Does the public pension fund really provide the profits they claim? The gap between private asset value (NAV) and their actual market value is a phenomenon known as volatitilitilonaling, which reveals important meanings for institutional investors. Public assets are often exaggerated, so the public pension fund can face a bigger performance than reported. This post explains how the volatility washing practice is distorted and the transparency in the evaluation of private assets is more important for the US public pension fund.
Play state
The treaty, such as private real estate and private equity, is carried by NAV in the calculation of institutional funding and rating. NAV is the number reviewed by an accountant by a general partner (GPS) of the Civil Asset Fund.[1]
In recent years, a gap has been held between the private asset value of the distribution market and its NAV. The gap continues today.[2] The market tells us that these private assets are GPS and their accountants are not worth saying they are valuable. Cliff Asness created the term volatilitilantering and explained that private assets are not put on the market.
Public fund performance with reported returns
It has obtained a profit rate for a sample sample of 50 large US public pension funds in the 16th fiscal year ending June 30, 2024. The source is the retirement research center and the fund's annual report of the Boston College (CRR). I included only the funds to report pure fees.
Next, we have created the same weight composite for fund returns and developed a market index to evaluate composite performance. The market index has the same risk and the same risk as the composite material (standard deviation of total revenue). Market index blends a single hybrid index by blending the return of the US and non -US and non -US inventory indexes and the return of US Treasury Bond Index.[3]
Composite materials are 6.88 % of the annual income in 16 years and 7.84 % of the market index returns. Two series or annual differences Excessive return (ER), -0.96 %. See Exhibition 1.
Figure 1。 Historical return 2009 to 2024。
| Finances year | Public funding composite | market index | excess return |
| 2009 | -19.8 | -17.5 % | -2.2 % |
| 2010 | 13.7 | 13.0 | 0.7 |
| 2011 | 21.5 | 22.6 | -1.1 |
| 2012 | 1.1 | 1.7 | -0.6 |
| 2013 | 12.0 | 13.9 | -1.9 |
| 2014 | 16.8 | 18.2 | -1.5 |
| 2015 | 3.3 | 4. % | -1.0 |
| 2016 | 0.6 | 0.9 | -0.3 |
| 2017 | 12.7 | 13.6 | -0.9 |
| 2018 | 8.8 | 9.1 | -0.3 |
| 2019 | 6.4 | 7.3 | -0.9 |
| 2020 | 2.2 | 5.2 | -3.0 |
| 2021 | 27.1 | 29.4 | -2.3 |
| 2022 | -3.8 | -13.3 | 9.5 |
| 2023 | 6.7 | 12.2 | -5.5 |
| 2024 | 9.4 | 15.4 | -6.1 |
| Annual rate | 6.88 % | 7.84 % | -0.96 % |
Distribution market price setting
In fiscal 2022, an unusually large gap -950 Basis Point (BPS )- appeared between the composite returns of public funds and the market index. The average ER in the past 13 years was only -1.2 %. See Attachment 1. The shares and bond markets fell sharply in late 2022.
However, NAV, reported by GPS of private asset partnership, usually delays more than one -quarter of public market reports. Report NAV delay has been greatly generated positive Returned private assets in the 2022 fiscal year, despite the sale of stocks and bonds. This has released a series of NAV adjustments by fund managers a few years later to conform to the reality of the marketplace. (See 2023 and 2024 of the exhibition 1.)
However, in the market, GPS and their accountants believe that there are more things to do when marking private assets to the market. This observation is based on data from the distribution market for private asset transactions. Attachment 2 data was summarized by Jeffreys's private capital consultation unit. Figure 2 summarizes discounts from NAV of private assets in various categories in the first half of 2024.
Figure 2。 NAV discount for private assets。
| Asset type | beginning half 2024 |
| Baiout | 6 % |
| credit | 15 |
| real estate | 26 |
| Venture | 30 |
| all | 12 % |
sauce: Jeffrey's Private Capital Advisory
The following analysis incorporates an overall discount of 12 % of private asset transactions in the first half of 2024 and estimates a pension fund return that reflects the fair market price.
Central for Retirement Research reports that public funds were allocated to 24 % (private stock and real estate only) by FY2022. Generate 2.9 % of numbers. Assuming that Jeffreies's overall discounts are applied, this indicates that the total funding is about 3 % over 3 % compared to the market.
This adjustment applies to excessive return numbers of -0.96 %. I do this, divide 3 % to 16 (years), and generate 0.2 % (18 BPS, exactly) hair cuts in excess returns. (If you spread a hair cut in the last 10 years, it will be 0.3 % a year. The selected period to apply hair cut is optional. Excessive return (AER) -1.14 % a year from 2009. See Fig. 3. The calculation is rough and ready, but it is enough to understand the ideas.
Figure 3。 Summary of adjusted over -return calculation。
| measurement | Annual revenue | |
| Reported return | 6.88 % | |
| Market index | -7.84 | |
| Excessive return (ER) | -0.96 % | -0.96 % |
| Private assets hair cut | -0.18 | |
| Adjusted excess return (AER) | -1.14 % | |
Important points
The Public Pension Fund has been lacking in the market index of about 1 % of the year since the global financial crisis. I will return this to their high operational costs and inefficient diversification.
Volatilitilon Dingling -The practice of not marking private assets in line with the market blures the other aspects of these funds of economic imprisonment. Public funds that mark private assets to the market can also worsen two -quarters of the long -term performance of two or 30th percentage.
[1] The ASC 820 adopted by the FASB in 2008 provides guidance on fair market evaluation of private assets.
[2] Jeffreies reports discounts on baskets for private assets trading in the distribution market that fluctuates between 8 % and 19 % between 2018 and 2024.
