.

One can compare returns for all three groups by using rolling, overlapping 10-year periods, so trends are clear. Here's a chart that shows how returns have converged over the last 30 years.

Top Endowments vs. Large Endowment Average

Not everyone in the NBA can be as successful as #lebronjames or #michaeljordan. Similarly, some of largest #endowments are superstars among their peers.

20-yr Endowments, Public Pensions vs. Index Fund Portfolios as of FY2020

Here is a 20-year chart as of FY2020 showing index fund portfolios vs. US endowments and public pensions.  The original paper "Alpha, Beta and the Endowment Model" can be read on SSRN here:

10-yr Endowments, Public Pensions vs. Index Fund Portfolios FY2020

Here is an updated 10-year chart as of FY2020 showing index fund portfolios vs. US endowments and public pensions.  The original paper "Alpha, Beta and the Endowment Model" can be read on SSRN here:

Endowment Model vs. US 60/40 update

Recent press/research discuss how the US 60/40 outperformed Ivy League endowments, leading some to question the viability of the Endowment Model. Yet, in the following chart, the Ivy average outperformed the 60/40's 10-year annualized returns for most of the 26 overlapping 10-year periods (each fiscal year ending June 30). Sounds like the 60/40 just caught up, not necessarily that the Endowment Model stopped working. 

Convergence of Ivy League Endowment Returns

Here's an interesting chart showing convergence of rolling 10 year returns across the Ivy League endowments. Despite the recent rebound in returns, it has been harder for endowments to differentiate their performance vs. peers, unlike the amazing dispersion among the Ivies during the era from the end of the Internet Bubble up until the 2008 Great Financial Crisis.

Canadian Investment Review: Digging into alpha, beta and the endowment model

"To gain alpha, institutional investors have many avenues. For large investors, the endowment model has traditionally worked well. However, it can lead to overdiversification and pose challenges for smaller investors looking to replicate the model, according to a new paper."

Endowments vs Stock & Bond Returns

Many endowments have suffered from low 10y annualized returns over the past decade, falling short of their rough 7% return hurdles of spending + inflation. That is why it is heartening to see the 10y annualized return for the S&P 500 finally exceed 10% as of the fiscal year ending June 30, 2018, the first time since FY 2005.