THE CAPITAL, TALLAHASSEE, June 30, 2017 .......... Florida's $155 billion pension fund is on track to show a positive gain for the eighth straight year, as the state's fiscal year ended on Friday.
Although the final number will not be calculated for some time, State Board of Administration officials said they expected the return to be near a Wednesday estimate showing the fund was up 14.24 percent for the fiscal year.
The anticipated double-digit return for the fund --- which pays retirement benefits for state workers, teachers, county employees and university personnel --- will be a much stronger showing than last year, when the fund eked out a 0.54 percent positive return.
This year's gain keeps alive a streak that began after a 19 percent drop in 2009. It is the second longest positive streak in the fund's last four decades.
The fund, which is one of the largest public retirement systems in the country, has earned a positive return in 35 of the last 44 years. In 25 of those years, the return will have exceeded 10 percent.
Although not as volatile as the prior year, the pension fund's journey through the 2016-17 fiscal year had its ups and downs, according to Ash Williams, executive director of the State Board of Administration.
“It wasn't positive at the beginning,” Williams said. “There was a lot of uncertainty and negativity before the (presidential) election.”
The uncertainty was tied to the long-term effects of the United Kingdom's decision to leave the European Union, a move known as “Brexit,” as well as the presidential election's impact on economic policies.
In both cases, Williams said the “anxiety” was tied to how a rise in populism could impact stock markets and other investments.
“Populism is seen as generally restrictive to trade, which is destructive to earnings,” Williams said. “It is also seen as somewhat destabilizing because it tends to increase the income gap between haves and have-nots.”
But Williams said “the markets reacted very, very favorably” both to Brexit and the results of the presidential election.
In the U.S., Williams said markets gained momentum as President Donald Trump and the new Congress outlined tax reforms that included cutting the corporate tax rate, spending $1 trillion on infrastructure improvements and revamping the federal health care law.
All those initiatives “could be very beneficial to earnings and therefore stock prices,” Williams said.
But as the stock market and real estate investments improved, Williams said the pension fund had to deal with historically low interest rates, with about 18 percent of the fund invested in “fixed-income” instruments, including bonds, as of March 31.
While the low interest rates allow businesses to more easily gain capital at a low cost, they do not help “savers,” like retirees or institutional investors, like pension funds, Williams said.
Nonetheless, Williams said, with a few days remaining in the fiscal year, the pension fund's fixed-income portfolio had an estimated 0.50 percent gain “which is pretty darn modest,” but ahead of a performance benchmark.
As of March 31, in addition to its fixed-income investments, the pension fund had 57 percent of its assets in stocks, both domestic and foreign, 9 percent in real estate and 14.6 percent in private equity and other alternative investments, according to the latest quarterly report to the SBA's Investment Advisory Council.
“We feel that our asset allocation is completely appropriate for the market environment we are in,” Williams said.
The allocations are based on policy “targets” and are adjusted throughout the year in reaction to the movement of the investments, Williams said.
As an example, Williams said the fund did a “rebalance” of its rising stock portfolio “and in doing so we effectively took $750 million in winnings off the table and put the chips in a safe place.”
Another impact on the pension fund came from the 2017 Legislature, which passed a law that could affect the number of public employees who end up in the pension fund or are covered by a 401(k)-type investment plan.
Previously, newly hired public workers who did not actively choose a retirement plan “defaulted” into the traditional pension plan. In the 2015-16 fiscal year, 59 percent of new workers defaulted into the pension plan, with 18 percent actively choosing the plan and 23 percent opting for the investment plan.
Under the new law, new teachers, county employees and state workers will default into the investment plan if they do not make a decision. The change is expected to decrease the number of workers covered by the traditional pension plan.
But Williams said projections show those changes will occur over time and the pension fund is not likely to have to make any major investment adjustments based on that policy for 15 or more years.
The $9.4 billion investment plan, like the $155 billion pension plan, was also showing a strong estimated return for the fiscal year, at just under 14 percent through Wednesday.
Both funds are running ahead of their performance benchmarks for the year, Williams said.
As for the new year, Williams said the investment community will be watching the ability of Congress to deliver on its tax reform, heath care and infrastructure initiatives.
“If you look at what the congressional experience has been just on one of those things so far, it doesn't exactly make it look easy,” he said.
But Williams said the U.S. market, compared to Europe and other markets, remains very attractive to investors, with low interest rates continuing to push money into “risk” assets like stocks.
“That tends to suggest we probably have some ways to go in this market on the upside,” he said.
Asked if he was “bullish” on the future of the market and the pension fund investments, Williams demurred.
“I wouldn't say I'm a bull. I would call myself a fully invested bear, which is cautious, always looking over your shoulder and if you hear footsteps there's probably a reason,” he said.