A one-quarter lag supplied most of the private equity outperformance in IMRF's second quarter

What's New

Ann O'Bradovich, Senior Vice President at Callan, attributes 81 of the Illinois Municipal Retirement Fund's 62 basis points of total manager effect to alternative investments in a second quarter performance review for the $65.4 billion plan. Private equity returned 4.75% against a custom benchmark of negative 2.65%. That benchmark is the MSCI World Index plus three points, lagged one quarter, and private equity returns are lagged one quarter as well. The lagged window captured a first quarter in which the S&P 500 fell 4.3%, while the reported private equity marks did not. Every other asset class combined contributed less than nothing to manager effect.

Why It Matters

The plan beat its policy target by 98 basis points and the release reads as a strong quarter. Strip out alternatives and manager selection cost the fund 19 basis points, with domestic equity alone giving back 36. The alpha did not come from picking managers. It came from comparing an illiquid portfolio marked in one period against a public index measured in another, at the exact moment those two periods diverged sharply. Consultants and trustees who read quarterly attribution as a scorecard on manager skill are reading a timing artifact. The same mechanism runs in reverse, and in this report it already has.

Big Picture Drivers

• The lag is disclosed, not hidden. Callan footnotes that private equity and its blended benchmark are both reported one quarter in arrears.

• The two periods moved in opposite directions. The S&P 500 fell 4.3% in the first quarter and gained 15.2% in the second, so a one-quarter offset produces a very large benchmark gap in either direction.

• Alternatives carried the entire manager effect. Alternatives contributed 81 basis points while domestic equity subtracted 36 and cash, fixed income, international equity and private real assets together added 17.

• The three-year record shows the reverse case. Private equity returned 13.14% annualized over three years against a 20.22% benchmark, a 708 basis point shortfall on the same lagged construction.

• Manager dispersion inside the sleeve is enormous. Domestic private equity funds returned 34.25% over one year while the Abbott fund of funds returned 6.97% and Pantheon returned 7.86%.

• Marks are explicitly provisional. Callan states that final third-party valuations may not be available when the report is issued.

By The Numbers

• 81 basis points of manager effect from alternatives, against 62 basis points for the whole fund.

• 4.75% versus negative 2.65% private equity return against its custom benchmark for the quarter.

• negative 36 basis points manager effect from domestic equity in the same quarter.

• 13.14% versus 20.22% private equity three-year annualized return against benchmark.

• 34.25% versus 6.97% one-year return for domestic private equity funds versus the Abbott fund of funds.

• 98 basis points of total fund outperformance against the policy target for the quarter.

Key Trends to Watch

• The lag reverses mechanically next quarter. The second quarter's 15.2% public equity gain enters the private equity benchmark one period later, which sets a much higher hurdle against marks struck in a calmer window.

• Three-year attribution is the more stable read. Over that horizon the plan trails its policy target by 73 basis points, and private equity is the largest single reason.

• Fund of funds and direct programs are diverging inside one portfolio. The five-fold spread between IMRF's domestic funds and its two fund of funds vehicles is wide enough that sleeve-level reporting obscures more than it shows.

• Revisions are a live variable, not a footnote. With alternatives at 14.05% of assets and marks subject to restatement, quarterly total fund numbers carry more estimation error than the single-basis-point precision of the attribution table suggests.

Memorable Quotes

• "Private Equity and Blended Benchmark (Private Equity) returns are 1 quarter lagged." The footnote that accounts for most of the quarter's reported alpha.

• "Total Fund outperformed the Policy Target by 98 basis points over the past 3 months." The headline result, produced by a sleeve holding 14% of assets.

• "may not reflect final data, and therefore may be subject to revision in future quarters." Callan's own caution on illiquid valuations, applied to the asset class carrying the attribution.

The Wrap

Trustees reading this report will see a plan that beat its benchmark and a private equity program that added value. Both statements are accurate for the period measured. Neither survives contact with the three-year table, where the identical benchmark construction turns a 740 basis point advantage into a 708 basis point deficit. What the quarter actually demonstrates is that a one-period offset between illiquid marks and a public index becomes the dominant term in attribution whenever public markets move sharply, which they did twice in six months. The information content of a single quarter of private markets attribution is close to zero. Anyone sizing a private equity program off this report should be reading the row that says three years.