Funds that sought higher returns to bridge shortfalls by turning
to private equity, hedge funds and real estate have seen lower
returns in the past five years than have funds that stayed with
stocks and bonds.
Searching for higher returns to bridge looming shortfalls, public
workers' pension funds across the United States are increasingly
turning to riskier investments in private equity, real estate and
But while their fees have soared, their returns have not. In
fact, a number of retirement systems that have stuck with more
traditional investments in stocks and bonds have performed better in
recent years, for a fraction of the fees.
Consider the contrast between the state retirement fund for
Pennsylvania and one in Georgia.
The $26.3 billion Pennsylvania State Employees' Retirement System
has more than 46 percent of its assets in riskier alternatives,
including nearly 400 private equity, venture capital and real estate
The system paid about $1.35 billion in management fees in the
past five years and reported a five-year annualized return of 3.6
percent. That is below the target of 8 percent needed to meet its
financing requirements, and it also lags behind a 4.9 percent median
return among public pension systems.
In Georgia, the $14.4 billion municipal retirement system, which
is prohibited by state law from putting its money in alternative
investments, has earned 5.3 percent annually over the same time and
paid a total of about $54 million in fees.
The two funds represent the extremes, with Pennsylvania in a
group of pension systems with some of the highest percentages of
investments in alternatives and Georgia in a group of 10 with some
of the lowest, according to groupings of funds identified by the
London-based research firm Preqin.
An analysis of the sampling presents an unflattering portrait of
the alternative bets: The funds with a third to more than half of
their money in private equity, hedge funds and real estate had
returns that were more than a percentage point lower than returns of
the funds that largely avoided the riskier assets. They also paid
nearly four times as much in fees.
While managers for the retirement systems say that a five-year
period is not long enough to judge their success, those fees
nevertheless add up to hundreds of millions of dollars each year for
some of the country's largest pension funds. The $51.4 billion
Pennsylvania public schools pension system, for instance, which has
46 percent of its assets in alternatives, pays more than $500
million a year in fees. It has earned 3.9 percent annually since
Whether the higher fees charged by the alterative-investment
firms are worth it has been hotly debated within the investment
community for years. Do these investment entities, over an extended
period of time, either offset the wild swings in assets during rough
patches of the market or provide significantly higher gains than
could be found in less-expensive bond and stock investments?
"We can't put it in Treasury notes and bonds; that's just not
making any money," said Sam Jordan, the chief executive of the
Austin Police Retirement System in Texas.
James Wilbanks, executive director of the Oklahoma Teachers
Retirement System, which has largely stayed with stocks and bonds,
said that pension funds were obligated to take a cautious approach.
"We all heard the stories about institutional funds that had more
than half of their assets in private equity in 2008" and then had to
sell, he said.
While both sides of the debate can point to various studies, the
topic is taking on a sharper focus as more funds embrace the riskier
strategy. By September 2011, retirement systems with more than $1
billion in assets had increased their stakes in real estate, private
equity and hedge funds to 19 percent, from 10.7 percent in 2007,
according to the Wilshire Trust Universe Comparison Service, known
as Wilshire TUCS. …