Falling global equity and bond values reduced Pennsylvania’s state employee pension system (SERS) by about $ 3 billion during the second quarter, staff and advisors warned directors at Thursday’s investment meeting.
The fund was worth $ 34.5 billion mid-year, down from $ 38 billion three months earlier, after counting an 8.5% investment loss for the quarter, along with payments to 130,000 retirees and contributions in course by taxpayers and 100,000 state employees: lawmakers, judges, college staff, prison officers, soldiers, social workers – who hope to retire someday with the system’s pensions.
The fund saw the decline as lawmakers considered how to cope with pressure to raise pensions for more than 70,000 senior public and state school retirees, whose last “cost of living” increases took effect in 2004. Pension checks, unchanged since time, are losing pricing power after prices for food, fuel and other prices rose earlier this year at the fastest rate since the early 1980s.
In the three months ended June 30 (approximately 17%, 15% and approximately 13%, respectively), US, foreign and “emerging market” SERS stocks fell sharply. System bonds, although long regarded as a hedge whose value tends to rise when stocks fall, have instead lost nearly 5%. And its commodities (whose SERS value ironically reports under the euphemism “Inflation Protection”) also fell 7% in the quarter ended June 30.
Private equity investments are down a relatively modest 1%, while the real estate sector grew by almost 4%. But SERS staff and advisors, led by chief investment officer James Nolan, warned that those asset values, as reported, benefited from accounting practices that tend to delay actual value changes and warned they would likely lose value by the end. of the year.
Unsaid: the threat that such losses could prevent SERS from reaching its 7% annual return on investment target, potentially requiring an increase in its annual “employer contribution” from taxpayers – currently at $ 2 billion – to prevent its $ 19 billion asset-to-liability deficit from escalating.
Nolan attributed the decline in investment values to the “Russian situation, which is only getting worse”, a reference to the invasion of Ukraine; with inflation, which he attributed to high government spending during the peak years of the pandemic; and the Federal Reserve’s interest rate hike, intended to curb price inflation.
The the system has to do with what amounts to a double whammy of stocks and bonds. From stocks account for nearly half of SERS’s investments, “we usually rely on (bonds) to move in the opposite direction,” Nolan said. So the decline in the value of existing bonds, as their low yields are unfavorable compared to new debt priced at today’s higher interest rates, is an “unfortunate circumstance,” he said.
To be sure, higher bond yields will eventually increase yields as SERS managers buy more newer bonds, noted Thomas H. Shingler, of Callan LLC, one of SERS’s investment advisors.
More importantly, “there weren’t many places to hide,” Shingler added.
Real estate returns are still “very strong” and private equity has not lost as much value as public equities, but “we expect them to cool down,” he said. Shingler said inflation is likely to drive up commodity prices, but he warned against betting too much on those “very volatile” assets.
What should SERS do with its available liquidity? Staff recommended two new investments, both of which are run by companies that already manage other money for SERS.
One recommendation was for Ardian Secondaries Fund IX LP (and a related “Ardian Sidecar Co-Investment” fund). The Ardian group based in Paris, France, which claims to invest around $ 80 billion, offers SERS “a different type of private equity fund, than our usual technology or industrial focus,” said Glenn Becker, l ‘Philadelphia suburban investor who heads SERS’ investment committee.
This latest Ardian fund is a scavenger among private equity funds, at a time when many large investors are selling those investments in private companies, to raise money.
The fund’s strategy, according to its founder, Dominique Senequier, is to buy non-public companies from acquisition funds, at discounted prices, and hold them until they can be sold at a profit.
“We are the largest buyer in the market,” added Senequier, “and we focus on the largest transactions”, in Europe and Asia, as well as in the United States.
Compared to other private equity funds, Ardian “has no high return expectations, but is a ‘volatility buffer'” whose price is less likely to jump with the latest market trends, Becker added.
If that sounds like lower expectations for a tough market, this is what the board was looking for: The trustees unanimously voted, 11-0, to send Ardian $ 150 million.
A second recommendation was issued for Oak Street Capital Real Estate Capital Fund VI. The Pittsburgh-based Oak Street Capital group was recently acquired by Chicago-based Blue Owl Capital.
Recognizing that “the real estate industry may be experiencing more difficult times,” Oak Street CEO Gary Rozier assured directors that the company has “historically done well in downtimes” and that it was a good time to invest new money. in property.
The team added few details about the impact on its investments of the change in the US real estate sector, from office and retail projects that produced large profits in the 2010s, to warehouses and apartments of the post-pandemic delivery service, which they have recently generated the highest profits and the greatest investor interest.
The two Republican lawmakers on the council, which is dominated by nominees and legislative allies of Governor Tom Wolf, a Democrat, said the presentation wasn’t enough to win their support.
The trustees voted 9-2 to invest $ 75 million in the new Oak Street fund. Schemel voted no on Oak Street, as did Senator John DiSanto, R-Dauphin.
The directors will review these investments and ratify their decisions at the next meeting of the SERS board of directors on 29 September.