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Board sets booked-rate target at 0.70%–0.80% after debate over total-return metrics
Summary
After presentations showing how total-return and booked-return measures can diverge, the State Board of Finance voted to set a booked-rate target of 0.70%–0.80% for Q2 FY2022 and asked Treasury staff to continue reporting both booked and total-return figures quarterly.
The State Board of Finance voted to set a target booked rate of return for Q2 FY2022 at 0.70%–0.80%, with 0.80% characterized as a stretch goal. The motion was made by the chairman, seconded and approved by voice vote.
The decision followed a staff presentation explaining the difference between a booked (realized) rate of return and a total-return approach that includes unrealized capital gains and losses. Steven Kilgore, director of investment accounting, showed an illustrative month (September 2021) in which a booked return was about +1.1% while a total-return calculation including unrealized losses would be about −1.01% on the same holdings.
"So that's kind of an illustration," Kilgore said, describing total return as useful to highlight reallocation opportunities while warning it can distort distribution calculations that are based on realized, booked amounts.
Robert Romanek, a senior investment manager, told the board that Arkansas’s statutory constraints and liquidity needs make it difficult to match the portfolio to common market indices; Romanek recommended using booked-rate targets for the purposes of distribution and performance measurement while retaining total-return analysis as an internal, strategic tool.
Grant Wallace recommended the 0.7%–0.8% booked-rate target for Q2 and told members the treasury would present both booked and total-return comparisons on a quarterly basis. A board member specifically requested a routine quarterly variance report between the two measures; staff agreed to provide that going forward.
What this means: The board’s vote formalizes a short-term performance benchmark that will factor into quarterly distribution decisions and provides the treasury with an explicit target for internal and external reporting.
