Double-digit returns were the norm for U.S. public pension plans for the year ended June 30, with smaller funds and those focused on domestic equities or taking opportunistic positions in credit achieving the best results.
The median return of the 42 plans analyzed by Pensions & Investments — all with assets of more than $1 billion — was 12.45%, slightly below the 12.61% median for public plans with more than $1 billion as reported by the Wilshire Trust Universe Comparison Service, administered by Wilshire Associates, Santa Monica, Calif.
Pension plans with higher allocations to public equity, especially U.S. equity, largely outperformed their peers. On the flip side, plans with higher allocations to traditional fixed income were hurt as bond returns barely broke even. While alternative investments — including private equity, hedge funds and real estate — produced returns on par with median overall returns, they still largely underperformed public equity.
“Basically, anybody who was overweight in U.S. stocks relative to most diversifying asset classes did better,” said Steve Charlton, partner and director of consulting services at NEPC LLC, Cambridge, Mass. “It doesn't surprise me that smaller investment programs, which are typically less diversified and typically have larger allocations to traditional stocks and bonds, would've done better in the last year relative to larger investment programs that tend to have a lot more in alternatives ... and dedicated emerging markets.”
For the 12 months ended June 30, the Russell 3000 returned 21.5%, and the Barclays Capital Aggregate Bond Index, -0.69%.
Among pension funds analyzed and reported on by Pensions & Investments, the $12.3 billion Oklahoma Teachers' Retirement System, Oklahoma City, was one of only five public plans with more than $1 billion in assets to outperform its benchmark by at least 300 basis points. Its 17.4% return, compared with the 14.4% benchmark, also blows away the TUCS median return.
The $7.06 billion San Bernardino County (Calif.) Employees' Retirement Association had the second best overall return and largest relative outperformance with a net 15.05% return against its 8.2% custom benchmark. The $5.4 billion Missouri Local Government Employees Retirement System, Jefferson City, was second at 14.5%, compared with a 9.1% benchmark.
Oklahoma Teachers likely would be considered a midsize public pension plan, and that potentially could be an advantage, said James Wilbanks, executive director. “Just like our belief in smaller companies, smaller plans can grow faster, be more nimble and more committed,” he said.
Kelly Cliff, senior vice president and chief investment officer of public markets at Callan Associates Inc., San Francisco said smaller plans have more difficulty diversifying, which benefited them this past year as U.S. equities outperformed global portfolios.
“In general, it's harder for some smaller plans to adopt the diversification practice of larger plans,” Mr. Cliff said. “Building a global equity portfolio with less home bias is more challenging for small plans.”