Enjoying some of the best returns in a decade, some big public pension funds now must rebalance their portfolios because they've exceeded their domestic stock target allocations.
Investment performance for fiscal 1995 also is improving funding ratios for many plans.
The Virginia Retirement System, Richmond, for example, reported its highest investment return in nine years - 17.1% for the year ended June 30. Some were even higher during the same period, including the Teacher Retirement System of Texas in Austin, 19.5%, and the Florida State Board of Administration, Tallahassee, 17.9%.
By contrast, the nation's largest public pension fund, the California Public Employees' Retirement System, Sacramento, reported a 1995 fiscal year (ended June 30) return of 16.4%.
"I'd expect most large (public) funds will report annual returns of 12% to 16% for the year ended June," said Michael Carter, public plan consultant with Wyatt Investment Consulting Inc., Dallas.
The median public pension plan in the Callan public plan sponsor database returned 15.4% for the year ended June 30, the fiscal year used by many public pension plans. The median public plan returned 10.3% for the three years ended June 30 and 10.02% for the five-year period.
As a result of the good domestic equity performance, some public funds now are shifting out of U.S. equities. Often, international stocks are the beneficiary.
Foreign stocks benefit
The $46.5 billion Florida State Board pension fund, for example, reduced its domestic equity allocation to between 57% and 58% of assets from more than 60% during the year, said Ash Williams Jr., executive director. The fund boosted its international equity allocation to 7.5%, from 2% to 3%.
"We got our equity allocation a little high...... a pleasant problem to have, so we took some profits to get back to where we wanted to be," he said.
"But the fact that we had this experience makes me that much more nervous about the future," said Mr. Williams. "The sun doesn't shine on the same spot forever."
Mr. Williams said 1995 market performance "absolutely" will allow the Florida system to reduce its nearly $14 billion unfunded liability - by as much as $1 billion. The amount will be determined by an actuarial study to be completed later this year.
The $2.3 billion Arkansas Public Employees' Retirement System, Little Rock, also found itself beyond its target domestic equity allocation of 37%. The reason: a "phenomenal runup in the domestic equity market" during the year ended June 30, said Gail Stone, investment manager.
The fund was "pushing 40%" in domestic equities, she said. The fund had a return of 16.6% for the year ended June 30.
As a result, fund executives used equity money to fund a $159 million commitment to four new international equity managers. Kie D. Hall, executive director, said the original plan was to use fixed-income assets to fund international equities. "But because of our equity growth during the past year, we ended up taking it out of (U.S.) equities," Mr. Hall said.
Other public funds, including the $37 billion Texas Teachers, are still studying the impact investment performance has had.
John Young, chief investment officer at Texas Teachers, said an asset/liability study under way will determine "if we should be doing anything different ..... to see if it calls for greater allocations to some other asset sectors."
Funded ratios improving
Mr. Carter, the Wyatt consultant, said state pension funds he works with have seen their funded ratios improve between five and 10 percentage points during the past five years.
Paul Zorn, manager of the Finance Research Center at the Government Finance Officers Association, Washington, said investment performance in 1995 should help most public funds with significant equity exposure to improve their funded ratios and reduce unfunded liabilities.
The average funded ratio of public plans has increased steadily to near 80% now from about 60% in the 1970s, he said.
"Over the past 20 years, funding has been improving and investment performance has been a significant part of that. Asset allocation has also played a part in the move away from fixed income and more equity exposure," Mr. Zorn said.
"I would expect funding ratios to continue to improve over time."
High stock allocations key
The best performing public pension funds during the fiscal year ended June 30 had heavy allocations to the domestic equity market.
On average, public pension funds have 40.1% of assets in U.S. common stocks, according to Greenwich Associates, Greenwich, Conn. But the top quartile public funds in the Callan universe had an average 49% allocation to domestic stocks for the year ended June 30. Texas Teachers, for example, has had about a 50% allocation to domestic equities for four years.
In theory, those funds now beyond their target equity allocations should rebalance their portfolios. But James P. Klein, principal at Towers Perrin, New York, said it's difficult.
"A consultant would tell you it is better to be disciplined and to rebalance the portfolio but sometimes you don't want to leave an asset class which has been hot," he said.
"It takes a firm belief that 'I don't believe in market timing and will try to stick with my target asset allocations and investment policy guidelines.' It all is part of the notion that if adjustments aren't made it can throw off the rest of the fund's managers."