Ohio School Pension Fund Tilting to Infrastructure

Officials expect the space to return 8%-10%, outperform commercial real estate by 200 basis points.

Ohio’s $14.3 billion school employees pension fund plans to mix things up in its real assets portfolio.

The Columbus-based Ohio School Employees Retirement System will exit some commercial real estate allocations and put the money into infrastructure investments, according to its fiscal 2020 investment plan. This will bring infrastructure to 21% of the portfolio, from 17% (real estate takes up the rest of the portfolio). The rebalance will be about $100 million and occur over the next 12 months, as part of its fiscal 2019-2020 plan.

The fund, which has been making additional real estate/infra switches over the past three years, expects its infrastructure to produce 8%-10% returns, which the report says would outperform commercial real estate by “approximately 200 basis points.” It will keep its current mix of real estate investments, which includes industrial and specialty real estate such as student and senior housing, as well as office and retail holdings.

Real assets were about 14.6% of Ohio SERS’s total portfolio as of April 30. The rest was in global equities (46.6%), global fixed income (15.1%), global private equity (9.8%), multi-asset strategies (7.9%), cash equivalents (3.3%), and opportunistic and tactical strategies (2.6%).

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Asset rebalances happen frequently, but more so lately among pension plans. Many pension plans have been more active in that area as of late as economists and institutional investors are expecting a recession within the next year or so.

The Los Angeles Country Employees Retirement Association said in April it would cut $1 billion in real estate as part of its restructuring. That same month, Norges Bank, Norway’s $1 trillion sovereign wealth fund, cut back on real estate and ended its property arm.

Neither the fund nor Farouki Majeed, its chief investment officer, could be reached for comment.

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2Q Earnings Growth Might Not Go Negative After All

But even if they stay in the black, they will be puny compared to 2018’s blowout.

This week starts earnings season, with the first companies reporting their returns for the second quarter. Let’s say expectations aren’t high. In fact, they are for a negative number overall in the earnings growth rate.

The analysts’ consensus, as FactSet reported, is for -3.0%, which would mark the second quarter in the red since the oil-related troubles of 2016’s second quarter. And it also would be a back-to-back negative quarter, paired with this year’s first period, which was down 0.3%. By negative, we mean earnings were less than in the quarter the year before.

But John Butters, the senior earnings analyst for FactSet, has pointed out that, over the past five years on average, the actual earnings growth rate has been 3.7 percentage points higher than the projected number.

If that’s the case, then 2019’s second quarter might well be in the black, up 0.7% or thereabouts.

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At the start of the year, coming off a robust, double-digit-growth 2018, analysts expected a 6.5% increase for this year’s second quarter. Indeed, the results from last year were stunning, ranging from a low of 12.1% in the last quarter to a high of 19.2%.

Note that at the end of 2018, we were seeing a deceleration. That may well owe in part to the dwindling of the tonic that the tax cuts had on earnings.

Monday’s kickoff was led by Citigroup, which had a smart uptick of 6.5% from the year-before quarter. Part of the banking giant’s increase was owing to its investment in electronic trading platform Tradeweb. Another factor was its cost-cutting campaign.

Tuesday’s big names are two other large banks, JPMorgan Chase and Wells Fargo, as well as health care company Johnson & Johnson.

Worries abound for some previous profit machines. Chief among them: Apple, which is enduring the ebbing of its iconic iPhone’s popularity in the US, coupled with slowing sales in China because of the trade war.

 

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