State pension funds are continuing to increase their exposure to alternatives and overall performance continues to be strong, said a report from alternatives consultant Cliffwater.
The Cliffwater 2014 Report on State Pension Asset Allocation and Performance said the average allocation to alternatives increased to 25% from 24% in 2013. The average allocation to alternatives had been 21% in 2011. As recently as 2006, the average allocation to alternatives was only 10%.
“It’s basically a continuing over the last 10 years of a ramp-up in alternative investments,” said Stephen Nesbitt, Cliffwater CEO, in a telephone interview, “and you know, I think the 25% is a little bit of a milestone only because it’s arguably a round number, and so I find that interesting. Also, the shift: While most pension plans have looked at alternatives from a derisking point of view coming out of 2008, money was coming out of equities. It’s shifted now. The money’s coming out of fixed income. They’re looking for a return on alternatives.”
The average allocation in 2013 to fixed income dropped to 22% from 25%, while public equities increased to 50% from 49% and cash increased to 3% from 2%.
Among alternatives, private equity had the highest average allocation at 39% of the alternatives allocation, while real estate accounted for 35%, hedge funds at 17%, real assets at 7% and the rest in opportunistic.
While the average allocation for alternatives was 25% for the fiscal year, the range of the target allocations varies widely, from zero to 61%, sometimes due to statutory restrictions.
State pension funds returned a median 7.2% annualized return for the 10 years ended June 30, 2013. Among alternatives for the 10-year period, private equity had a median annualized return of 12.4% and real estate, 7.9%.
“On performance, I think there are a couple of things,” Mr. Nesbitt said. “The first is I think it’s important to note there’s nothing wrong with performance overall on these state funds. They’re producing a rate of return that’s very competitive above the passive 60/40 mix.”
“While there may be problems with states not funding pensions or benefits, or all those other arguments, at least the stewardship of the assets seems not to be in question,” Mr. Nesbitt added.
“Secondly, you know ultimately I think on alternative investments, they need to be delivered in terms of performance, either risk reduction or enhanced return, something you can’t get with just stocks and bonds, I think we demonstrate this year that at least in private equity and real estate, they’ve been very additive over the years.”
The $14.1 billion Oklahoma Teachers’ Retirement System, Oklahoma, had the highest annualized return, with a gross 8.8% return for the 10 years ended June 30, 2013, followed by the $9.1 billion Delaware Public Employees’ Retirement System, Dover, and $5.7 billion Missouri Local Government Employees Retirement System, Jefferson City, both of which reported 8.4%, not specifying whether the returns were gross or net. The $8.1 billion Missouri State Employees’ Retirement System, Jefferson City, reported a net 8.4% annualized return.
The entire report is available on Cliffwater’s website.