Pensions with higher private-market exposure lagged those with higher allocations to the public markets in the 2023 fiscal year, a sharp reversal from performance trends in 2022, according to proprietary projections from Markov Processes International, Inc. (MPI), a leading independent FinTech provider of software and services for analyzing investment performance and risk.
The projections are generated by the MPI Transparency Lab, a one-of-a-kind data hub for endowment and pension performance. The Lab provides a wealth of information on performance and risk of the largest U.S. endowments and public pensions.
This years performance of pensions marks a 180-degree turn from our experience just a year ago, said Michael Markov, Founder and Chief Executive Officer of MPI. We know that the dynamics of performance attribution are important, yet most stakeholders lack visibility into these important institutional investors. The rebound in the public markets has certainly helped balance a lack of gains from areas like private equity and venture capital.
MPIs estimates are based on the 2022 fiscal year asset class exposures, which were derived from annual pension returns, and asset class returns for four quarters of the 2023 fiscal year (ending June 2023). The full report and projections are available here.
The median FY2023 projected return for the group of 40 state pensions MPI tracks is 9.0%, which is lower than the 9.4% return of the Global 60-40 benchmark. Gains in the benchmark were driven primarily by U.S. and ex-U.S. equities (19.6% and 18.8%, respectively) with bonds returning -0.9%. Private equity, real estate, and commodities all had negative returns for the fiscal year leading to underperformance of pensions with significant allocations in private equity.
Contributions from private equity and bonds were negligible to pension performance, according to the data, while pensions with the highest exposures to global equity came out at the top. Teachers Retirement System of Georgia, with a 74% exposure to global equities, is estimated to have the highest return for the fiscal year in the group.
The lowest estimated FY2023 performers in the group were state employees pensions of Oregon (1.8%) and Pennsylvania (2.9%). Interestingly, last fiscal year these pensions reported some the highest performance in the group as shown in chart below. Thus, Oregon PERS reported a 6.3% gain in FY2022 while most peers lost more than 5% and some lost even more than 10% over the same period.
MPI launched its Transparency Lab to shed light on opaque pension and endowment performance. MPIs software utilizes proprietary technology and public data sources to peek, quantitatively, behind the curtain of a wide range of investments, providing information that is often impossible to obtain otherwise. With the Transparency Lab, all that data and analysis is contained in one place and publicly available, allowing investors, beneficiaries, regulators, researchers, journalists, and other stakeholders to garner unique insight into some of the largest and most opaque investors.
With the MPI Transparency Lab, registered users can view analytics and download MPI-360 reports that help them uncover trends in asset allocation and exposures, explain drivers of both recent and historical results, obtain estimates of risks, drawdowns, and efficiency, perform historical stress tests, and evaluate various hypothetical scenarios.
MPI uses its proprietary Dynamic Style Analysis (DSA) and public annual returns to reverse-engineer asset exposure dynamics of large investor portfolios. When pensions report only annual performance figures, a decades worth of performance is represented by only 10 data points. Traditional static and rolling-window methods of regression analysis struggle to find credible insights from such infrequent data. MPIs DSA, however, is uniquely adapted to work with such limited data.
Knowing how your pension is doing quarter by quarter not only serves to satisfy ones curiosity, Markov said. Rather it prepares beneficiaries so that they are not caught by surprise at the year-end by the results of their pension. However, we see the main value of this feature in providing pension CIOs valuable datapoints about their narrow set of close peers.
Markov Processes International Inc. (MPI) is a leading provider of solutions for investment research, analysis and reporting to the global wealth and investment management industry. MPI works with more than 200 client organizations, including pensions and endowments, sovereign wealth funds, global wealth management firms, institutional consultants, regulators, investment advisors and asset managers. Rooted in the principles of transparency, objectivity, and efficiency, MPI takes an innovative approach to problem solving in the areas of fund analysis, risk management, asset allocation, and reporting to ensure that its clients have the tools to succeed in ever-more-crowded markets. Follow us on Twitter @MarkovMPI and connect with us on LinkedIn.
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Markov Processes Inc.
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