Friday, April 16, 2010

Low Risk/Low Cost versus High Risk/High Cost

In the 12 months ending December 31, 2009, the S&P 500 index gained 23.5%, moving from 903.25 to 1115.10. At the same time, NYCERS total assets rose by 17.5% from $30.4B to $35.7B driven by the same market rebound.

In particular, NYCERS holdings with its domestic stock indexed managers, and its government and corporate bond managers gained 22.3%, closing the year at $15.5B up from $12.7B. The interesting aspect of this is that NYCERS paid only $1.8M in management fees for this return.

At the same time, the rest of the portfolio returned 16.2% moving from $17.7B to $20.6B. For this performance, NYCERS paid $132.2M.

If the NYCERS trustees had invested the entire portfolio with the indexed stock and the government/corporate bond managers, the portfolio would have been worth $37.2B instead of $35.7B and NYCERS would have saved $130M in fees.

Managers Assets 12/31/2008 Assets 12/31/2009 Return % Fees - 2009
US Stock Index$9.651B$12.333B27.80%$295,108
US Government Bond$1.229B$1.007B-18.03%$261,158
US Corporate Bond$1.794B$2.161B20.48%$1,211,612
Total Portfolio
Actual Reported $30.396B$35.727B17.54%$134,000,000
Low Risk - Low Cost $30.396B$37.179B22.31%$4,000,000

This is a clear example how a low risk/low cost strategy actually is more profitable than a high risk/high cost strategy. NYCERS makes no attempt to review the effectiveness of its investment decisions.

A note of warning: NYCERS lost $387.2M on its real estate investments in 2009, a 32.7% loss.