NJ Pensions Enjoy 15% Gains; Higher Alt Allocations

(March 24, 2011) — The New Jersey State Investment Council has approved new investment guidelines for the state’s pensions to boost returns, which will allow a higher alternatives allocation totaling 35% of assets from the current cap of 25%.

The new rules, approved by the New Jersey State Investment Council, which makes investments for state pension assets, come as New Jersey’s pension funds gained 15% this fiscal year. As of February 28, assets were $72.6 billion, which represents a $1.8 billion increase since December 31, Bloomberg reported.

The State Investment Council revealed that domestic equities returned 32.3% from June 30 to February 28, making it the best-performing asset class. Meanwhile, about $35 billion, or 48%, of the fund’s assets were in public equity with $10.8 billion, or 15%, in alternative investments, which include private equity, real estate, and hedge funds.

Alternatives have enjoyed heightened popularity among institutional investors. According to a recent report by Preqin, sovereign wealth fund assets have swelled 11% in the past 12 months to about $4 trillion, fueled largely by intensified alternative investment programs.

“Following global economic stabilization, many sovereign wealth funds that had delayed plans to diversify their holdings as a result of the economic downturn have now resumed these plans,” Sam Meakin, Managing Editor of the 2011 Preqin Sovereign Wealth Fund Review, said in a release. “Therefore we expect the proportion of SWFs moving into the various alternative asset classes, as well as the amount invested by SWFs in alternatives, to continue to increase in the coming year. The significant collective assets under management of SWFs means that they represent an important potential source of capital for fund managers across all asset classes.”

Preqin’s findings provide context for the Korea Investment Corporation’s (KIC) decision to allot a greater portion of its portfolio to alternatives. “At this stage, we’re about 15% in the alternative/strategic space and 85% in public markets,” the KIC’s Scott Kalb told aiCIO during a telephone interview in January. “Normally, when you get involved in alts, there’s a ‘J-curve effect’ as it takes a while to get performance – but, interestingly, all our alternative and strategic investments are moneymaking, even at this early stage, which is unusual.”

Additional research has shown that pension funds and other institutional investors are backing out of traditional equity and bond allocations and increasingly favoring alternative asset classes. In January, financial services consultant firm bfinance noted that the findings from its recent study signals a shift in sentiment by pension funds, as they are seeking to diversify away from core asset classes and into property and alternatives, with infrastructure and private equity attracting the most popularity.

Also in January, a report by Cliffwater, an advisory firm for institutional investors, showed that public pension funds in the US are likely to allocate an additional $20 billion to hedge funds. The study by the alternative advisory firm found that nearly half of the pension funds surveyed invest only directly in hedge funds, while 33% invest solely through funds of hedge funds, and 18% allocate via a combination of both. The firm noted that it expects that persistent low bond yields and modest expected equity returns will likely drive pension systems to further increase their allocations to hedge funds. “Increased institutional familiarity with hedge funds should cause most new hedge fund investments to be direct rather than through fund-of-funds,” according to the report by Cliffwater.