Made Off With NJ Pension Money

The New Jersey State Investment Council held a public meeting yesterday and three news sources covered it – all a little differently. Investment gains for New Jersey’s $79 billion pension fund fell sharply in the fiscal year that ended June 30, and those pension investments are in negative territory so far this year, state officials reported Wednesday…..Venture capital, real estate and equity investments performed the best. But the state’s investments in commodities tumbled 20.85 percent largely due to crude oil prices falling by half in recent months, and bets on emerging and developing economies around the world turned out to be losers. The pension fund supports the retirement of nearly 800,000 active and retired public employees in New Jersey. It pays out roughly $700 million a month in benefits. Its market value over the past year decreased dramatically from $79 billion at the end of June to slightly more than $71 billion at the end of December.  About $27 billion of the fund’s assets were invested in alternatives including global diversified credit, hedge funds, private equity, real estate, and real assets as of June 30. For the fiscal year that ended June 30 and the calendar year that ended Dec. 31, the best performing asset classes were those that are part of the state’s controversial alternative investment program…..For the calendar year, alternatives had a one-year annualized return of 5.6 percent, compared with .63 percent for the total fund and –1.88 percent for traditional investments. Over five years, alternatives’ annualized returns were 9.22 percent, higher than all other investments’ 6.56 percent. “The alternative investments program (net all fees) has outperformed the broader pension fund and a mix of broader global public markets… on an absolute and risk-adjusted basis,” the division said. A consultant, Aon Hewitt Investment Consulting, also reported favorably on the fund’s alternative investments, saying the division’s “alternative investment program has achieved higher returns with less risk” and “may be viewed favorably from a cost-benefit perspective.”

njspotlight: Still, pension-system officials yesterday defended their overall alternative-investment strategy, pointing to the numbers compiled by Aon Hewitt that showed the investments have produced 9.2 percent net returns over the last five years. That beats the pension system’s assumed rate of return of 7.9 percent, and the overall 7.3 percent rate of return the system experienced during the same five-year period.

The takeaway:

$27 billion (38%) of the $71 billion fund is in ‘alternative investments’ for which a value is assigned by the seller of the investment.  Could we someday (possibly this year) be reading some variation of a story like this about New Jersey’s pension fund investments?

With hindsight, it is easy to say how foolishly those who invested acted — easy, but unfair. What was constructed was the investing equivalent of putting a red rope in front of an empty club and then letting no one in. They didn’t dream up impenetrable financial products; they offered consistently better-than-average returns. Who wouldn’t want that?

Delivering 20 percent every year for 30 years would have been too hard to believe (and pay out) while 5 percent would have sent most people searching for more elsewhere. Returning 10 to 12 percent year after year was a stroke of genius: it was within the realm of possibility, if just barely.

The point is that the mistakes investors made are ones that anyone could make. While the stories of so much money lost are tragic, none had to occur. Much of this loss could have been prevented if people had questioned what they were doing.

With slight variations, the source material for this warning.

5 responses to this post.

  1. Posted by dentss dunnigan on January 28, 2016 at 12:20 pm

    Hmmmmmm not a problem ,since the taxpayer is on the hook to make up any shortfall.Once that constitutional ballot question passes ,just deposit your home into the pension fund .


  2. Posted by dentss dunnigan on January 28, 2016 at 1:52 pm

    Just noticed it ….is your headline a play on words “made off” as in Bernie ?


  3. Right. The value of alternatives is that there is no publicly available value. So you can just decide “expected returns” are higher and retire to Florida before the truth comes out.


    “There is a fascinating and counterintuitive spin on all of this: “Nobody seems to care about performance”, as pension consultant Christopher B. Tobe told Gretchen Morgenson of the New York Times.”

    “That’s not precisely true. People do care about performance, as well as fees. It is just that in the hierarchy of public-pension fund needs, both take a back seat to expected returns. This is because the higher the expected return, the lower the capital contributions required of some obligated public entity.”

    “Here is the punchline: Those expected returns are a myth. They don’t exist, except for the most elite funds, which are a tiny percentage of the industry. A few can generate alpha; most of the rest are mere wealth-transfer machines.”


  4. Posted by Anonymous on January 29, 2016 at 11:55 am

    How much was paid to outside investment firms in 2015?


  5. Posted by Sean on January 29, 2016 at 3:26 pm

    Referencing this post, Mary Pat Campbell had some interesting things to add:

    “So it did okay in the short term (5 years is very short term for a pension), was higher than the overall portfolio rate… which was lower than the target rate.

    Consider that that five year period was a bull market almost the entire time, one starts to see a problem. They can’t meet the overall target when the market is doing very well.

    Have you seen what’s been happening this year?”

    “The problem is NJ is in a deep, deep pension hole. And they can’t even make the full pension contributions with relatively high assumed rates of return.”

    “They need the magic money fairy, and they can’t pretend the magic money fairy will come visiting if they’re invested in Treasuries and stock indices.”


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