The $35.1 billion Pennsylvania State Employees’ Retirement System (Penn SERS) reported an 11.1% investment return net of fees for the year that ended Dec. 31. That follows an 18.8% return the previous year and falls short of its benchmark’s return and a 60/40 index fund, which gained 13.5% and 13.6%, respectively.
“The past year, 2020, brought an array of challenges, primarily resulting from the COVID-19 pandemic,” Penn SERS Executive Director Terrill Sanchez and Chief Financial Officer (CFO) Sara McSurdy wrote in the fund’s annual comprehensive financial report. “Thanks in part to our investment strategy and the asset allocation adopted in December 2019, SERS finished 2020 on a positive note.”
The fund reported three-, five-, and 10-year annualized returns of 8.0%, 9.1%, and 8.0%, respectively, below its benchmark’s returns of 9.1%, 9.7%, and 8.8% over the same time periods, respectively.
Over the longer term, the portfolio’s 15-, 20-, and 25-year annualized returns were 6.5%, 6.4%, and 7.9% net of fees, respectively. Benchmark comparisons over the long term were not available. The unfunded actuarial accrued liability for Penn SERS is $22.4 billion, and it has a funded ratio of 59.4%.
Emerging market equities and US equities were the top performing asset classes for the portfolio, returning 24.5% and 21.3%, respectively. They both beat their benchmark returns of 18.4% and 20.9%, respectively.
Private equity returned 18.4%, ahead of its benchmark, which returned 13.1%, while Treasury inflation-protected securities (TIPS) gained 11% for the year. International developed markets equities returned 9.6%, followed by private credit and fixed income, which returned 9.1% and 5.8%, respectively. Real estate was the portfolio’s worst performing asset class, returning 2.1%, although it was still well ahead of its benchmark’s return of 0.3%.
The fund’s target asset allocation is 26% in fixed income, 25% in US equities, 14% in private equities, 13% in international developed markets, 8% in real estate, 4% in emerging markets equities, 4% in private credit, 4% in TIPS, and 2% in cash.
The fund’s top US equity holdings are Apple, Microsoft, Amazon, Facebook, and Google owner Alphabet’s class C shares. Rounding out the top 10 are Tesla, Alphabet’s A shares, Johnson & Johnson, Berkshire Hathaway, and Mastercard. And the largest non-US equity holdings in the portfolio are Brookfield Asset Management, Linde, Accenture, Medtronic, and Taiwan Semiconductor Manufacturing Corp. They were followed by Keyence, LVMH Moet Hennessy Louis Vuitton, Shin-Etsu Chemical Co., AIA Group, and CSL Ltd.
Penn SERS recently lost CIO Seth Kelly, who resigned from his position last month after less than a year on the job. The fund’s board appointed Deputy CIO James Nolan as acting CIO while it searches for Kelly’s permanent successor.