Pension Funds Struggle to Find Returns

By on April 4, 2012

Julie Creswell of The N.Y. Times writes about the challenges facing pension funds in a low return world. Apparently the managers of these funds are increasingly turning to alternatives including high fee hedge funds.

Creswell contrasts the $26.3 billion Pennsylvania State Employees’ Retirement System with Georgia’s $14.4 billion municipal retirement system. The Pennsylvania pension fund has bet the house on riskier alternatives with 46% of its assets in 400 private equity, venture capital and real estate funds. Georgia’s state law prohibits alternative investments.

Pennsylvania paid about $1.35 billion in management fees and achieved returns of 3.6% annually over the past 5 years. Georgia paid a comparatively lilliputian $54 million in fees (about 1/25th of Pennsylvania’s) while achieving returns about 50% greater at 5.3% annually over the same 5-year period.

The median return over the past 5 years was 4.9% for all public pension plans. Pennsylvania and Georgia represented the extremes of  pension fund allocations between alternative and passive investments.

It is granted that a 5 year period is not a sufficient look back to determine efficacy over long time periods, but it will be interesting to observe how the two systems compare going forward.

Creswell reports that pension funds are increasingly using alternatives (with higher fees). According to the Wilshire Trust Universe Comparison Service, retirement systems with more than $1 billion in assets had increased their stakes in real estate, private equity and hedge funds to 19 percent in September 2011, from 10.7 percent in 2007.

It appears the managers of pension funds are afflicted with “magical thinking,” as Larry Swedroe would put it.

Source: The N.Y. Times

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