SOLANA BEACH — In future performance reports, Solana Beach City Council members said they’d like to see how returns on certain actively managed city investments might compare to a passive approach.
Under active management, investment professionals adjust individual funds or total portfolio holdings for a fee, trying to generate returns that outperform the market or some segment of it.
Passive investments mirror the composition of a predetermined benchmark index — such as the Wilshire 5000 Total Market Index (stocks) or Bloomberg Barclays Aggregate Index (bonds) — to approximate market returns. These types of vehicles also generally carry lower costs.
The city had $33 million under active management with firms as of June 30, according to the city’s most recent quarterly investment report, which the Council received at their Sept. 23 meeting.
Of that, HighMark Capital Management, portfolio manager for Public Agency Retirement Services (PARS) — based in San Francisco and Long Beach, respectively — manages $3.3 million.
This amount, split roughly 50/50 between equity and fixed-income mutual and exchange-traded funds, comprises the city’s pension and other post-employment benefits (OPEB) trust.
“I still look at so many [funds in the portfolio] that are actively managed that are quite far in the negative,” Mayor Jewel Edson said. “What’s the overall percentage that the portfolio’s off?”
It “might be useful for future presentations” to compare performance between active and passive strategies, said Councilman Dave Zito.
HighMark/PARS actively manages the city’s portfolio, plus money managers elsewhere actively manage many of those constituent funds. Reported performance stats account for the latter’s cost, but not the former’s.
Since its inception in 2016, the trust portfolio yielded 7.55% annually on average. That’s a good long-term return “as far as pension funding goes,” and better than CalPERS’s estimated 7%, Finance Director Rod Greek told the Council.
Though the trust’s performance doesn’t include PARS/HighMark 0.6% annual management fee, according to a recent investment report. That fee worked out to about $16,000 in FY2020, Greek told The Coast News.
The trust in turn comprises 19 funds, many actively managed in their own right. For instance, Vanguard’s Growth and Income Fund carries management and operating costs of 0.23%; Prudential’s Total Return Bond Fund costs 0.39%; Columbia Threadneedle’s Contrarian Core Fund costs 0.64%.
Morningstar’s 2019 U.S. Fund Fee Study puts asset-weighted average costs at 0.45% for all funds, 0.66% for active funds, 0.13% for passive funds.
Grouped by asset class, some of the trust’s funds outperformed the market over certain periods, others didn’t. Since inception, the trust’s fixed income and large-cap equity assets, together accounting for three-quarters of the portfolio, underperformed comparator indexes by 0.1 and 0.45 percentage points, respectively — not including HighMark/PARS’s fees.
“As a municipality with stewardship over public funds, our highest priority is being fiscally conservative and protecting those funds,” Greek told The Coast News. “By using investing arrangements such as we have with the PARS trust fund, the city is able to choose different investment strategies to seek enhanced returns while following” laws governing the investment of public monies.
