STUMP » Articles » Which Public Pension Funds Have the Highest Holdings of Alternative Assets? Has It Paid Off? » 29 November 2017, 06:17

To follow up on yesterday’s post, let’s take a look at allocations to alternative asset classes by public pensions.

I’m going to look at it multiple ways, but let’s start out with something simple: percentage of assets allocated to alternative asset classes.

I’m using the Public Plans Database.

So here are the top 20 highest allocations for fiscal year 2016:

To the left of each plan name is what is called a sparkline: it’s showing the trend of allocation to alternatives since 2001 for that particular plan.

You can see that for almost all these plans, the increase in holdings of alternative assets has been fairly recently.

CORRELATION BETWEEN ALLOCATION AND RETURN?

So, have these allocations paid off? One of the columns there is the average return (geometric) since 2001 (when the database started). Not every plan has complete 2016 data… or even complete 2015 data. So for each plan, I picked the year that had the last complete info.

Squinting really hard… I can’t really see a pattern. Yes, some of the points on the graph look bogus: I think the ones with 0% average return are “false” data. But it’s what’s in the database, and I’m not going to go in an adjust these numbers right now.

Let’s see what a linear trendline shows:

Yes, it shows a slightly negative slope… but the r-squared statistic essentially shows there’s no correlation at all. The returns have little to do with allocations to alternatives (so far).

POSITIVE (OR NEGATIVE) EFFECT REMAINS TO BE SEEN

One could argue that for almost all the high-allocation plans that the high allocations developed only recently. We can see that from the sparklines, but let’s take a look at this really messy graph:

You can see the allocations are fairly low pre-2008, and really take off after that.

To make it even more clear, let’s just pick the top 10 plans:

Yup, it really was post-2008 where these allocations take off (and yes, that Detroit line looks weird in 2015. I highly doubt the allocation was 0% that year).

However, it doesn’t really seem that allocations to alternatives really has a positive effect, at least so far.

This post from John Bury on hedge fund returns casts further doubt.

To be sure, not all alternative assets are equal – neither are all equities or bonds. But the main reason being given for adding alternative asset classes that are not public securities like corporate bonds and stocks is to boost return.

That doesn’t seem to be actually happening.

Underlying spreadsheet is here.