U.S. public pension funds are boosting allocations to emerging market debt and international equities, recognizing they can't hit targets for investment returns by staying in domestic assets, a report shows.
Among the 50 largest public plans, about half have dedicated allocations to emerging market debt, while about 16 have exposure through other fixed-income mandates, a Goldman Sachs Asset Management report showed Tuesday. Some funds are shifting away from strategic bets on U.S. equities in favor of international stock investments, according to the report.
Public funds are contending with market volatility and low interest rates as they work to boost returns amid swelling liabilities. Michael Moran, a pension strategist at GSAM, said plan officials are looking for new investment areas after some already have ratcheted down their forecasts.
"They've come down a lot," Mr. Moran said in an interview. "But when you look at long-term return expectations across individual asset classes, it's going to be hard for them even to meet the lower return assumptions."
GSAM found that funds are interested in real assets. The $739 million Omaha (Neb.) Police and Fire Retirement System and the $51.5 billion Illinois Teachers' Retirement System, Springfield, have increased allocations to real estate over the past seven years, according to fiscal year 2017 data compiled by Boston College's Center for Retirement Research. The $219.2 billion California State Teachers' Retirement System, West Sacramento, has signaled plans to allocate more to private equity, real estate and infrastructure.
GSAM warned some accounting proposals that would make funds use a lower discount rate when calculating liabilities could hurt the "perceived health" of state and local government retirement plans. Already, the Federal Reserve estimates the plans face an unfunded liability of more than $4 trillion.
"It would make those liability numbers a lot larger," Mr. Moran said.
Not all alternative investments have benefited from the push by public plans to find higher-yielding assets. The pension plans have continued to reduce allocations to hedge funds this year, according to the GSAM report. In October, hedge funds reported the worst monthly performance in seven years amid a slump in stock markets.