15.5% Return – Really?

For the fiscal year ended June 30, 2014 the New Jersey pension funds got a return of 15.5%:
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If the funds really earned 15.5% you would expect the governor to call for an increase in the 7.9% interest funding rate to reflect actual experience – unless it was explained to him about what the funds are investing in:

Since 2008, according to the annual reports of the State Investment Council, the funds have more than doubled their investment in ‘alternative investments’ possibly because of how they are allowed to be valued (as described in those reports):

Alternative investments (private equity, real assets and absolute return strategy funds) – estimated fair value provided by the general partner and/or investment manager and reviewed by management. Because alternative investments are not always readily marketable, their estimated value is subject to uncertainty and therefore may differ significantly from the value that would be used if a ready market for such investments existed. Accordingly, the realized value received upon the sale of the asset may differ from the fair value.

Comparing the amount of alternatives to total assets:

Annual Reports……Alternatives…………….Total Assets…….Perc of Assets
6/30/08………….$9,480,927,776………..$78,555,786,863……12.07%
6/30/09…………..$8,074,899,057……….$62,923,069,358……12.83%
6/30/10………….$10,859,313,636………$66,824,229,179…….16.25%
6/30/11…………..$13,499,143,393………$73,735,190,225…….18.31%
6/30/12………….$16,810,102,421……….$70,109,097,425…….23.98%
6/30/13…………$20,015,522,984………$78,857,370,937……..25.38%

Near the end of those annual reports are listings of assets in Common Fund E (aka Alternative Investments). Comparing the values of three at random:

…………………..RC Woodley Park, LP……King Street Capital…AG Garden Partners
6/30/08………….$222,738,055……………..$114,539,250…………$146,909,535
6/30/10………….$486,017,039……………..$140,253,170………….$153,575,100
6/30/11………….$539,5197620……………..$200,154,792………….$174,301,975
6/30/12………….$490,996,319……………..$202,273,057………….$ 12,853,367
6/30/13………….$809,172,694……………..$228,634,153………….$   9,337,711
Perc Change……….+263.28%………………….+99.61%………………..-93.64%

It is impossible to tell if the extraordinary changes in values over the years are due partly to sales or purchases (or defaults) within these funds since those are not detailed.  All we have is an estimated fair value for investments not always readily marketable provided by the general partner and/or investment manager that may differ significantly upon the sale of the asset.  And that (plus the promise that the state will make their contributions) is what pension security in New Jersey increasingly hinges upon.

8 responses to this post.

  1. Posted by Anonymous on July 6, 2014 at 1:49 pm

    Hey John if there really is a 15.5 return how does that really help. Especially would it allow him to make the full contribution he was required by law. And what about state assets

    Reply

    • First off, the whole point of this blog is that those returns are bogus and Chritie knows it which accounts for his warnings about future returns in the video.

      Secondly, 15.5% would be nice if it was applied to $200 billion, which is what is supposed to be there if the plan were fully funded, but not that much of a factor when applied to $72.4 billion (which I calculate to be the base Christie refers to considering a 15.5% return versus 7.9% to get that $5.5 billion extra). I went into this actuarial flaw in a prior blog:
      https://burypensions.wordpress.com/2012/02/01/pension-funding-flaws/

      Reply

  2. Posted by LGreene on July 6, 2014 at 3:51 pm

    I don’t agree with your point that he should be asking for a change in the ” long term” expected rate of return based on the success of the past year or past few years ( too much volatility) . 15.5% does make it easier to achieve a 7.9% long term rate BUT:

    1) What return would be need to have a 7.9% return over next 5 years , 10years?given the 15.5% return of the past year? Is it achievable? How can the plan reduce its risk to help make its 7.9% return more probable?

    2) An Audit needs to be done of the alternative investments to make sure that the value reported is close to accurate. With 25% of assets in a highly illiquid and non-transparent asset class, it is even more important that a thorough in depth review be done of these investments. Reputable firms would welcome such a review. Those that don’t should be redeemed ASAP and managers found should be willing to be open about the value of their underlying investments.

    Some of these managers have close to $1B in assets in illiquid investments. A forensic audit is called for. NJ could even team up with other pension funds that are invested with these managers and collectively request the audit. Some of these assets could even be sold in the secondary market and some of their value realized .

    3) Immediately there should be an effort to review and reduce the fees paid for these investments.

    4) How much have the NJ taxpayers lost ( and retirees) because the fund was underfunded? If the fund had more money invested , such as 1B then the fund would’ve earned $150MM in past year. Now that has to be made up by taxpayers.

    Keep up the good work and providing interesting information

    Reply

  3. Posted by Eric on July 6, 2014 at 4:41 pm

    John:
    I seem to remember that the alternative investments had been listed by you at 38%. I guess the good news, from these numbers, is that it is listed at only 25%.
    Was an error made somewhere?
    Thanks,
    Eric

    Reply

  4. Posted by Eric on July 6, 2014 at 5:09 pm

    John:
    Thank you.
    Eric

    Reply

  5. […] there’s the issue of criticizing a rate of return of 16.9% (or 15.9% or 15.5%).  Imagine you get any one of those as an annual return in your own portfolio.  Are you […]

    Reply

  6. […] there’s the issue of criticizing a rate of return of 16.9% (or 15.9% or 15.5%).  Imagine you get any one of those as an annual return in your own portfolio.  Are you […]

    Reply

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