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    GSAM Insights

     

    CLAWING BACK

    Public Pension Quarterly 1Q 2023

    May 25, 2023  |  8 Minute Read

    Quarterly Snapshot

     

    Market Performance1

     

    Source: Goldman Sachs Asset Management. As of March 31, 2023.

     

     
    • Global equity markets moved higher in the first quarter as the Fed inched closer towards the end of its hiking campaign. Non-US developed market equities outperformed, bolstered by a warmer winter in Europe, earlier-than-expected reopening in China, and weaker US dollar.

    • In the US, first quarter earnings proved to be better-than-feared. Specifically, consensus expected a -7% S&P 500 EPS decline, year-over-year, with latest estimates tracking for just a -3% decline. Markets continued to prioritize balance sheet strength amid a tightening credit backdrop.

    • Fixed income markets also stabilized as the market softened monetary policy expectations for 2H 2023, especially in response to financial sector stress. Higher starting yield levels drove a rebound in the US Agg.

    • We estimate returns for public pension plans were 4.7% in the first quarter of 2023, which helped to boost the aggregate funded status of the system to 78% as of the end of 1Q 2023. While this represented a 3-percentage point increase during the quarter, it is still below the level from 1Q 2022. estimated 2.8%.

     

     

    Historical Aggregate S&P 500 Funded Status2

     

    Source: Boston College Center for Retirement Research and Goldman Sachs Asset Management. As of March 31, 2023. Funded status reflects estimated asset returns and liability growth.

     

     

    In the News

    Pension Industry Updates

     

     

    NASRA Highlights Continuing Decline in Return Assumptions

    • The National Association of State Retirement Administrators (NASRA), in a March 2023 Issue Brief, noted that the average public pension plan investment return assumption declined again in fiscal year 2023 to 6.93%.

    • While some corporate pension plans have recently been raising their return assumption in light of higher interest rates and upwardly revised capital market assumptions for many asset classes, public plans have continued to lower their forecasts.

    • NASRA’s Issue Brief noted that some public pension plans have put in place systematic policies to reduce the return assumption either due to actual results exceeding expectations or simply due to the passage of time. This has likely played a role in the average return assumption continuing to decline.

     

     

    City of Chicago Makes Voluntary Advance Pension Payment

    • In early January, the City of Chicago made a $242 million voluntary pension payment to the City’s four pension funds. This follows the City making actuarially determined contributions in 2022.
    • Changes to the City’s pension contribution policies have played a role in rating agency upgrades and outlook changes over the past year.

     

     

    Notable Pension Plan Portfolio Updates

    Many public pension plans remain focused on building out their allocation to private market securities. Nonetheless, 2022’s financial market volatility has resulted in some plans seeing their actual allocation to these positions exceed strategic targets due to the denominator effect. We highlight below certain recent actions taken by some plans with respect to their allocations to private markets.
     

    • At its January 2023 Board of Trustees meeting, the Ohio Public Employees Retirement System (OPERS) approved a new 1% allocation to Private Credit in conjunction with an overall increase to Alternatives. The increase in the allocation to Alternatives resulted in a decrease to both public equity and fixed income targets.

    • In February 2023, the Massachusetts Pension Reserves Investment Management (Mass PRIM) Board increased its target allocation to Private Equity by 1 percentage point. Unlike other institutional investors grappling with actual allocations to private assets in excess of strategic targets given the denominator effect, Mass PRIM’s private equity allocation remains within its allowable range which enabled it to effectuate the increase.

    • At its February 2023 Investment Committee meeting, the Maryland State Retirement and Pension System discussed its actual weighting to Private Equity of 21.6% being in excess of its policy target of 16%. Consequently, the Committee discussed lowering the pace of annual commitments to this asset class.  

     

     

    Portfolio Manager Perspectives

    In our spring edition of Perspectives, Elizabeth Burton, Client Investment Strategist at Goldman Sachs Asset Management, discusses the various challenges CIOs face in the current volatile investing environment and potential solutions to address these hurdles.

     

     

    Elizabeth Burton

    Client Investment Strategist, Client Solutions Group

    Elizabeth Burton

    How big an issue are the numerator and denominator effects for CIOs, and how are they addressing them?

