SDCERS' Final Investment Return for FY 2023

Date: Sep 15, 2023


At the September Board meeting, SDCERS reported a net return of 5.2% for Fiscal Year 2023. As of June 30, 2023, the trust fund’s assets totaled approximately $10.6 billion. SDCERS’ annualized rate of return over the past 10 years is 7.7%, and its return since inception is 8.7%.
SDCERS’ net return for Fiscal Year 2023 of 5.2% was less than its assumed rate of return (6.5%), and also below the policy benchmark, which posted a 7.6% return for the year. The policy benchmark is a measure of how the Total Fund would have performed if the actively managed public portions of the portfolio had been completely passively invested in index funds, and if the private portions of the portfolio achieved stated benchmark returns. Allocations away from the policy benchmark, in other words, relative over- and underweights to specific asset classes, as well as selection effects within specific asset classes, hurt SDCERS’ relative returns. Specifically, SDCERS did not meet its benchmark for FY 2023 primarily due to the Fund’s overweight to Private Equity, which underperformed other asset classes on a relative basis, and underperformance of the Opportunity Fund investments. The Opportunity Fund underperformed its benchmark by 13.9%, and the majority of this underperformance is explained by the difference between the policy benchmark return, which is a mix of global equity and fixed income, and the strategy specific benchmark returns.
As of June 30, 2023, SDCERS benched the performance of the Opportunity Fund to a mix of 78% global stocks and 22% U.S. Fixed Income. This mix was used to represent the opportunity cost of allocating assets to the Opportunity Fund. Going forward, the Opportunity Fund will be benchmarked to indices that more closely align with the type of investments held, which should control tracking error to the policy benchmark. Looking at the performance of the Opportunity Fund against the trend following benchmark, the Managed Futures allocation underperformed as a result of trend reversals in fixed income markets in the first quarter of 2023. SDCERS’ trend-following managers were short in fixed income when rates rallied on the heels of the regional banking crisis, hurting relative returns.
While Private Equity enjoyed fantastic returns in 2021 and 2022, the asset class was challenged in late 2022 and into 2023 as a result of the Fed’s interest rate hiking cycle, which created a less favorable environment for Initial Public Offerings amidst higher borrowing costs. SDCERS’ overweight to private equity hurt returns from both an allocation and selection effect, as private equity as an asset class underperformed, and also from a selection effect, as private equity holdings within SDCERS’ portfolio underperformed the private equity benchmark by 2.9% due to valuation write-downs.
Performance can also be measured in comparison to returns of other public pension plans, though it is important to remember that different plans have a variety of circumstances impacting their asset allocations and, in turn, their return targets. SDCERS compares very favorably against its peers over longer time periods – posting returns in the upper second quartile of the universe over rolling 3-, 5-, and 10-year periods ending June 30, 2023. Over the past 20 years, SDCERS’ return is in the top 4% of similarly-sized public pension plans. SDCERS’ risk-adjusted return, which takes into account reward for risk undertaken, is in the top quartile compared to similarly-sized public pension plans over the past 3, 5, and 10 years.

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