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TRS responds to Ennis

Wednesday, Aug 31, 2022 - Posted by Rich Miller

* Crain’s Chicago Business

Pension expert Richard Ennis took a closer look at 24 such funds, including two big ones in Illinois. In a recent issue of the Journal of Portfolio Management, he wrote that they underperformed passive investing indexes by an average 1.4 percentage points, despite reporting a 0.3-point positive margin against benchmarks. Only one of the funds beat indexing over the 10-year period.

“This sharp disconnect raises questions about the usefulness of the funds’ performance reporting, as well as their heavy reliance on expensive active management,” he concluded. “Altogether, the results paint an unflattering portrait of the stewardship of public pension funds in the United States.”

Ennis, 78, is a retired chairman of industry consultant EnnisKnupp (acquired in 2010 by Hewitt Associates, now part of Aon) and a former editor of Financial Analysts Journal. He argues that funds set benchmarks too low and then overpay managers once performance is made to appear better than it is. He estimates that management fees average 1.3% of assets—roughly equaling the fund underperformance he measured.

Among the two dozen funds he surveyed, the $66 billion Teachers’ Retirement System of the State of Illinois was the fourth-worst performing, reporting an annualized return (8.3%) that was 3.23 percentage points lower than an indexed return. The gap was a negative 1.24 points, just above the median, for the $24 billion State Employees Retirement System of Illinois. For the State Universities Retirement System, which Ennis examined at Crain’s request, the shortfall was 1.9 points.

* Crain’s follow-up editorial

TRS in particular came out looking especially bad in Ennis’ analysis. Its active management record “is among the worst of the approximately 50 large funds in my dataset,” Ennis told Crain’s Steven R. Strahler. “The excess return of -3.23% for TRS means that it underperformed passive investment by that margin annually for 10 years.”

So what would Ennis do to hold public pensions more accountable and set them on a path toward healthy funding levels?

“I would bring about the type of reform initiated in the private sector in the wake of the Studebaker debacle,” Ennis said, referring to the epic implosion of Studebaker-Packard, which closed its South Bend, Ind., plant in 1963 and subsequently slashed pensions for roughly 4,000 workers. That collapse ultimately inspired the Employee Retirement Income Security Act, signed into law by President Gerald Ford a decade later. That law, among other things, established minimum funding requirements for corporate pension plans. It also required that liabilities be reported at their market value. “The reform played out over decades and in piecemeal fashion,” Ennis noted, “but these are the two pillars that set apart public and private plan funding: assured funding and liability valuation.”

Illinois’ public employee pension plans could certainly use a lot more of both.

* I asked TRS for a response to the original article. Here’s Dave Urbanek…

The conclusions drawn by Mr. Ennis are limited to the subjective conditions, benchmarks and timeframe he selected to develop his analysis.

Due to TRS’s under-funded status, the System’s primary objective is to protect member assets against large market drawdowns caused by market volatility, such as we have seen this year.

Market returns are asymmetric. As an extreme example, a 50% loss requires 100% gain to break even. With this in mind, TRS believes the most prudent portfolio is a diversified one that seeks to participate in the upside of the market but is also positioned to better protect assets in times of high market volatility.

The analysis Mr. Ennis performed is limited in scope. The 10-year period used within Mr. Ennis’ research ended in 2020 and is predominantly a period of very strong equity returns. More importantly, it includes a period where a select few U.S.-based high-growth technology companies, such as Apple and Google, dominated the returns in passive equity index funds. While TRS holds large positions in passive index funds and such companies, the System is mindful to diversify the volatility risk such exposures can have on the total portfolio.

Even during this high growth investment environment, the overall TRS portfolio maintained a performance ranking in the top 25th percentile among U.S. public pension systems during that 10-year horizon ending in June 2020. In that period, the System ranked in the 22nd percentile of 193 funds with more than $1 billion in assets, and in the 25th percentile of 33 funds with more than $25 billion.

Through June 30, 2022 and during the environment of market volatility, the TRS diversified strategy performed as intended. As significant market volatility, rising inflation, and interest rate increases hit in early calendar year 2022, the TRS portfolio performed very well and ranked in the top 10% of the broad peer universe for the first six months of 2022.

For the fiscal year ended June 20, 2022, TRS’s -1.2% return, net of fees, compares very favorably to the median public plan’s return of -7.1%. Further, the TRS portfolio also maintains its top quartile rankings for annualized 5, 10, and 20-year periods that ended on June 30, 2022.

TRS is managing the assets of our 432,000 members using a diversified approach so that we can pay retirement benefits as required by law. For more than 80 years, TRS has paid all benefits on time and in full.

