Riskier Investments Are Costing Pension Funds
Unable to meet projected returns, California’s public pension funds have increasingly been turning to higher-yield alternative assets like private equity, hedge funds and real estate. But that decision has come at a price.
A new report from the PEW Charitable Trusts shows the state’s largest pension funds incurred over $10 billion in fees and investment-related costs in 2014 from these more complex and risky vehicles. As a percentage of assets, spending on investment fees have climbed 30 percent.
“Greater investment in equities and alternatives can provide higher financial returns but also bring heightened volatility and risk of shortfalls,” according to the report. “Most funds exceeded their investment return targets during the bull market of the 1990s but then suffered losses during the volatile financial markets of the 2000s – leading to higher pension costs for state and local budgets.”
Despite the turn toward more complex investments, returns remain disappointing. The trend does appear to have waned since the time period studied by PEW. Over the past two years, CalPERS has moved away from some of these alternative investments, even closing its hedge fund division.
Read more at the Sacramento Bee.