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PENSION AND ENDOWMENT RISK PROFILES SHOULD BE LOOKED AT CLOSELY GIVEN POTENTIAL
MARKET DISRUPTION CAUSED BY SILICON VALLEY BANK, ACCORDING TO PROPRIETARY
RESEARCH FROM MPI
--------------------------------------------------------------------------------
News provided by
Markov Processes International, Inc.
Mar 23, 2023, 10:15 ET
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After initial projections on pension and endowment performance from MPI's
Transparency Lab, the industry must consider both overall performance and
potential risk, given potentials for duration and liquidity mismatches.
SUMMIT, N.J., March 23, 2023 /PRNewswire/ -- While pension and endowment funds
appear to have rebounded from their losses in FY2022, industry participants
should focus more on assessing risks stemming from potential duration bets, as
shown in the collapse of Silicon Valley Bank, and also on measuring potential
markdowns in illiquid private assets, according to projections from Markov
Processes International, Inc. ("MPI"), a leading independent FinTech provider of
software and services for analyzing investment performance and risk.
Continue Reading
Pensions and endowments have more risk than you may think, amid the current
banking crisis.
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While overall performance of pensions is largely similar, the risk to achieve
those returns varies widely.
"Given the current market environment, now is an especially good time to not
simply look at performance in a vacuum but to also consider the cost of the
performance, based on the risk a fund takes," said Michael Markov, MPI's
co-founder and CEO. "We know that private-market investments are likely to be a
drag on pension performance this fiscal year, but the issues surrounding Silicon
Valley Bank should prompt fund managers and stakeholders to look more closely at
issues like how illiquidity might affect performance."
MPI today released its initial projections on pension and endowment performance
from its proprietary Transparency Lab, a hub of reports and analytics on
pensions and endowments.
Performance of the Global 60-40 benchmark for the second half of 2022 was 0.2%,
with -6% loss in the third quarter and 6.6% gain in the fourth quarter of 2022,
which provides a basis for projections about most pensions' experience. However,
given the differences in pensions' asset allocations, both the magnitude of the
swing and the end-result vary.
According to data from the Transparency Lab, most pension and endowment funds
have had similar performance over the past few years but have done so with
widely different risk appetites, as measured by standard deviation. For example,
the $13 billion Columbia University endowment and the $86 billion North Carolina
Teachers and State Employee's Retirement System have shown historically lower
performance than their peers but maintained almost half the risk of some of
their high-performing peers.
According to MPI's projections, the biggest variable in how pensions are faring
is private-market exposure. The lowest estimated performers in the group for the
second half of 2022 are state employees' pensions of Washington, Oregon, and
Pennsylvania. Interestingly, last fiscal year, these three pensions reported the
highest performance in the group. Indeed, Oregon PERS reported a 6.3% gain in
FY2022, while most peers lost more than 5% and some lost even more than 10% over
the same period.
What makes this group of three pensions unique is their outsized allocations to
private assets. When pensions report their annual results, they usually use
previous-quarter valuations for their private assets: e.g., first quarter
private valuations for June fiscal year report. In 2022, that was enough to
propel these three funds to the top: Cambridge Associates Private Equity index
performance for the first quarter was -0.35% (vs. -5% for the second quarter)
and at the same time the second quarter return of the S&P 500 Index was -16.1%.
In the last half of 2022, these three pensions will have to absorb the 5% loss
for private equity in the second quarter, since it was not counted in the last
fiscal year number.
Over the year, it has become more difficult for stakeholders to obtain relevant
risk exposure details on many U.S. pension funds, which have been plagued by
chronic underfunding and decreased disclosure. Even when this information is
available, peer-to-peer comparisons are almost impossible because every
institution is unique in how it defines asset classes and categories of
alternative investments. The MPI approach standardizes allocation types across
investors, providing a common denominator for comparison.
This data becomes especially important given how broadly exposed pensions could
be to Silicon Valley Bank, through the impact on private equity and venture
capital investments, Markov said.
"Before the release of the Transparency Lab there was no place where
stakeholders could compare and assess real market risks of pension portfolios,"
Markov said. "We believe the public and the marketplace are better served with
more transparency, and these projections mark a step toward shining light on the
performance, risk, and styles of these important investors."
MPI's software utilizes proprietary technology and public data sources to peek,
quantitatively, behind the curtain of a wide range of investments, providing
information that is often impossible to obtain otherwise. With the Transparency
Lab, all that data and analysis is contained in one place and publicly
available, allowing investors, beneficiaries, regulators, researchers,
journalists, and other stakeholders to garner unique insight into some of the
largest and most opaque investors.
With the MPI Transparency Lab, registered users can view analytics and download
"MPI-360" reports that help them uncover trends in asset allocation and
exposures, explain drivers of both recent and historical results, obtain
estimates of risks, drawdowns and efficiency, perform historical stress tests,
and evaluate various hypothetical scenarios.
MPI uses its proprietary Dynamic Style Analysis (DSA) and public annual returns
to reverse-engineer asset exposure dynamics of large investor portfolios. When
pensions report only annual performance figures, a decade's worth of performance
is represented by only 10 data points. Traditional static and rolling-window
methods of regression analysis struggle to find credible insights from such
infrequent data. MPI's DSA, however, is uniquely adapted to work with such
limited data.
For additional information on MPI's proprietary data, visit the Transparency
Lab. For further information, contact MPI at +1 (908) 608-1558
or info@markovprocesses.com.
About MPI
Markov Processes International Inc. (MPI) is a leading provider of solutions for
investment research, analysis and reporting to the global wealth and investment
management industry. MPI works with more than 200 client organizations,
including pensions and endowments, sovereign wealth funds, global wealth
management firms, institutional consultants, regulators, investment advisors and
asset managers. Rooted in the principles of transparency, objectivity, and
efficiency, MPI takes an innovative approach to problem solving in the areas of
fund analysis, risk management, asset allocation, and reporting to ensure that
its clients have the tools to succeed in ever-more-crowded markets. Follow us on
Twitter @MarkovMPI and connect with us on LinkedIn.
Contact: info@markovprocesses.com
SOURCE Markov Processes International, Inc.
×
MODAL TITLE
ALSO FROM THIS SOURCE
MPI SIGNIFICANTLY INCREASES RETIREMENT PLAN ADVISOR CAPABILITIES AND
COMPETITIVENESS WITH THE LAUNCH OF NEW STYLUS WEB
--------------------------------------------------------------------------------
MPI LAUNCHES PROPRIETARY TRANSPARENCY LAB TO TRACK PENSIONS AND ENDOWMENTS
EXPLORE
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