In fiscal year 2022, TRS paid more than $7 billion in benefits to approximately 128,000 beneficiaries. TRS will continue to position its $63 billion investment portfolio to ensure it is able to fulfill its stated mission to its members and pay all benefits on time and in full.



  1. - H-W - Wednesday, Aug 31, 22 @ 2:40 pm:

    I am speaking above my pay grade here, but if Ennis reviewed 24 funds, and concluded the TRS funds performed at the bottom, and indeed performed worse than passive investment indexes, then it seems to me the TRS response by Urbanek ignores the findings that TRS is doing worse than most other pension funds.

    Am I missing something here?

  2. - Numbers Guy - Wednesday, Aug 31, 22 @ 2:48 pm:

    If TRS only lost 1.2% in FY2022 (when the market was down about 10%), they outperformed the market by almost 9%. That is pretty impressive to me. I’ve been waiting to hear how the funds did, and this is the first I heard. When the funds do well, it always seems to be easier to find out how they did.

  3. - 47th Ward - Wednesday, Aug 31, 22 @ 2:55 pm:

    Maybe they could put all of the pension funds into a blind trust? The Governor is reportedly earning boatloads of returns using this strategy.

    Just kidding. I think pension fund returns over 8% should be welcome news. But what do I know?

  4. - thechampaignlife - Wednesday, Aug 31, 22 @ 3:18 pm:

    I am a big proponent of index funds, but I am also sympathetic to the cashflow constraints TRS faces due to underfunding. If they need $10B in stable assets to pay benefits during a market downturn, and they only have $40B in assets, that is 25% sitting idle. If they were closer to fully funded at say $90B, only 11% would be idle.

    So the response should be “Yes” to index funds and “Yes” to full funding. Until both of those are met, returns will continue to underperform.

  5. - Back to the Future - Wednesday, Aug 31, 22 @ 3:23 pm:

    Richard Ennis is a very well respected professional in the investment business.
    His review of TRS was based on the TRS returns and verified market returns.
    This is not complex stuff. Based on the comparison of. the numbers, TRS has been poorly managed and taxpayers have had to kick in tens of millions of extras dollars each year because of the job the Trustees and staff has been doing for at least the last decade.
    Really tired of the “spin” approach Mr. Urbanek is putting forward.
    Sometimes just taking responsibility for mistakes can be the first step in dealing with a problem.

  6. - Juvenal - Wednesday, Aug 31, 22 @ 3:42 pm:

    Tried to find the journal article and searched but didn’t see it.

    If anyone has a link or a title, that would be helpful.

    My first question is always “Who paid for the study?”

    Mr. Ennis is was once highly respected in his field but is now retired. He’s exactly the kind of person you would hire to do an “independent study” if you were an advocacy group who was trying to make pensions an issue in the election.

    Said advocacy group would then pitch the study to a friendly news outlet.

    I would like to see if the published study reveals who paid for it.

  7. - Back to the Future - Wednesday, Aug 31, 22 @ 4:07 pm:

    I saw the article in Crain’s. It was published in a Professional Journal that is mentioned in the Crain’s story.
    Hope this helps.

  8. - ESR - Wednesday, Aug 31, 22 @ 4:22 pm:

    To paraphrase TRS, the fund is so disastrously underfunded that we can’t afford to properly invest for maximum long term returns because the short term swings would risk the immediate solvency of the fund. In other words, it takes money to make money and we don’t have enough of it, which necessitates investing in such a manner as to ensure we never will.

  9. - DuPage - Wednesday, Aug 31, 22 @ 4:46 pm:

    TRS- Wasn’t that the one that Rauner had his own employee directing funds to Rauner’s investment company?

  10. - Anyone Remember - Wednesday, Aug 31, 22 @ 6:53 pm:

    ” … if you were an advocacy group who was trying to make pensions an issue … .”

    There are legions of such people who are ok with a 67 year old fireman who’ll work until 71 as his/her 401(k) got turned into a 201(k) by Gordon Gekko.

  11. - Blake - Thursday, Sep 1, 22 @ 8:22 am:

    I’ve noticed in the past the funds returns underperform index funds, but when I emailed my State Rep about it, he didn’t answer.

  12. - Nathan - Thursday, Sep 1, 22 @ 10:57 am:

    Here is some basic financial planning principles. When you are young in your 20s or 30s, you can put all of your investments in the stock market (which is more volatile) because you have a long time to make up any potential losses. However, the closer you get to retirement, you have to allocate more and more assets to lower performing but safer fixed income investments. The TRS does have new younger teachers in it, but it also has to have current money to pay out retired or soon to be retired teachers. It can’t fully invest in the stock market because of that. So therefore it will always underperform the stock market by some amount. It would not be prudent otherwise.

Sorry, comments for this post are now closed.

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