Ohio STRS: Trade-Offs, Alternative Assets, and More

Reduce complexity to improve governance, but the investment results may ultimately be the same

Mary Pat Campbell

Jul 19, 2024

Transcript

In light of the ongoing anger of Ohio STRS participants over the removal of COLAs (cost-of-living adjustments) in 2017, and the plan’s fairly typical asset allocation for a public plan (though better-than-peers results), I look at two recent research papers calling into question the use of alternative assets in public pensions. I have a different point to make: that the assets are not really what is at issue. The pension promises are.

Ohio STRS: Public meeting notice for July 19, 2024

Last item: Investment Committee Meeting Presentation

Slide exhibits I referenced:

Boston College Paper: How Do Public Pension Plan Returns Compare to Simple Index Investing?

June 2024, by Jean-Pierre Aubry and Yimeng Yin

Key Findings:

Public pension plans are increasingly relying on alternative investments and active management.
But how does plan performance compare to a simple 60/40 index over various periods from 2000-2023?
Over the full period, plan returns are virtually identical to the simple index strategy, but plans have done much worse since the Global Financial Crisis.
If the current approach doesn’t yield higher long-term returns, a strong argument can be made for sticking with a simple, transparent strategy.

Here are the key graphs from the report:

Richard Ennis Paper

Girard Miller: How ‘Alternative Investments’ Are Dragging Down Pension Performance

Commenting on the Ennis paper, in case you can’t download from SSRN.

SSRN Link: How Hidden Costs Undermine Public Pensions in the US

Abstract

Public pension plans in the US incur exorbitant asset management costs. Most spend a lot and get nothing for it. High cost has hindered efforts to realize their actuarial return requirement. It has resulted in poor performance pretty much across the board. And yet, very few plans provide a full accounting of the costs they incur. Some still fail to net all their investment expenses from the returns they report. High cost is the Achilles heel of the public pension system in the US. It’s time to bring costs down, way down.