The report also showed an increase in fund managers that extend private loans to companies or buy distressed debt. The pensions used 36 "alternative credit managers" in fiscal 2023 compared with 27 last year.
Public pensions have latched onto private credit because it offers higher yields than U.S. government or corporate bonds, while protecting funds from price swings in public markets. Investors get paid more because they hold assets that are less liquid and harder to trade. Private debt comprised 6.7% of total assets among state pensions with dedicated allocations to the category, according to a August 2023 report from KBRA.
"While rising interest rates have the potential to negatively impact companies' cash flows and, ultimately, their ability to make loan payments, investment returns have been sound despite the elevated percentage of floating rate obligations within most private debt portfolios," the KBRA report said.
The city's five funds used 321 managers, with more than 70% overseeing more costly alternative assets like private equity, according to the financial report.
In fiscal 2023, pensions for the city's retirement funds returned about 8%, boosted by a rally in domestic and international stocks in the first half of 2023. Since the gain exceeded the funds' 7% target, the city's required contributions to the pensions will decline by about $550 million over the next five years.
Still, the pensions' gain was almost four percentage points lower than a benchmark that represents the return of a portfolio with a mix of 65% equity and 35% fixed income, according to the city.
The five funds are $40.1 billion short off the assets needed to cover promised benefits, or about 83% funded, according to the financial report. Nationwide, U.S. state pensions had assets sufficient to cover 78.2% of promised benefits as of June 30, according to pension consulting firm Wilshire.
