You Can Do Better Than Your Pension Funds

01/12/2011 Share 0 comments

With many public pension funds under performing in recent years, state and local governments have to increase current employees' contribution to fund the benefits. Employees and retirees in public sectors are feeling greater pressure to take care of their own finance. 

A Bloomberg article in October 2010 reported that the largest pension fund Calpers (California Public Employees' Retirement System) had $240 Billion unfunded liabilities. Let's take a closer look at Calpers' portfolio and its performance. 

Based on Calpers' latest annual report for fiscal year ended 6/2009 (we can not find the annual report for fiscal 2010), the following is its last 10 year's performance.

The following table shows the asset allocation from the same report. It is reasonable to assume Calpers' risk profile is about 60-70% in risk assets and 40-30% in fixed income.



From the same Bloomberg article, it was reported that Calpers achieved about 11% return in their 2010 fiscal year (7/2009 to 6/2010). With that in mind, we estimated that Calpers achieved about 3.2% annualized return from 7/2001 to 6/2010. 

3.2% in the last 9 years can only barely keep up with the CPI increase. But that is Calpers, one of the largest public pension plan that has plenty of resources to hire high power hedge fund managers, venture capital investment managers,  influence corporate governance and invest in real estates in its own fund. The last two financial downturns have inflicted severe damage to the behemoth. 

It is a natural question to ask: can an individual do better than pension funds like Calpers?  For California public employees, they are entitled to invest in defined contribution or deferred compensation retirement plans such as California State University and Public Employees Savings Plus Plan  (or see the original plan  401(k)/457 page for more details). The investment choices could be found in this current fund performance document.

Currently, the plan consists of 12 funds. These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income. The list of minor asset classes covered:

Foreign Large Blend: EFA, VEU, GWL, PFA 
Intermediate-term Bond: AGG, CIU, BIV, BND 
Large Blend: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX 
Mid-cap Blend: IJH, IWR, JKG, VO, MDY, EMM, PJG, DON, EZM, MVV 
Short-term Bond: CSJ, BSV, VCSH 
Small Blend: IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA, UWM, SCHA 

For a moderate portfolio, MyPlanIQ Strategic Asset Allocation strategy invests in a fixed equal amount in US Equity and Foreign Equity (both are about 30%) and about 40% in fixed income. The strategy looks at the allocations monthly and decides whether to re-balance the portfolio using the best funds available in an asset class. 

The portfolio's performance is as follows:

From 12/31/2000 To 01/10/2011

From the portfolio historical data, we derive 4.9% annualized return from 7/2001 to 6/2010. This beats Calpers' pension fund by additional 1.7% annually. 

Notice the Strategic Asset Allocation strategy only uses the 12 funds available in the plan and adheres to buy-and-hold principle with periodical re-balance and fund selection. With only three major classes (US Equity, International Equity and Fixed Income) in the plan, the strategy periodically selects best funds from each asset class and re-balances the portfolio. This does show the benefit of fund selection (mainly through style rotation such as large cap to small cap value etc.).

The takeaway is that a public employee can do better than its pension fund by adopting sound asset allocation strategy and manage his/her portfolio periodically. One does not need to have fancy hedge funds, private equity or venture investment to achieve better returns.

labels:investment,

Symbols:SPY,VTI,EFA,VEU,AGG,BND,CIU,BIV,GWL,PFA,IVV,IYY,IWV,VV,DLN,RSP,SCHX,IJH,IWR,JKG,VO,MDY,EMM,PJG,DON,EZM,MVV,IJR,IWM,JKJ,VB,PJM,DES,SAA,UWM,SCHA,CSJ,BSV,VCSH,