Philadelphia Inquirer

Returns Slide On N.J. Pension-Fund Investments

The Philadelphia Inquirer — Thursday, September 24, 2015

Andrew Seidman, Inquirer Trenton Bureau

TRENTON — New Jersey's pension-fund investments posted an annual return of 4.16 percent in the fiscal year that ended June 30, following years of mostly sustained double-digit returns, state officials said Wednesday.

Nevertheless, according to Treasury Department data, the unaudited investment returns beat the state's benchmark, a composite of various indexes, which yielded 2.93 percent.

The pension system for nearly 800,000 active and retired public workers had about $79 billion in assets at the end of the fiscal year.

Public employees and the state contribute to the pension funds, which are invested in stocks, bonds, real estate, hedge funds, and other asset classes.

Last fiscal year, the investments netted a rate of return of 16.9 percent. Between fiscal years 2010 and 2014, the average annual return was 12.4 percent, according to Treasury data.

Benjamin Hurst, a member of the State Investment Council who represents the Public Employees' Retirement System, acknowledged at the board's meeting Wednesday that Treasury's Division of Investment had done a good job.

But given the state's underfunding of the pension system, he said, "People are still concerned about the future of their lives."

Last fiscal year, citing a budget shortfall, Gov. Christie underfunded the pension system by more than $1 billion — money that would have been invested and returned more cash to the fund. He again underfunded the system in June, by $1.8 billion, in the fiscal 2016 budget.

Christie, a Republican presidential candidate, says he wants to move to a 401(k)-style system to shore up the pension funds.

The 2015 rate of return fell short of the state's 7.9 percent assumed rate of return, which the treasurer and actuaries determine is necessary to cover long-term liabilities.

The state's investment performance was weighed down by geopolitical turmoil in emerging markets and volatile prices for commodities such as oil, according to the Division of Investment.

New Jersey's so-called alternative investments performed better, with buyouts-venture capital, real estate, and debt-related private equity each returning greater than 10 percent. About 13 percent of the pension funds were invested in those three asset classes combined.

Domestic stocks, which accounted for nearly a third of the asset allocation, returned 7.48 percent, narrowly beating the S&P 1500. New Jersey's top stock holdings include Apple, Microsoft, and Walt Disney.

The state's decision to invest in alternatives has been criticized by some Democrats and public-sector union leaders because the funds are invested by outside managers who command high fees.

The state paid external fund managers a combined $570 million in management fees and incentives in fiscal year 2014.

Fees paid in fiscal 2015 will be included in the Division of Investment's annual report, which is likely to be released in early 2016, according to the division's director, Christopher McDonough.

Members of the State Investment Council, which oversees the management of the pension funds, have defended the fees, saying alternatives are key components of a diversified portfolio.

Moreover, they say, outside money managers who have expertise in areas such as private equity are better equipped than the state's own staff to manage these investments.

Net of all fees, over the last five years the state's alternative investments have outperformed the broader fund and a standard index of 70 percent stocks and 30 percent bonds, the division said in a report presented to the council on Wednesday.

Also Wednesday, McDonough said the state was close to selling its interest in JLL Partners, a private-equity firm, which had come under scrutiny for investing in a payday lending firm that was fined $10 million last year by the federal government for using illegal debt-collection tactics.

In 2005, the state invested $50 million in pension funds with JLL, which acquired Texas-based Ace Cash Express Inc. a year later.

Payday lending is essentially illegal in New Jersey. The nonprofit group New Jersey Citizen Action, which asked the state to divest earlier this year, praised the state's effort to do so.

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