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Public Pension Quarterly Q3 2021

Proceed with Caution

The positive combination of a resilient economic recovery, ongoing support from the Federal Reserve, and strong corporate earnings served as a tailwind for equity markets early in Q3. However, economic growth and inflation concerns resurfaced late in the quarter and may result in headwinds for risk assets moving forward.

While returns have been robust for risk assets recently and we remain constructive on public equities in the short-term, the combination of high valuations and the concerns we highlighted above, lead us to suggest that investors Proceed with Caution.

Historical Aggregate Funded Status

We estimate that, in aggregate, public pension asset returns were approximately -0.4% for the third quarter, resulting in the estimated aggregate funded status of our sample of plans rising 4% year-to-date through September 30, 2021.

Slight Drop in Aggregate Funded Status

 

Source: Boston College Center for Retirement Research, Goldman Sachs Asset Management as of Septmber30, 2021. All aggregate funded statuses based on estimated asset returns and liability growth.  For illustrative purposes only. Based off an estimate of a sample of 99 public pension plans’ market value returns and plan liabilities, with asset allocation data sourced from Boston College Center for Retirement Research; plan assets for these plans are approximately $3 trillion. 2. As of September 30, 2021; S&P 500 and Barclays Agg figures represent total returns.  Real estate performance represented by Dow Jones Global Select Real Estate Index.  Hedge fund performance represented by Proshares Hedge Replication ETF.

Market Perspectives: Do Bonds Still Belong in Public Plan Portfolios?

What can public plan sponsors do with their bond portfolios?

US public pension plans typically need to simultaneously maintain portfolio diversification, meet liquidity goals and hit actuarial EROA targets, but the ‘low for long’ state of interest rates combined with potential Fed tapering makes forward return estimates for public fixed income challenging.  We believe the following adjustments to fixed income portfolios may improve outcomes:

  • Reweight sector allocations within the Aggregate
  • Rethink and reorganize credit exposures
  • Reduct long only allocations in favor of alternative diversifiers.

Average Public Plan Allocation (%) to Fixed Income

 

Source: Goldman Sachs Asset Management. For illustrative purposes only. Equity assumed to be 100% US Large cap; Fixed income assumed to be 100% Barclays Agg; Private assets assumed to be 50% private equity and 50% private debt.

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The views expressed herein are as of 9/30/2021 and subject to change in the future. Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.

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