The New Jersey State Investment Council, which oversees seven state pension funds that have about $72.6 billion in assets, may substantially boost its alternative investment allocation cap.
A May 19 final vote appears likely on the preliminary asset allocation presented at a March 24 Council meeting, which covers goals in the two-year to four-year range; the new allocation targets are long-term targets, and the one-year target has not been determined yet. The biggest shift in the current thinking involves a move to an alternatives allocation ranging from 27.5 percent to 38 percent, up from the current 19.2 percent target and 17 percent actual holding. Long-term targets for specific alternative asset classes include 14 percent for hedge funds, 7.9 percent for private equity, 7.1 percent for real estate, and 4.2 percent for commodities. If approved, the new allocation targets would take effect July 1 for the fiscal 2012 year.
The New Jersey funds returned about 15 percent for the 2010 calendar year, and 13.4 percent for the fiscal year ended June 30, 2010, says Timothy Walsh, director of the Department of the Treasury’s Division of Investment. That compares to 9.3 percent for the 99 state retirement systems that reported actuarial data for 2010 to Wilshire Consulting. Walsh, who started his job in August 2010, attributes New Jersey’s relatively robust 2010 results to massive rebounds in world equity and credit markets.
Asked about the reasoning behind the potential alternatives allocation shift, Walsh says the funds have come close to the alternatives cap in several sub-categories, and need enough flexibility to make moves as needed. “Our main goal is to get the best risk-adjusted return with the least risk,” he says. He adds that, “The key for any large public fund is to remain diversified. They cannot have huge downside shocks like some have had in the past 10 or 12 years.”
The pension plans’ current underfunded liability, reportedly $53.8 billion, played a pretty minimal role in thinking about changes to the asset allocation, Walsh says. “We try to control what we can control,” he says of the Division of Investment. “We look at the left side of the balance sheet: the assets. But we obviously are not blind.”
Commodities and real estate are getting the closest looks among alternatives from Walsh and his colleagues. “We like the opportunity there, and we are underweighted,” he says. But their approach could evolve in both areas. Of real estate, he says, “There are more alternatives than just being a limited partner.” And many public funds lack a real grasp of how to define investment in commodities, he believes. “There are better ways than throwing money at the two main indexes,” he says, referring to the Dow Jones-UBS Commodity Index and the S&P GSCI Commodity Index.
The New Jersey thinking mirrors an ongoing migration among public funds to alternatives, says Donald Steinbrugge, managing partner at Agecroft Partners LLC, an alternative investment consultant. He offers a couple of explanations for moving more toward alternatives now, rather than sooner. “It takes a very long time for these pension funds to adopt a new asset class. If you go back 20 years, most public pension funds only invested in U.S. equities and U.S. fixed income,” he says. “And a lot of them are underfunded: The average funded status is probably close to 70 percent. A lot sustained very big losses in 2008, which was a big catalyst to find ways to reduce downside volatility and enhance return.”