RICHMOND — It may not look like much, but the Virginia Retirement System‘s strategy of diversifying its investments paid off with a 0.6% return last year in a brutal market for indexed stocks and bonds.
The $101.2 billion retirement trust fund estimated that it outperformed passively managed, indexed investments by 10% in the fiscal year that ended on June 30, using gains from private equities and real assets to compensate for losses in public equities and fixed income investments.
“I applaud VRS for being diversified like they have,” said Kent Engelke, chief economic strategist at Capital Securities Management in Richmond. “It’s really great. Accolades to them. They’ve been vindicated.”
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The return fell far below the 6.75% assumed rate of return that the retirement system uses to calculate contribution rates by state and local government employers, but VRS said its investments outperformed the measure over the long term – over three, five and 10 years.
“We registered a positive return by following VRS’ long-term strategy of diversification while taking advantage of strong private markets,” said Chief Investment Officer Ronald D. Schmitz, who will retire at the end of this year.
Schmitz acknowledged that the system’s return on investment – which pays most of the costs of retirement benefits – was “muted” in the fiscal year, compared with the record 27.5% it earned in the fiscal year that ended in mid-2021. The fund lost $5 billion in value from the end of March to the end of June.
However, he said the VRS total fund “outperformed passively managed stock and bond indices by over 10%,” using an internal investment team that actively manages about one-third of the system’s total portfolio.”
Engelke, at Capitol Securities, said investors have become over-reliant on big returns from indexed funds for stocks and bonds that don’t require active management.
“Your more active strategy, like the VRS, is going to continue to out-perform because they’re not doing what everybody else is doing,” he said.
VRS outperformed expectations primarily by investing in private equities, which grew 27.4%; real assets, up 21.7%; and private investment partnerships, up 17%. Those gains offset a 14.8% drop in return from public equities and 10.6% from fixed income investments, such as bonds.
The retirement system’s investment portfolio is diversified among: $29.9 billion in public equity; $12.9 billion in fixed income, $14.5 billion in credit strategies, $15.1 billion in real assets, $19.0 billion in private equity, $2.6 billion in private investment partnerships and $3.6 billion in public strategies.
The VRS is the 17th largest public or private retirement system in the United States, with 751,471 active or retired members, including state employees, teachers and local government employees.
“VRS remains in a solid position to support our current and future retirees while maintaining stable contribution rates for our employers,” VRS Board Chair A. Scott Andrews said Thursday.
“In a year scarred by inflation, war, supply chain issues and other disruptions, the VRS investment staff achieved a remarkable 6% of added value above the benchmark, which translates to hundreds of millions toward the bottom line of the VRS trust fund,” Andrews said.