The top performing state pension plans over the past 10 years tend to have the highest allocations to alternatives, according to an annual report from Cliffwater.
Allocations to alternatives and the right selection of managers have largely made the difference in returns for the 10 years ended June 30, 2012. Over that period, global stocks and U.S. bonds have generally had the same annualized performance, at 5.73% and 5.64%, respectively, meaning the stock/bond mix has had little influence on returns, said Stephen Nesbitt, CEO of the alternative consultant.
State pension plans earned a median 10.9% on private equity and 7.7% on real estate over the 10 years, surpassing the median 6.4% total return, which is well below the average 8% actuarially assumed rate of return.
“It's really a continuation of the major trends from last year, such as continued allocations to alternatives,” Mr. Nesbitt said in a telephone interview. What has changed from prior years is that pension plans are taking more out of fixed income to fund alternatives than before, Mr. Nesbitt added. The shift has largely come from equities.
The average allocation to alternatives among the 97 plans studied increased to 24% from 21% in 2012, and Mr. Nesbitt said the number eventually could reach about 33%, still well below endowments, which have a 55% allocation to alternatives.
The largest trend is pension plans increasing allocations to hedge funds as plans look to derisk, Mr. Nesbitt said. Hedge funds now make up 17% of alternatives and 4% of all state pension assets. Private equity makes up 42%; real estate, 32%; and real assets, 9%.
The $8 billion Missouri State Employees' Retirement System, Jefferson City, was once again the highest returning pension fund, with a 10-year annualized return of 8.1%, followed by the $7.8 billion South Dakota Retirement System, Sioux Falls, at 7.8%. The $11.8 billion Oklahoma Teachers' Retirement System, Oklahoma City, continues to be an “anomaly,” with returns of 7.6%, good enough for a tie for third, Mr. Nesbitt said. Oklahoma Teachers is one of five pension funds studied that does not have any allocation to alternatives.