    The numerator and denominator effects have been a frustrating recent hurdle in portfolio construction, particularly for investors with tight strategic asset allocation (SAA) policies and narrow tolerance band limits around those policies. We’ve seen some Limited Partners adjusting their policies to allow for additional leeway, but this has left CIOs with challenges pacing investments into private markets and, in a bind, being forced to raise liquidity—especially for pensions with high payout ratios of 2% or more. The problem is most acute for those with large, mature allocations to private equity and/or low allocations to real assets and private credit. In nearly all cases teams have initially endeavored to work with stakeholders (i.e., boards and consultants) to tackle these short-term constraints by adding wider tolerance bands or by shifting asset allocation targets. Other considerations being discussed include portfolio lines of credit, collateralized financing, portfolio realignment, leverage, and cash flow matching.

     

    How are investors evaluating committing capital to new funds vs. preserving liquidity?

    CIOs are taking the intermittent liquidity, which is being returned through redemptions, distributions, or public markets rebounding and recommitting to private markets and, in some instances, liquid alternatives. On the former, we are seeing 50% haircuts to re-ups with existing partners and a rationing of key relationships. From an SAA angle, many CIOs are considering starting a real asset program if one isn’t already in place, or alternatively increasing the commitment to real assets as an inflation hedge. We believe it is important for investors to spend more time in foreign markets, given the heightened interest in single-country funds in both public and private markets and the opportunities for alpha ex-US arising from China's reopening, diverging central bank policies, deglobalization and geopolitical tensions.

     

    How are investors thinking about and measuring liquidity, and the spectrum of liquidity?  Where do things get uncomfortable?

    While most investors have liquidity on hand, they do not tend to think of their public markets portfolios as liquidity providers – potentially because it is difficult to rely on something that can experience 30% drawdowns for liquidity. There has been heightened focus around augmenting efficiency in public markets and allocating to more cash-efficient strategies, but for many stakeholders this is a long educational period resulting in slower implementation.

     

    How are investors thinking about and measuring liquidity, and the spectrum of liquidity?  Where do things get uncomfortable?

    While most investors have liquidity on hand, they do not tend to think of their public markets portfolios as liquidity providers – potentially because it is difficult to rely on something that can experience 30% drawdowns for liquidity. There has been heightened focus around augmenting efficiency in public markets and allocating to more cash-efficient strategies, but for many stakeholders this is a long educational period resulting in slower implementation.

     

    In an environment like this, where prior experience may not be a perfect guide, what characteristics will help CIOs to successfully navigate their portfolios and teams?

    I cannot emphasize enough the value of building a personal board of directors; whether it’s through your staff, your internal board, or your external managers, make sure you are seeking out a variety of voices. The synergy that comes from diversity of thought is invaluable. This is like building an athletic team – every recruit should not bring the same strengths to the table, and they should lean into their strengths when investing. If a team is excellent at assessing co-investments in credit, lean into that niche and seek opportunities there. If a portfolio has excellent cash management, leverage that and be nimble. If there is no obvious advantage in any one asset class, then leverage the global partners that do have a sustainable, repeatable edge in those markets.

     

    This is also an ideal environment to leverage external partnerships to outsource talent across a broad spectrum – investment analysis, investment advice, staffing, human resources, logistics, organizational restructuring, general consulting, etc. Now more than ever, it is critical to start and maintain dialogue with investors spanning the globe. Lastly, leveraging technology often requires up-front time, attention, and resources, but has a very high potential return on investment (ROI) and can lead to exponential rewards in the long run.

     

     

    Summary of Tactical Asset Class Views

     

    Source: Investment Strategy Group. Asset class views as of May 2023. This material represents the views of the Investment Strategy Group (“ISG”) and is part of the Asset & Wealth Management Segment of Goldman Sachs and is not a part of Goldman Sachs Global Investment Research ("GIR"). Information and opinions expressed by individuals other than Goldman Sachs employees do not necessarily reflect the view of Goldman Sachs. Goldman Sachs does not provide accounting, tax or legal advice to its clients. It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed herein may vary significantly from those expressed by Goldman Sachs Asset Management or any other groups at Goldman Sachs. Investors are urged to consult with their financial advisers before buying or selling any securities. The information contained herein should not be relied upon in making an investment decision or be construed as investment advice. Goldman Sachs Asset Management has no obligation to provide any updates or changes.

     

     
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    Public Pension Quarterly 1Q 2023: Clawing Back

     

     

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    1 Figures represent total returns. Real estate performance represented by Dow Jones Global Select Real Estate Index. Hedge fund performance represented by HFRX Global Hedge Fund Index.

