Year-end investment returns for the Wisconsin Retirement System directly affect annuity adjustments for retirees and contribution rates for active employees; many participants often measure the State of Wisconsin Investment Board's success based on year-end returns. This past year the Core Trust Fund and the Variable Trust Fund earned extremely strong preliminary gross returns of 19.9% and 28.6%, respectively. However, the true value that SWIB provides is measured over long time horizons and not simply by the rise and fall of the market in a single year. Over the long term, SWIB’s investment strategy—along with the WRS’s unique design—has maintained the plan’s fully funded status and kept the WRS financially stable.
Like any other year, the 2019 returns include two components: overall market performance and contributions made by SWIB staff that add value to the trust funds above market returns. When looking over a 20-year period through December 31, 2019, SWIB’s active management and its diversified investments generated $37.1 billion dollars for the Core Fund above what SWIB would have earned by simply investing in a low-cost passive portfolio consisting of 60% global equities and 40% domestic bonds, assuming no contributions or withdrawals.
Although the stock market finished strong in 2019, there are growing concerns about an economic downturn in the near term. In recent years, the markets have shown some volatility. This was evident at the end of 2018, which experienced wild swings of record highs and sharp downturns. While the Core Fund’s preliminary gross return of 7.8% over the past five years is more than its 7.0% target; going forward, we believe we will see returns moderate and decrease. This creates some challenges for meeting the WRS’s 7.0% return target.
We are doing a number of things to meet those future challenges. The most important is building on the kinds of innovative and complex investment strategies we have implemented, which are designed to meet the uncertainty caused by the ever-changing financial markets. That requires us to build out and leverage technology infrastructure and highly skilled staff as we seek ways to find additional sources of value. That added value can fill the gap between what the markets provide and what is needed for continued success in the new year and beyond.
Having passive investments within major asset classes is a relatively efficient way to take advantage of positive market performance, especially for individual investors. However, because of SWIB’s size and access to more and different types of investment markets as an institutional investor, SWIB also uses active management, including some sophisticated and innovative investment strategies and tools, to attempt to earn additional money for the trust funds above passive investments.
Through the combination of skill-based portfolio allocation and construction techniques that generally outperform passive market indexes, SWIB’s investment staff are looking for ways to add value to the trust funds so that we can help deliver the promises made to the more than 642,000 WRS participants.
Delivering on this investment strategy requires an agile and collaborative organization that can identify and implement complex investment opportunities. This is why SWIB created a comprehensive and competitive compensation program that successfully allows us to meet the challenge of competing for and retaining people with the expertise needed to support and implement a successful investment strategy. With the support of the Trustees, SWIB has assembled an award-winning team and is able to recruit top talent from premier investment management firms. This has allowed SWIB to invest in its people and hire highly qualified professionals to deliver returns that will help sustain the WRS.
Furthermore, we do all of this while we continue to optimize costs. According to an independent cost consultant, SWIB saved $54 million over its peers in 2018 and $1.3 billion over the last ten years. Together, SWIB’s overall performance and management costs compare favorably to similar public pension funds across the country.
As we look to the future, SWIB’s strategic approach of looking for ways to add value becomes even more critical to maintain a fully funded pension system.