Public pension plans are giving endowments and foundations a run for their money in alternative investing, according to a preview of a J.P. Morgan Asset Management report that shows state and local plans will outpace other institutional investors in increasing their allocations.
Public pension plans will have an average 21% allocation over the next two to three years, seven percentage points above the 14% average in the first quarter 2009, according to the report, “Market Pulse — Alternative Assets,” from the New York-based money manager.
Meanwhile, endowments and foundations expect to boost their allocations by an average five percentage points, to 31%, from the 26% average allocation as of Dec. 31, 2009. Corporate pension plans are expected to increase their average allocation by three percentage points, to 14%, over the same time period.
Despite the heavy losses suffered by endowments and foundations in the credit crisis, because of highly leveraged positions and large investments in alternatives, the report's authors say the endowment model for investing “appears alive and well.”
Among all funds surveyed for the report, 56% plan to increase funding to alternatives, 31% expect to maintain investment at existing levels and 13% planning to reduce allocations.
John Hunt, CEO, U.S. institutional, at J.P. Morgan Asset Management, said in a telephone interview that the credit crisis increased foundations' and endowments' awareness of liquidity issues, but it didn't make them turn away from alternatives.
“They probably came out (of the credit crisis) better risk managers,” he said.
Corporate plans are being held back by funding requirements set out in the 2006 Pension Protection Act, Mr. Hunt noted, leading them to increase positions and durations in fixed income to match assets with liabilities. Public plans, not subjected to PPA requirements, have focused more on making up losses suffered in the credit crisis, he said.
“Public plans are more focused on return generation, so they've increased their allocation to alternatives; the survey bears that out,” Mr. Hunt said.
The survey's results mirror those of a Greenwich Associates study released in March that showed corporate plans are shedding risk in preparation for higher cash contributions mandated by the PPA, while public plans make a “swing-for-the-fences” attempt to close funding shortfalls.
“There's clearly a derisking going on that's continued despite the fact that, because of the historically low levels of interest rates and the decline in market values, corporate pension funds are substantially underfunded,” Greenwich analyst Chris McNickle told Pensions & Investments in a story published on March 8. “And that implies a willingness or acknowledgment that they're going to have to make contributions (to become fully funded.)
“Public funds are going in a different direction. They've got huge (funding) gaps and they're trying to make that up by excess returns.”
Seventeen percent of public pension funds in the Greenwich study plan to reduce fixed-income allocations significantly over the next two to three years, while 23% plan increases in private equity and by 2012 and 18% plan to significantly increase hedge fund allocations.