Managers of public pension funds have been notable advocates of switching to an investment approach that incorporates the disciplines of ESG or something akin to it (ESG is a variant of “socially responsible” investment under which potential or actual portfolio companies are measured against various environmental, social, and governance guidelines). Yes, there was a green bubble for a while, and there may well be others in the future, but it’s by no means clear (I’m being polite) that ESG will help deliver superior returns over the long term.
Top state and local pension funds lost $250 billion on the markets during the month of June and are down more than $600 billion for the year, according to a new study.
The 100 biggest public sector pension funds were a staggering $1.5 trillion underfunded by the end of June, according to the latest survey by analysts at Milliman. That funding gap will ultimately be the responsibility of taxpayers if the pension plans can’t make it up through investments. The gap is equal to more than $11,000 per full-time U.S. worker.
On the bright side, pension fund investments did better than a balanced portfolio of 60% stocks and 40% bonds through the first half of the year…
On the gloomier side, this investment performance will include optimistic valuations of illiquid assets like private equity and venture capital.
I think we know what “optimistic” means.
Marketwatch:
“Pension funds [were] 26% unfunded by June 30, meaning they only have 74 cents in assets for every dollar of liabilities.
It’s easy to hope for better times ahead, and maybe we should. On the other hand, cynics note that this funding gap comes after an unprecedented 40-year bull market in U.S. stocks and bonds. From 1982 to the present, the S&P 500 has beaten inflation by an average rate of 10.4% a year, 10 year Treasury bonds by 5.2% and investment grade corporate bonds by 7.2%.
These numbers are all way, way ahead of the historic averages. We had better hope future returns don’t end up “reverting to the mean.”
If they do, pension fund levels may get worse, not better.
Of course, without knowing what has been in these funds’ portfolios, it’s impossible to know to what extent (if at all) ESG has affected their performance (let’s just hope that they were not underweight conventional energy in the first half of the year). And it should be remembered that this was a general survey. Some funds, obviously, will have done better than others. Nevertheless, the overall numbers reported by Marketwatch make for grim reading, not least for the taxpayers who may well end up picking the tab for any shortfall. Those managers who have succumbed to ESG would do well to drop the political agenda that comes with it — and, for that matter, they should forget ESG’s false promise that it offers a way to do well by doing good. In fact, they should forget ESG entirely: They should invest for economic return, and economic return only.