The New Hampshire Retirement System announced Friday that the pension fund posted a 0.9% gain for Fiscal Year 2012.

Preliminary estimates had projected a 0.7% gain, but upon the final calculation for the fund’s real estate and alternative assets, the rate of return was revised upward.

In the quarterly investment highlights, the system also published the performance of each of the asset classes’ benchmarks. In benchmarks are used as a standard to see how well the fund has performed. Sometimes they are broad; such using an entire index, or they can be more specialized. In the case of the NHRS, the benchmarks are a mix of both, using indices as well as taking into account historical investment strategy decisions.

Below is a chart showing how well the NHRS matched the benchmarks for each asset class.[i]


Given the market volatility over the past year, the fact that the NHRS has lagged behind its benchmarks is no surprise. Generally speaking, volatility favors passive management over active management.

Market volatility however, is not the cause of the spread between the realized return and the benchmark for alternative assets. By definition, these types of holdings do not trade on the open market and are made up of stakes in privately held companies, non-publicly traded debt and distressed assets. These types of holdings are on the higher end of the risk spectrum, meaning big losses when things go poorly, or big gains should they do well.

The level of risk in Alternative Assets has split the public pension fund community, with some embracing it and others shunning it entirely. The NHRS currently has roughly 2.5% of assets in this type of holding, with plans to expand up to 10%.


Recently the New Hampshire Retirement System (NHRS) released its preliminary investment return figures for Fiscal Year 2012. Over the fiscal year, the NHRS saw .7% return on pension fund, falling well short of the assumed rate of return of 7.75%. While this shortfall will lead to a decline in the funding ratio, it is important to remember that pension funds do not function on a year to year basis. One really good year, or one really bad year does not mean that a system is healthy or sickly respectively.  Nor does the NHRS operate in a bubble, independent of global economic conditions.

The chart below shows a comparison of how the returns of the NHRS stand in relation to a handful of other state retirement systems that have reported preliminary figures so far. More or less, the NHRS’s returns were average when stacked against similar systems.

The research firm Wilshire Associates calculated the median gain to state and local pension funds for fiscal year 2012 at 1.15%, so though New Hampshire’s return was lower than the median, it was only by 0.4%.

So did the NHRS do badly this past year? While the system did poorly in terms of meeting the assumed rate of return for the year, comparatively speaking, the NHRS was firmly in the middle of the pack.

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.