U.S. state pension plans with higher allocations to alternative investments generally experienced better 10-year returns than those with less exposure, a new analysis from consultant Cliffwater LLC shows.
Contrary to common market wisdom, researchers at Cliffwater, based in Marina Del Rey, Calif., also found that those decade-long returns owed more to manager and fund selection than to the size of the alternatives allocation, according to the firm's most recent biennial study “Trends in State Pension Asset Allocation and Performance.”
In analyzing data culled from the 2011 comprehensive annual financial reports of 96 state pension plans, Cliffwater took “a big picture, 10-year point of view in analyzing the experience of state pension funds by digging beyond simple performance rankings to find out how these funds have achieved their results,” said Stephen L. Nesbitt, the firm's CEO, in an interview.
The $7.8 billion Missouri State Employees' Retirement System, Jefferson City, was the best-performing state pension plan for the 10-year period ended June 30 that Cliffwater studied; it had an annualized 7.1% return.
The South Dakota Retirement System, Sioux Falls, was second with a 7% return, and the Oklahoma Teachers Retirement System and the Texas County & District Retirement System shared third place with 6.9% each. Four funds each returned 6.7% for the period: Delaware Public Employees' Retirement System; Louisiana State Employees' Retirement System; Municipal Fire and Police Retirement System of Iowa; and Washington State Investment Board.
Rounding out the top 10, each with a 6.5% return, were the Massachusetts Pensions Reserve Investment Management Board and Oregon Public Employees Retirement Fund.
All returns are annualized.
All but one of the top 10 had alternative allocations greater than 24%. Cliffwater researchers found that “above-average allocations to alternatives played a key role in all but one of these funds achieving strong 10-year returns,” according to the report.
That single outlier was the $10.1 billion Oklahoma Teachers system, Oklahoma City, where the “selection of traditional managers was the primary contributor to a comparatively strong 10-year return,” according to the report.
By contrast, as of June 30, 2011, MOSERS had a 55.3% allocation to alternatives when leverage from the fund's portable alpha program is included, and the $7.8 billion South Dakota system, Sioux Falls, had 27.6% of total fund assets invested in real estate, private equity and hedge funds. The $17.6 billion Texas County & District system, Austin, had 30.7% invested in the full panoply of alternative asset classes.
The $58.8 billion Washington State board, Olympia, had the largest allocation to alternatives excluding leverage at 42.1%.