Mr. Ennis said in an email that the $40.1 billion Iowa Public Employees' Retirement System has "one of the cleanest benchmarks I came across."
The Des Moines-based pension fund reported a net return of -3.9% for the fiscal year ended June 30, 15 basis points above its policy benchmark return of -4.05% for the period. For the three, five and 10 years ended June 30, IPERS returned an annualized net 8.8%, 8.6% and 8.6%, respectively, compared to the respective benchmarks of 8.7%, 8.5% and 8.6%.
Sriram "Sri" Lakshminarayanan, IPERS chief investment officer, said in a phone interview that for one thing, "private markets tends to have these real long investment horizons and it doesn't do anybody any favors by trying to measure the value of a private market investment or the performance on a monthly basis and daily basis. It's a different time horizon and needs to be measured differently."
Mr. Lakshminarayanan said they do not use external benchmarks for their private markets. Their solution is that the pension fund benchmarks its private markets investments and the asset allocations to its own past performance "to make sure that the noise of private market benchmarking doesn't affect us on a day-to-day basis and lead us to bad decisions in rebalancing the portfolio."
IPERS also has separate allocations to core-plus fixed income, which is benchmarked to the Bloomberg U.S. Universal Bond index, and public credit, which has its own custom benchmark of 67% Bloomberg U.S. High Yield 2% Issuer Capped index and 33% J.P. Morgan EMBI Global index.
Mr. Lakshminarayanan said the distinction helps the pension fund avoid the issue of really wanting to hire a "high octane credit manager," but having to place it in a portfolio with the wrong benchmark.
When the pension fund implemented factor-type portfolios, investment staff created a new asset class "global smart beta equities" with its own custom benchmarks and carved out traditional domestic and international equity asset classes.
"We felt these factor premiums manifest themselves over decades," Mr. Lakshminarayanan said. "It takes 20 years before you can realize whether these things can add value or not."
Valerie Ge contributed to this report.