At the September Board meeting, SDCERS reported a net return of 7.2% for Fiscal Year 2024. As of June 30, 2024, the trust fund’s assets totaled approximately $11.3billion. SDCERS’ annualized rate of return over the past 10 years is 6.7%, and its return since inception is 8.6%.
SDCERS’ net return for Fiscal Year 2024 of 7.2% was higher than its assumed rate of return (6.5%), but below the policy benchmark, which posted an 8.9% 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.
Differences in the portfolio’s composition relative to the policy benchmark, as well as managers’ selection of specific assets within specific asset classes, hurt SDCERS’ relative returns. Specifically, SDCERS did not meet its benchmark for FY 2024 primarily due to the Fund’s overweight to specific areas within Private Equity, which underperformed in a difficult fundraising and exiting environment.
While Private Equity enjoyed fantastic returns in 2021 and 2022, the asset class was challenged in 2023 and into 2024 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 9.7% due to valuation write-downs and a larger growth equity tilt.
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 the most recent10-year period ending June 30, 2024. Over the past 20 years, SDCERS’ return is in the top quartile 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 5 and 10 years.