Investment returns of the country's top public pension funds soared in 1997, easily outpacing their assumed rates of return.
An informal telephone survey of a majority of the 25 biggest public funds found they logged returns from 13.3% to 21.6%, well ahead of actuarial assumptions, which were 7.75% to 8.75%, respectively.
The Florida State Board of Administration, Tallahassee, posted the highest return; the Ohio Public Employees' Retirement System, Columbus, posted the lowest. Both easily surpassed their interest rate assumptions.
In a year when large-capitalization domestic equities shone -- with the Standard & Poor's 500 stock index returning 33.36% -- pension funds that made the greatest commitments to big-cap U.S. stocks were rewarded with the best results.
William Bell, chief of management policy at the $78 billion Florida board, attributed the pension fund's 21.6% return to a 60% weighting in equities.
In addition, he said, the fund benefited by not committing much to international equities.
"We only had 8% in international equities and that really helped us," Mr. Bell said.
The New Jersey Division of Investment, Trenton, also had a very good year. The $60 billion pension fund returned 21.1% in 1997, largely because it allocated 64% of its assets to domestic stocks. The portfolios were managed internally, using a core strategy that is broader than the S&P 500.
"We use our own list of stocks, and that component returned 30.5% last year," said Roland Machold, director. "Our small-cap component, which is linked to the S&P 1500 index, did well, too, returning 26% on its own."
Mr. Machold said the fund's scant real estate and international stock holdings also boosted performance.
At the other end of the spectrum was the $47 billion Ohio employees' fund.
"We didn't do as well as our peers because we had a more conservative asset allocation than many, with only 30% of our assets invested in equities," said Joel Buck, chief investment officer.
More than 50% of the fund was in fixed income, which returned 9.17%, while the U.S. stock portion rose 25.4%.
The $78.9 billion California State Teachers' Retirement System, Sacramento produced a 15.9% return last year. Patrick Mitchell, CIO, also attributed lagging results to a domestic equity allocation that was lower than that of its peers, while its international and fixed-income investments were higher.
CalSTRS' domestic equities gained 30%, but its fixed-income investments added only 12.56% and its international equity investments were flat for the year.
Selecting the proper asset allocation was the key last year, said Steve Remboski, vice president of Trust Universe Comparison Service, Santa Monica, Calif.
According to his analysis of public pension funds with assets of $1 billion or more, funds that ranked in the top 5% of the TUCS universe returned 21.7% or better in 1997.
Those ranked in the top quartile returned 20%.; those in the median quartile returned 18%; those in the third quartile returned 15.6%; and those in the bottom 5% returned 11.3% or lower.
Several pension funds linked their rosy returns to passively managed large-cap domestic equity strategies.
Scott Henderson, spokesman at Massachusetts Pension Reserves Investment Management, Boston, attributed the $22.6 billion pension fund's 18.5% return to its large allocation to passively managed domestic equities, benchmarked to the S&P 500 index.
The story was similar at the $35 billion pension fund of the Teachers' Retirement System of the City of New York and at the four pension funds in the New York City Retirement Systems, which have a market value of $54.7 billion.
John Lukomnik, deputy comptroller for the city of New York, said the five funds, which returned from 20.1% to 22% in 1997, benefited from a 54% weighting in U.S. equities, 80% to 85% of that was passively managed. Because of a concern that the good times may not continue, the funds are in the process of trimming their domestic equity allocation and adding to their international investments.
The California Public Employees' Retirement System, Sacramento, also posted strong performance because of its large equity commitment, spokesman Brad Pacheco said.
"In September, we increased our equity exposure to 65% from an earlier target of 63%, despite the stock market's volatility," he said.
As a result, the fund's investments gained 19% for the year, with a market value of $128 billion on Dec. 31. Eighty-five percent of the fund's domestic equities were indexed and managed internally, while 15% were actively run by outside managers.
Several public pension fund officials noted that their international allocations hurt overall performance. Typical was the $28.6 billion Virginia Retirement System, Richmond, whose holdings gained 20.6% last year.
"Nearly half of our domestic equities were in a passive portfolio, benchmarked to the Russell 3000, which did very well. But a 13% allocation to international equities, which included 3% in emerging markets, hurt us," said CIO Erwin Will.
Pension consultants said the public pension funds that produced the most outstanding results were those with the greatest domestic equity exposure.
"Many public pension funds have policies against investing internationally," said Terry Dennison, a public sector consultant at William M. Mercer Investment Consulting, Inc., New York. "Others are just uncomfortable investing internationally, because they're concerned that it reduces job opportunities for Americans. As a result, a number have a low allocation to international investments. Those who compensated by investing in U.S. equities saw strong returns."
The 1997 returns of most public pension funds studied by Mr. Dennison have ranged from the high teens to the mid-20s, he said.
"To surpass the mid-20s, they had to develop a unique strategy, such as holding a heavy domestic equity allocation, while avoiding international and not putting much into bonds. Those funds whose domestic equities were mainly indexed did exceptionally well, since the market did so well, and few active managers were able to keep up with it," Mr. Dennison said.
