Saturday, December 19, 2020

NYCERS Profit from 2016 to 2020


Every year the Comptroller reports on a quarterly basis the rate of return for the NYCERS portfolio. NYCERS’s fiscal year ends on June 30 each year.

Based on the Comptroller’s figures NYCERS has averaged 6.78 % (net of fess) over the last five years. Part of this figure, 2.96%, is created by an inflow of $8.928B in dividends and interest received during the five years.

The rest of the return is created by an increase in the value of the portfolio. The June 30 value of NYCERS’s assets was $69.910B. The starting value in 2016 was $54.289B. That is a 28% increase over the five years. As reference the S&P 500 Index increased from 2063.11 to 3100.29, a 50% increase. 6.78% may seem like an acceptable figure. But what if you could easily increase that return, safely and at a lower cost. There has, unfortunately, never been any comparative analysis of NYCERS’s investment strategy to determine its relative efficiency.

A Better Way

Out of the 40 sub classes of NYCERS's investment strategies, some combination of classes can consistently produce a better long-term return than 6.78%. The NYCERS Russell 1000 Index (stocks) managers have averaged 9.83% (net of fees) over the last five years. The June 30 value of this class was $19.256B

The NYCERS Structure Fixed Income (bonds) managers have averaged 5.47% (net of fees) over the last five years. The June 30 value of this class was $13.427B.

If you calculate a 60/40 stock/bond return using these figures, you will arrive at an 8.09% average rate of return over the last five years. These two classes generate the bulk of the dividends and interest received by NYCERS during the year.

Another aspect of using only this combined class strategy is that you would save at least $750M in fees over the five years.

Fantasy Island

There are three of NYCERS's sub classes of investment strategies, private equities, real estate, infrastructure, that are highly questionable.

The Comptroller has reported the total value of these classes to be $9.272B as of June 30, 2020. That is 13.45% of the total $68.91B NYCERS portfolio. The $9.272B amount is not verifiable, just a guess.

He quoted the 5-year average rate of return for these classes (gross of fees) as: 9.56% (PE), 11.07% (RE), and 11.93% (IF). These rates of return are also not verifiable, just guesses.

These investments do not pay dividends nor interest and incur most of the $750M in fees that would be saved with the two-class strategy. There is, however, a constant flow with these investments, cash going out and cash coming in. Unfortunately, this flow is not reported in the financial statements. I suspect if this cash flow were reported for the last 23 years, there would be changes in the law governing the allowable investments for the city’s pension investments.