Rudy Fichtenbaum on STRS investment returns

From Rudy Fichtenbaum

March 4, 2021

Subject: STRS investment returns

It is very hard to find a long time series on STRS rates of return. Annual reports on the STRS website are available only back to 2016 and they lock them so you cannot cut and past numbers or text. The same Annual reports on the Auditor’s website only go back to about 2000. They are unlocked i.e., you can cut and paste but the early reports don’t show investment rates of return. STRS started showing rates of return in 2002. So much for transparency.

I have taken the rates of return published in STRS Annual Financial Statement and compared them to what they would have been if STRS had invested 60% in the S & P 500 and 40% in AAA Corporate Bonds. I know staff and some board members may claim that such a simple portfolio with such a high proportion in stock would be too risky. But the expected returns for Alternate Investments is about the same as Equity investments and the standard deviation for my hypothetical portfolio is lower than the standard deviation for STRS’s actual rates of return.

I calculated that the difference in the compound annual rate of return for my portfolio and the STRS actual returns is 0.52%. I know that seems small but when you compound the differences the extra 0.52% adds up. Assuming this extra 0.52% were added to the actual percentage increase in the Fiduciary Net Position (the denominator in the funded ratio) The funded ratio in 2020 would have been 83.2% instead of 75.5%.

Here is a graph showing how the differences grow over time. To make it easier to see the differences I started the graph at 40% instead of 0. (Starting at 0 doesn’t change the result but it makes it harder to visually see the difference in a graph.)

I have another series using the Total Vanguard Stock Fund for Institutional Investors and the Total Bond Market for Institutional Investors and the difference is even greater (again with a 60/40 portfolio). But I haven’t had a chance to make all of the calculations to make a graph using this data. In the future I plan to add international data, although international equities have lagged domestic equities for nearly 20 years. Working with Vanguard data is a little more complicated because it is annual data so I had to estimate returns for fiscal years. The other data that I used for the graph is actually for fiscal years that start July 1 and end June 30.

What this says is that if STRS had done a better job investing, e.g.,using index funds instead of trying to “beat the market”, our funded ratio would likely would have been nearly at the level needed to restore the COLA, under current STRS Board policy. 

Rudy Fichtenbaum is Professor Emeritus of Economics at Wright State University and a candidate for a retired seat on the STRS Board.