North Carolina pension may shift bond holdings to boost returns

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.

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.

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.