STUMP » Articles » On Alternative Assets and Pensions: Multiple Stories in New Jersey » 28 January 2016, 15:45

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On Alternative Assets and Pensions: Multiple Stories in New Jersey  


28 January 2016, 15:45

We’ve been here before. Back in 2014, I looked at alternative asset boosterism and I had a whole series of posts then (I will list at the bottom of this one).

Last year, I looked at the link between pensions investing in alternative assets and riskiness:

The problem one understands as these stories pile up:

- the way we value and fund public pension liabilities give extremely strong incentives to chase returns
- and there isn’t much in the way to tamp down this piling-on-the-risk behavior

In the insurance world, there are risk-based capital rules, where insurers have to hold capital against the risk inherent in the assets they hold to support their liabilities.

And pensions don’t.

Hell, they aren’t even required to hold the value of what they promised, much less additional risk capital.


John Bury excerpted three NJ news sites, but I came across this via an investment industry news source:

Ten years into its alternative investments program, the New Jersey Division of Investments had only positive things to report about the strategy at its annual state investment council meeting Wednesday.

The $26.7 billion alternatives portfolio has outperformed both the broader pension fund and global public markets on absolute and risk-adjusted bases over the last five years, according to the review.

“There’s been a lot of discussion about, ‘Are alternatives worth it?’” said Director Christopher McDonough. “This says yes.”

The $79 billion pension fund faced scrutiny for its alternatives program last year following the revelation that the asset owner paid over $600 million in fees to external managers in 2012, 2013, and 2014.

“To get 16.5% from private equity and 15% from real estate when they combined represent about 12% of our assets had a really meaningful impact on the performance for the year,” he said.

Kristen Doyle, head of pension funds at Aon Hewitt Investment Consulting, also gave a glowing review of the pension’s alternatives program, citing alpha generation, downside protection, and volatility reduction as key benefits.

According to Aon Hewitt’s analysis, a diversified portfolio including alternatives outperformed a 70/30 equity/bonds allocation for all rolling 10-year periods from 2003 to 2015. The portfolio also held up better in strong drawdowns, such as 2008.
While Doyle noted that the outperformance Aon Hewitt reported was net of fees, McDonough said the costs of New Jersey’s alternatives program were still a concern, and one the investment division would continue to evaluate going forward.

That one did not give me the benchmark numbers, but from one of the stories John Bury linked to:

Still, pension-system officials yesterday defended their overall alternative-investment strategy, pointing to the numbers compiled by Aon Hewitt that showed the investments have produced 9.2 percent net returns over the last five years. That beats the pension system’s assumed rate of return of 7.9 percent, and the overall 7.3 percent rate of return the system experienced during the same five-year period.

So it did okay in the short term (5 years is very short term for a pension), was higher than the overall portfolio rate… which was lower than the target rate.

Consider that that five year period was a bull market almost the entire time, one starts to see a problem. They can’t meet the overall target when the market is doing very well.

Have you seen what’s been happening this year?


Yes, I know that phrase is from something else. But it might as well be from someone writing on public pensions.

The reason NJ is desperate for yield is simple:

The desperation to make up for pension undercontributions as well as shoddy past performance explains this crap just as well.

But that goes for the subprime mortgage crisis as well — while some people who fed that beast were engaging in outright fraud, I think many more took on risks they really couldn’t afford, out of a variety of motivations. But it didn’t matter if their intentions were good or bad — that desperation for returns still ended with disaster.

The problem is NJ is in a deep, deep pension hole. And they can’t even make the full pension contributions with relatively high assumed rates of return.

They need the magic money fairy, and they can’t pretend the magic money fairy will come visiting if they’re invested in Treasuries and stock indices.


Just for convenience. This is fairly comprehensive, and most of these are from 2014.

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