Less than 1 percent of institutional portfolios—both pension and endowments—achieve superior results after costs, according to a report by State Street Center for Applied Research and The Fletcher School at Tufts University.
Looking at global pension funds from 2002 to 2011, the study found that both U.S. and U.K. pension funds reported negative real annual mean performance during this period and pension funds did not earn returns above the rate of inflation in either country during this time period.
Since the financial crisis, most pensions have experienced a decline in performance with many negative, further accentuating their core challenge of closing the return-liability gap, State Street found. This was accompanied by a significant increase in the volatility of the portfolio returns.
The report highlighted the fact that U.S. pension funds were doing poorly before the financial crisis at a mean -1.32 percent return and slightly worse after at -1.73 percent. It had the worst real average net annual investment return of the countries studied.
In contrast to global pensions, endowment portfolios have returned relatively solid performance, particularly since 2002, State Street found. The annualized geometric mean of all endowments from 2002 to 2011 was 5.24 percent compared with returns of .093 percent for the S&P 500.
Endowment returns were also less volatile, resulting in substantially higher risk-adjusted returns.
University endowments on average increased in size by nearly two-thirds in the 10-year period through 2011, despite sizable losses in 2009. Endowment performance is persistent and nearly 75 percent of return variation can be directly attributed to strategic asset allocation decisions, including alternative assets.