State pension plans could do better with a greater mix of alternative investments in their portfolios, according to a report from Cliffwater LLC.
Examining investment trends and asset allocation over the last 10 years, Cliffwater, an alternative advisory firm, took particular note of asset allocation in the report.
Over a 10-year period ended June 2012, the 97 state pension plans surveyed earned an average of 6.4 percent as compared to individual pension funds, which posted returns ranging from 5 percent to 8.1 percent, according to Cliffwater.
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A trend toward passive strategies and poor manager selection were to blame, said Cliffwater's Stephen Nesbitt.
He noted the top-performing state pensions in the survey were plans setting aside the highest allocation to alternative investments, meaning hedge funds, private equity and real assets. In particular, the Missouri State Employees Retirement System was the highest-yielding retirement fund, posting 8.1 percent gains over the 10-year period. This fund also had the highest allocation to alternatives — far more than any other state — at 65 percent.
Nesbitt, for one, thinks states should take a more diverse approach to pensions.
"The lesson of the past 10 years is that alternatives as a whole can potentially contribute
significant value to state pension systems, although the types and selections of alternatives also impact results," Nesbitt said. "The traditional 1990s investment model that placed so much importance on manager selection within traditional stock and bond asset classes generally produced below average returns over the past 10 years and will likely do so going forward."
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