Sunday, January 6, 2013

Investment Failure for NYCERS in FY-2012

The books for FY-2012 are closed. NYCERS’s closing balance for FY-2012 was $42.655B. This represents a 1.02% profit from the $42.409B closing balance for FY-2011. The profit is due to dividends and interest payments of $1.165B.

Unfortunately, there was is only a .58% increase in the valve of the NYCERS portfolio and there was a loss of $481.7MM in the fair value of its investments.

The S&P 500 Index, a broad gauge of the US stock market, increased from 1320 to 1365 during FY-2012, a 3.4% increase. If NYCERS had matched the S&P 500 Index, that loss would have been an increase of $1.442B.

The Russell 3000 index, a broader gauge of US companies, went from 790.00 to 803.63, a 1.73% increase. This index would have produced an increase of at least $734MM.

This poor performance was in spite of a $633MM jump in employer contributions which increased from $2.387B to $3.017B (Cash Statement shows only $2.661B)in FY-2012. While Albany in 2012 was radically cutting the pension benefit structure for all new employees, the NYCERS trustees were digging the whole deeper.

There was no press release from NYCERS acknowledging this disappointing investment result for 2012.

Hidden away on page 74 of NYCERS 2012 Comprehensive Financial Statement is the following comment on NYCERS financial highlights for 2012:

Financial Highlights — NYCERS’ net assets held in trust for benefits have increased by $246 million (.6%) from $42.4 billion at June 30, 2011 to $42.7 billion at June 30, 2012. The main reason for the modest increase was that the increase in value of the Plan’s bonds and private equity segments, along with the increase in employer contributions, were enough to offset the losses in the domestic and international equities markets.

It is unclear why NYCERS had losses in its domestic and international equities assets, since the domestic and international indexes were up for the year ending June 30, 2012. A subsequent NYCERS comment below appears to contradict the above quote.

Investment Performance — Investment performance results for fiscal year 2012 were generally consistent with related benchmarks. Domestic equities returned 2.23%, which significantly trailed the Russell 3000 benchmark of 3.84%. International equity holdings returned 13.62%, slightly below the MSCI EAFE Index of 13.83%. Fixed income securities returned 7.05%, significantly below the NYC Core Plus Five Index of 9.35%.

What is clear, however, is that there are serious questions about the investment decisions being made by the NYCERS trustees.

For the record, this is the first year NYCERS is reporting hedge fund investments with a value of $833MM or $929MM depending on which report you look at. The Comptroller reported this asset class with a -2.14% loss for the year ending June 30, 2012.

As a word of caution, while the market value of fixed income assets increased $632MM ($13.222B - $12.590B) based on prices from open market trading, the private equity assets were “reported” to have increased by $669MM ($5.925B - $5.256B). The private equity increase, unlike fixed income assets and employer contributions, is unverifiable and most probably exaggerated.

The last 12 years have been a disaster for NYCERS investments. The closing balance on June 30, 2000 was $42.824B. On June 30, 2012 it was still only $42.655B. While this represents an average annual profit of 3.71% due dividends and interest payments, the assets have been totally stagnant.

Some of this problem is due to financial crises beyond the trustees control but the trustees, like desperate gamblers, have raised the risk level of the portfolio over the last 12 years in a manner that is inappropriate for a prudent pension fund with a mandated $3.758B in annual benefit payments.

No one ever holds the trustees accountable for their actions.

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