Pa. pension fund outperforming major markets

March 2, 2008 1:26:37 PM PST
State-subsidized pension funds for Pennsylvania state workers and teachers far outperformed the U.S. stock and bond market indexes, leaving many investing professionals wondering how the results were achieved in such an awful environment. The $76 billion Pennsylvania Public School Employees' Retirement System announced last week that it earned 13.8 percent in 2007. The $35 billion State Employees Retirement System said it did even better, at 17.2 percent.

By comparison, the benchmark Russell 3000 U.S. stock index was up just 5.1 percent. U.S. bond indexes used by the funds as pension benchmarks did little better than the stocks.

"One would like to know what they were invested in and how they managed this spectacular performance," said Bernard McCabe, senior mathematician at Independence Advisors Inc., of Wayne, told The Philadelphia Inquirer for Sunday's editions.

The pension systems credited the strong numbers to private-investment managers that collected a total of $640 million in fees from the two funds last year.

The high returns enabled SERS to slow the expected increase in the state's payroll contribution that helps keep the system solvent. PSERS said it should actually be able to cut its expected contribution from the state and local school districts for next year.

A closer look at the numbers shows the investment categories for which the pension systems reported the highest returns are also the hardest to verify.

Both PSERS and SERS reported 2007 results that were above their overall average from three categories - private equity, real estate and commodities. Foreign stocks also reported big gains.

For both private equity and real estate, the pension reports excluded data from the fourth quarter of 2007, when the global decline in credit markets hurt asset prices. For the fourth quarter, future reports should show that "returns may be lower as compared to recent returns, but still above the benchmarks," said PSERS spokeswoman Evelyn Tatkovski.

Also, returns for private equity and real estate include the estimated value of assets that are not publicly traded and may be hard to sell in the current difficult credit markets. Tatkovski said PSERS sold real estate investments made long before the downturn, so it was still able to book a significant profit in 2007.

The funds did not make year-end data available for individual private-equity and real estate funds. SERS will make that data available after its next board meeting March 14, said SERS spokesman Robert Gentzel.

Commodities, the smallest category for both funds, have soared in value with the decline of the U.S. dollar. Foreign stock values also benefited from the dollar's decline, and international diversification helped both funds.

At PSERS, U.S. stock investments returned 4.8 percent for the year, slightly trailing the benchmark Dow Jones Wilshire 5000 index (up 5.6 percent), as they have for the last five years.

By contrast, SERS said its U.S. stock managers trounced the Russell 3000 index, returning 9.5 percent, compared with 5.1 percent for the benchmark.

But the SERS U.S. stock returns include profits reported by two multibillion-dollar hedge fund accounts managed by Blackstone Alternative Asset Management LP of New York and Pacific Alternative Asset Management Co. LLC of Irvine, Calif.

Those hedge funds "did particularly well in 2007," and hedge profits accounted for "almost all the difference" between the overall "U.S. equity" profit and the benchmark's lower increase, Gentzel said.