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May 05, 2010 01:00 AM

North Carolina pension may shift bond holdings to boost returns

Bloomberg
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    The $68.7 billion North Carolina Retirement Systems, Raleigh, is considering whether to shift some money out of bond investments to boost returns, its trustee said.

    The pension, with more than 37% of its assets in bonds at the end of the first quarter, needs the extra income to meet its target annual return of 7.25%, said Janet Cowell, the state treasurer. She's the sole trustee for the fund, whose five-year return at the end of the quarter was an annualized 4.5%.

    “We have a fairly long-duration bond portfolio that's been a wind at our back the last few years,” Ms. Cowell said in a telephone interview on Tuesday from Raleigh, the state capital. “As those higher yields expire it will be harder to reach the 7.25%, so we have a challenging investment climate ahead. We're looking to curb some of the bond exposure.”

    States are searching for higher returns after a 38% decline in the Standard & Poor's 500 Index in 2008 helped open a $1 trillion gap between what public pensions have and what they owe future retirees, according to a February study by the Pew Center on the States, a Washington-based researcher. The S&P 500 rebounded 23% last year and is up about 4% in 2010.

    The California Public Employees Retirement System, Sacrament, boosted its holdings of domestic and international equities to 65% of its $213.3 billion at the end of February from 53% a year earlier, it reported on Tuesday. The bond allocation fell to 24% from 27%, it said.

    Fixed-income holdings

    North Carolina's fixed-income allocation, authorized at 38%, is higher than the 29% average in fiscal 2008 at state and local funds surveyed for an October report by the National Association of State Retirement Administrators. Its stock portion, at 48.5%, is less than the 53% found in the survey.

    “The large bond allocation helped our performance through the stock market crash,” said Ms. Cowell, a Democrat who took office in January 2009. “But it's a different day and we're having to reassess our asset allocation.”

    North Carolina's state pension is one of only four – along with New York, Connecticut and Michigan – headed by a single trustee and needs legislative approval to change its asset allocation, Ms. Cowell said.

    New asset classes

    State lawmakers last year allowed the fund to create two new asset classes with 5% allocations each. One is credit investments, such as high-yield bonds and Federal Reserve term asset-backed securities, and the other is inflation-resistant vehicles such as commodities, timber and Treasury inflation- protected securities.

    “We can go up to 25% in alternative investments, including 10% in real estate,” Ms. Cowell said. “We haven't fully utilized all of that.”

    She said she will consider asking for authorization to invest in hedge funds and private equity next year.

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