New York Teachers Adds 9% in Turbulent 2022-23

Equity outperformance helped the New York State Teachers Retirement System (NYSTRS) posted a 9% investment return for the 12 months ended June 30, 2023, according to the system’s latest annual report.

The system reported assets under management of $137.2 billion, up from $132 billion a year earlier. Its investment portfolio showed a net appreciation of $9 billion, driven primarily by domestic and international equity allocations.

The equity portfolio alone generated a 17.5% return net of fees for the 12-month period, the annual report showed. Domestic equities, which make up just over a third (33.9%) of NYSTRS’s total portfolio, generated a return of 19.4%.

International equities, accounting for 13.9% of total assets, gained 13.6%, while its smaller global equities allocation (3.7% of the portfolio) returned 16.1%.

During the year, NYSTRS’s investment team rebalanced its equity portfolio to meet the system’s liquidity requirements as it continues to experience growth in the number of retired members receiving pension benefits.

In addition, the system also added an Indian equity strategy. NYSTRS committed $100 million to the strategy, run by Goldman Sachs Asset Management, in December, a spokesperson confirmed.

Real estate woes

Within its real estate equity program, valued at $16.5bn at end of June 2023, NYSTRS lamented “dismal” returns from office investments as the pandemic-fuelled shift to remote and flexible working continues to impact this sector. Office investments make up just over 21% of the pension fund’s real estate portfolio.

“Tenants are leasing space, however with smaller footprints as space needs have declined significantly,” the fund stated in the annual report. “In addition, staffing cuts and layoffs are occurring across the tech industry, which has been one of the biggest drivers of office space demand.

“The overarching issue for all property classes has been the rapid rise in borrowing costs, which has had a significant (negative) effect on earnings and valuations.”

The fund’s direct property portfolio lost 4.2% during the period, but NYSTRS said this poor performance was “somewhat offset” by better returns from industrial and multi-family assets.

In real estate debt — valued at $7.5 billion or 5.5% of the total portfolio — the investment team increased its focus to assets such as commercial mortgage-backed securities rated AAA or AA, with high quality underlying properties as collateral.

Despite the challenges of a rising rate environment, the real estate debt portfolio gained 0.2% over the period, outperforming its benchmark by 80 basis points.

Longer-term returns and challenges

The one-year performance helped NYSTRS, one of the top 10 largest public pension funds in the US by assets, to report a 7.6% annualized investment return net of fees over the past five years. Over 10 years the average annual return was 8.5%, and over 30 years it was 8.3% net of fees.

Its funded ratio remained unchanged at 99.3% — an important metric given that the number of people drawing benefits from the system is increasing year-on-year. Retirement benefit payments have increased from $7.7 billion in the 2020-21 financial year to $8.2 billion in the 2022-23 fiscal year, meaning income generation and liquidity are key priorities for the pension fund.