Pennsylvania SERS to Cut Return Rates, Hedge Fund Allocations

The Pennsylvania State Employees’ Retirement System is trimming its long-term assumed rate of return as well as its hedge fund allocations amid choppy markets and political pressure.

The $29 billion fund’s board agreed to reduce the rate to 7.125%, from 7.25% at last week’s meeting. Executive Director Terrill Sanchez said the present market environment was the deciding factor for the 0.125 percentage point reduction, which she called “appropriate.” The target change will happen at year-end.

Pennsylvania’s state plan also voted to temporarily invest less in hedge funds, shifting some of that money into bonds as it determines its next allocation moves. The targets for bonds and hedge funds, which fall into the retirement system’s “multi-strategy” category, hovered at about 11% and 10% of the portfolio, respectively.

State politicians such as Treasurer Joe Torsella and Gov. Tom Wolf have been vocal about the organization cutting assumptions and dumping hedges from its asset mix. Torsella, a Democrat who served on the Public Pension Management and Asset Investment Review Commission last year, has welcomed a rate cut.

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Wolf, a fellow Pennsylvania Democrat, and some Republicans have also criticized the fund’s heavy usage of high-fee investment managers, opting that the plan go passive and allocate to more low-fee index funds.

“By modestly reducing the assumed rate of return and reducing allocation to costly alternative hedge funds, SERS can reduce risk to the fund and improve security for beneficiaries,” Torsella told CIO. “I would be concerned with any investment fund that fails to acknowledge the continuing trend of lower and more realistic expected investment returns, or the substantial risks associated with investment strategies that strive to capture unrealistic earnings.”

How has the program been doing? According to accounting firm Korn Ferry’s just-released actuarial report, in this year’s first quarter, it earned 8.2% over the period ended March 31. Global public equity was the big winner, as a 12.9% harvest offset much of the fund’s 4.6% loss at 2018’s end. Hedge funds (7.1%), real estate (4.3%), bonds (3.7%), private equity (0.6%), and cash (0.4%) also worked out, as no asset classes were in the red.

The Pennsylvania State Retirement System is 61.7% funded.

Tags: Assumption Rate, Bonds, Hedge Funds, Pennsylvania Public School Employees Retirement System (PSERS), Pension, Returns

Institutional investors representing almost $5 trillion in assets across Asia, the Middle East, Africa, and Latin America are drifting somewhat in the same direction in different key aspects, a report by global consulting firm Mercer concluded.

Mercer found that investors are trading sizable amounts of their fixed income holdings in their asset allocations to make room for investments in the equities markets, with Japan and South Korea putting an emphasis on this strategy. The report found that of the total group they studied, there was an aggregate 8% increase towards their exposure in equities, resulting in portfolios with average weights of 46% to fixed income, 40% to equities, 10% to cash/other, and 4% to alternatives. The latter is gaining traction as well, especially in the likes of infrastructure and private equity.

“We believe the trend will become more pronounced in the future as many investors continue their education and decision-making process to move into these asset classes,” Mercer said in the report. South Korea and Taiwan collectively have the largest allocations towards alternative investments, with Argentina and Mexico following close behind.

These investors are facing a multitude of separate issues that require a keen eye on strategy and market movements. Mercer notes that one of the many market trends is an indication of overextension of credit, while at the same time, government policies that provide a boon to business practices and consumer optimism continue to increase. The two contrasting equity and bond markets meeting in this fashion provides the potential for turbulence going forward.

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The study found that growth market economies in these regions are blossoming into global economic leaders, with almost 70% of growth now originating from these economies. This is due in part to more of the world’s population, especially in these markets, growing into middle class or wealthy societal rankings; 54% of the world’s middle class resides in Asia.

The countries do hold a bias towards investments in their own countries, however, a creeping sense of liberalization is pushing these investors past their traditional boundaries for the sake of portfolio diversification.

“In general, we are seeing trends toward more open markets, which enable investors to better diversify their portfolios across geography, sectors, asset classes, and currencies,” said Fiona Dunsirem, Wealth Leader, Growth Markets at Mercer. “They often face regulatory restrictions on investments outside their home countries, as well as needing to address political, economic, and demographic shifts.”

Mercer normally reports on pension trends both domestically and internationally.

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Tags: Alternatives, International Investors, Mercer, Mexico, South Korea, Stocks