The recently released investment return figures from the third quarter show that while the New Hampshire Retirement System investment fund saw a 8.4% return in the corpus’s investments, beating the benchmark, the fund has only seen returns of just under 3% so far for the year, falling short of the 7.75% assumed rate of return.
The domestic equity portfolio, saw a 12.2% return, though falling short of the benchmark of 12.9%. Non-US equity saw 13.2%, which beat its benchmark by 2 points. Fixed income assets also did well, seeing a 2.5% return versus a .9% benchmark.
Due to the complex nature of the valuation of assets of Alternatives and Real Estate, the figures and benchmarks a lagged by one quarter, but the data is still valid. Real Estate saw 1.3% return, though the benchmark was 3.1%.
Lagging behind all other investment vehicles was Alternatives. Alternatives are private equities, essentially stakes in a company that does not have shares that are publicly traded. For example, Burger King and Toys R Us, fall into this category. Bain Capital, which was in the news as of late, as well as Berkshire Hathaway are both involved in these financial sector.
Alternatives saw a -.2% loss for the quarter, while the benchmark was 9.2%. So far this fiscal year and year to date, the NHRS has lost money on these investments. Annualized returns have also the System lagging far behind. Granted, the system had left the Alternatives portfolio go dormant, (i.e. new investments were not made, but money was not pulled either) until its revival in fiscal year 2011. For FY11, Alternatives saw a 13.9% return.
All that being said, it is hard to gauge the success or shortcomings of an investment class over the time frame of less than two years and even more so for just a single quarter that this investment snapshot looked at.
In the world of pension funds, Alternatives are a mixed bag. Some systems embrace them, seeing them as a way to close unfunded liabilities without resorting to pension reform. Others shun them, viewing them as far too risky an investment. While the gains could be substantial, so could the losses they reason.
The New Hampshire Retirement System currently allocates roughly 2.1% of the fund for these kinds of investments, roughly $132 million. Their new target 10%, all things being equal would mean an investment of more than $650 million. While that in of itself is not a bad thing, investments in this area must be carefully placed and closely monitored. Big risks can mean big rewards, but we shouldn’t forget it can mean big losses as well.
Though the fund is currently falling short of the 7.75% goal, the books do not close until June 30th, so there is time to make up the difference. Only time will tell if we hit or miss the mark this year.