The Washington State Investment Board (WSIB) returned 8.36% for its 12-month fiscal year ending June 30, despite volatile markets, beating its own expected rate of return by more than 80 basis points.
The pension plan shoots for an expected annual return of 7.5%.
The $108 billion WSIB’s top-notch results have a lot to do with the pension plan’s emphasis on private markets, said Gary Bruebaker, the system’s chief investment officer, in an email to CIO.
WSIB has one of the largest allocations to private equity of any pension plan in the US, with 21.5% of the portfolio devoted to the asset class. This is compared to the pension plan’s public equity’s portfolio, which makes up 32.5% of the pension plan, much less than the standard approximate 50% or more allocation found in many pension plans.
“Whenever private equity markets outperform public equity, as they did during this period of time, the Washington State Investment Board’s defined benefit retirement funds will be positioned to outperform most other state retirement funds,” Bruebaker said.
Pension plan statistics show that WSIB’s $23.2 billion private equity portfolio returned 12.26% for the fiscal year ending June 30. It beat its custom private equity benchmark of 5.2%.
In comparison, the pension plan’s $35.4 billion public equity’s portfolio returned 5.98% for the fiscal year ending June 30.. It did beat the plan’s custom equity benchmarks of 4.89% but the results were less than half of the private equity returns.
If public equities had done better, it would have gone the other way, and WISB’s bet on private markets might not have seemed as smart. Bruebaker said, “unfortunately,” when public equity outperform private equity, Washington State will underperform.
However, long-term private equity returns have beat public equities, putting Washington State on a winning streak. “Fortunately, in most markets this holds true, which often puts us on the right side of the math,” he said.
Not only did WSIB beat its own benchmark, it also beat the returns of most other large pension plans in the 2018-2019 fiscal year.
The two largest US pension plans—the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) had less robust returns in the fiscal year of 6.7% and 6.86%, respectively.
The Wilshire Trust Universe Comparison Service found that large US pension plans saw median returns of 6.92% for the 12-month fiscal year ending June 30.
Bruebaker said WSIB’s real estate portfolio also helped the pension plan with its returns in the 2018-2019 fiscal year. The $19.7 billion returned 8.66%, beating its 6.83% benchmark.
The Washington State real estate portfolio is also large, making up 18.3% of the portfolio. It has a structure consisting solely of captive real estate companies and partnerships that are ultimately controlled by the board.
“We have a unique and customized real estate portfolio, which is unlike any other program I am aware of, and which performs quite well at providing equity-like investment returns with lower risk and more stability,” he said.
The pension plan’s $22.9 billion fixed income portfolio also performed well in the fiscal year, returning 9.2%, compared to the pension plan’s 8.07% benchmark.
“When you add up these results,” Bruebaker said of the overall portfolio highlights, “it gives us excellent overall investment performance for the year.”
The one underperforming asset class for 2018-2019 was WSIB’s Tangible Assets Portfolio, which Bruebaker says was “the lowest performer for the fiscal year.” The $5.5 billion asset class returned 3.11% for the June 30 fiscal year compared to its benchmark of 5.87%.
“However, the portfolio is structured as a bond-plus return portfolio and is not expected to have the high returns that you typically see with an equity-like portfolio,” he told CIO. “It is more in line with a fixed income portfolio.”
Additionally, Bruebaker said, “the tangible assets portfolio is structured to serve as a diversifier to the portfolio with low correlation to the other assets in the retirement portfolio.”
“This means it will most likely underperform/outperform the benchmark and our commingled trust fund (CTF) at different times in the market cycle,” he said.
It’s not just the one-year returns that are strong for Washington State. On a three-, five and 10-year annualized basis, it returned 10.65%, 7.85%, and 10.31%, respectively. It beat its benchmark in all time periods.
Bruebaker credited WSIB’s investments “with the highest quality investment partners” as the reason for the pension plan’s successful financial performance.
WSIB has been more successful than other large pension plans in gaining entrance into private equity funds run by top-rated managers.
It was one of the first private equity investors in 1981 and has been able to maintain strong relations with private equity firms for almost four decades. Its private equity portfolio in relation to its overall investment assets is more than twice as large as pension plans like CalPERS and CalSTRS.
WSIB’s previous returns for the fiscal year ending June 30, 2018, were 10.04%.