    2 Sample reflects approximately $3 trillion in total assets across over 130 US state and local plans in the Boston College Center for Retirement Research public pension dataset. Past performance does not guarantee future results, which may vary. “Fed Pivot” refers to the end of a hiking cycle, i.e., when the Federal Reserve reaches its peak Fed Funds Rate for the cycle.

     

    RISK CONSIDERATIONS

    Equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.

    Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates.

    High yield fixed income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment grade fixed income securities.

    Investments in foreign securities entail special risks such as currency, political, economic, and market risks. These risks are heightened in emerging markets.

    An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate.

    Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

    Alternative investments often are speculative, typically have higher fees than traditional investments, often include a high degree of risk and are suitable only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase volatility and risk of loss.

    Alternative Investments by their nature, involve a substantial degree of risk, including the risk of total loss of an investor's capital. Fund performance can be volatile. There may be conflicts of interest between the Alternative Investment Fund and other service providers, including the investment manager and sponsor of the Alternative Investment. Similarly, interests in an Alternative Investment are highly illiquid and generally are not transferable without the consent of the sponsor, and applicable securities and tax laws will limit transfers.

    GENERAL DISCLOSURES

    THESE MATERIALS ARE PROVIDED SOLELY ON THE BASIS THAT THEY WILL NOT CONSTITUTE INVESTMENT ADVICE AND WILL NOT FORM A PRIMARY BASIS FOR ANY PERSON’S OR PLAN’S INVESTMENT DECISIONS, AND GOLDMAN SACHS IS NOT A FIDUCIARY WITH RESPECT TO ANY PERSON OR PLAN BY REASON OF PROVIDING THE MATERIAL OR CONTENT HEREIN. PLAN FIDUCIARIES SHOULD CONSIDER THEIR OWN CIRCUMSTANCES IN ASSESSING ANY POTENTIAL INVESTMENT COURSE OF ACTION.

    THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

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    Goldman Sachs does not provide legal, tax or accounting advice, unless explicitly agreed between you and Goldman Sachs (generally through certain services offered only to clients of Private Wealth Management). Any statement contained in this presentation concerning U.S. tax matters is not intended or written to be used and cannot be used for the purpose of avoiding penalties imposed on the relevant taxpayer. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the U.S. federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.

    The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.

    Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

    The views expressed herein are as of 5/24/2023 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.

    This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

    This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice.

    Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

    Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

    This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. This material is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon the client’s investment objectives.

    Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. It should not be assumed that investment decisions made in the future will be profitable or will equal the performance of the securities discussed in this document.

    Company names and logos, excluding those of Goldman Sachs and any of its affiliates, are trademarks or registered trademarks of their respective holders. Use by Goldman Sachs does not imply or suggest a sponsorship, endorsement or affiliation. 

    Index Benchmarks

    Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

    The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.

    Standard & Poor’s (S&P) 500 Index is Standard & Poor's Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices.

    Bloomberg US Aggregate Bond Index represents an unmanaged diversified portfolio of fixed income securities, including US Treasuries, investment grade corporate bonds, and mortgage backed and asset-backed securities.

    This material represents the views of the Investment Strategy Group (“ISG”) in the Consumer and Wealth Management Division of Goldman Sachs. It is not a product of Goldman Sachs Asset Management nor financial research or a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed herein may vary significantly from those expressed by Goldman Sachs Asset Management or any other groups at Goldman Sachs. Investors are urged to consult with their financial advisers before buying or selling any securities. The information contained herein should not be relied upon in making an investment decision or be construed as investment advice. Goldman Sachs Asset Management has no obligation to provide any updates or changes.

    Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. Any allocation advice and/or recommendations included in this document are prepared by the ISG team. Allocation advice and recommendations are independent from any Goldman Sachs Asset Management products and services.

    Neither MSCI nor any other party involved in or related to compiling, computing, or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability, or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

    Canada: This presentation has been communicated in Canada by GSAM LP, which is registered as a portfolio manager under securities legislation in all provinces of Canada and as a commodity trading manager under the commodity futures legislation of Ontario and as a derivatives adviser under the derivatives legislation of Quebec. GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts in Manitoba and is not offering to provide such investment advisory or portfolio management services in Manitoba by delivery of this material.

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    Date of First Use: May 25, 2023. 319453-OTU-1803645.

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