New Jersey Posts Mixed Results in Meeting Benchmarks

New Jersey’s state pension fund is trailing most of its goals, which is not helping it bridge its wide funding gap.

In its most recent monthly report, the New Jersey’s State Investment Council revealed it had not only failed to return 3.68% over the past year, but also that the $76 billion pension fund has only achieved two of its longer-term custom index requirements.

That would be the 10- and 20-year benchmarks. The fund returned just five and 39 basis points above its 10.18% and 5.46% goals, respectively. Plus, the fund is currently above its year-to-date target, by 32 basis points. But it is sagging elsewhere.

The fund’s three- and five-year returns are 39 and 10 basis points below the 10.37% and 6.52% targets, respectively.

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New Jersey’s State Investment Council is two-thirds into its current fiscal year, which ends in June, and has so far only achieved 1.67%, slightly more than half of its expected 2.89% policy benchmark.

Source: New Jersey State Investment Council

The fund’s assumed annual rate of return is 7.5%. Considering the state is also 31% funded, things are looking grim for New Jersey in 2019.

That’s not to say it hasn’t had its share of good fiscal years—some, such as 2018 (9.6%), 2017 (13.07%), and 2014 (16.79%), were great. Others, such as 2016 (-0.93%), 2015 (4.09%), and the dismal 2009 (-15.49%) and 2008 (-2.61%), were not.

Source: New Jersey State Investment Council

So what’s working?

Stocks have been mostly good during the non-crisis periods, but have also waned in the past year to due volatility, especially troubling in non-US developed and emerging markets. In the US, the fund bets on tech: Apple, Alphabet, Microsoft, and Facebook are top-weighted among domestic equities.

Venture capital investments have done fine, as have private equity strategies, which are not included in February’s investment summary (they are reported on quarterly). Debt-based moves have been OK with the exception of the past year. Real estate has also been decent.

That leaves the plan’s equity-oriented hedge funds, whose picks have underperformed consistently with the HFRI benchmark in the one-, three-, and five-year periods. They’ve been good over the 10-year period, though.

Source: New Jersey State Investment Council

It’s not just hedge funds that are to blame. Government contributions have lagged. Since 1999, annual payments have only risen from $2.7 billion to last year’s $11 billion.

Gov. Phil Murphy’s administration wants to pump $3.2 billion into the pension plan, which would only cover about 60% of what actuaries have said would help restore its funded status. Murphy’s 2020 budget proposal suggests increasing it to $3.7 billion, but that would only bring it to 70% of what actuaries want. If the state’s contributions trudge along that sluggish, the fund won’t get the full actuarial amount until fiscal 2023.

New Jersey’s public pension plan is one of the worst-funded in the country. A mounting deficit and a future downturn could place the fund into insolvency.

The pension fund’s asset mix is 58.31% global growth strategies, 19.75% income, 8.72% real return, 6.07% liquidity, and 4.81% risk mitigation. Targets for those classes are 56.25%, 21.50, 8.75%, 8.50%, and 5%, respectively.

Source: New Jersey State Investment Council

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Tags: Insolvency, New Jersey State Investment Council, Pension, Returns

Canada’s C$309.5 billion ($230.2 billion) pension fund Caisse de dépôt et placement du Québec (CDPQ) added C$10 billion in low-carbon assets in 2018, and raised its target for 2020 to C$32 billion, according to its second Stewardship Investing Report, which provides an update on its environmental, social, and governance (ESG) initiatives.

“In 2018, we acted on several fronts to meet our objectives, because we understand that our financial performance will only be as sustainable as the world we invest in,” Michael Sabia, CEO of CDPQ, said in a release. “We reduced the carbon intensity of our portfolio by 10%. Our progress is solid, underscoring our goal to make a constructive and concrete contribution to the fight against climate change.”

According to the report, CDPQ performed more than 250 analyses of companies and assets representing all of its new investments in 2018, as well as investments being monitored to determine whether there have been any changes in the quality of their ESG practices.

“These detailed analyses provide an overview of issues specific to each company’s industry and the measures implemented to manage them,” said the report.

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It said the ESG analyses are submitted to portfolio managers and investment committees who consider them in their decisions, and in their negotiations with the company for the investment.

“Many give rise to more extensive follow-ups and discussions with companies to encourage them to improve their practices,” said the report. “Our teams also perform follow-ups to ensure that our portfolio companies are managing ESG criteria properly, thereby allowing la Caisse to play its role as a long-term investor in an effective and responsible manner.”

The fund said it also regularly discusses its ESG expectations, in particular governance matters, at annual meetings of the companies in which it invests. The proposals voted on in 2018 related to various topics, especially governance and compensation, such as the election of directors, executive compensation and disclosure of political contributions, and government relations activities.

The report said that in recent years, CDPQ has increased its engagement as a shareholder, and in 2018 alone, it addressed 771 ESG-related topics with companies in its portfolio, which is a 62% increase from the previous year.

The fund said tackling climate change has become its priority among ESG issues as “the impacts of climate change are becoming more obvious than ever around the world, with negative human, environmental, and economic consequences.”

In addition to climate change, CDPQ has targeted four focal areas: governance, expanding opportunities for women in business, promoting sound practices and transparency in international tax, and engaging on social issues.

“We also encourage the election of board members with different skills and experience, as well as the inclusion of women, since they are still underrepresented in the boardroom,” said the report. “In our view, having a variety of perspectives provides for better decisions.”

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Tags: Canada, Carbon, CDPQ, ESG, Michael Sabia, Pension