I read a very interesting article in the Wall Street Journal last week, which explained how public pension plans have become extremely dependent on making “alternative” investments. The article, Weaning Off Alternative Investments, cited South Carolina’s public pension plan strategy as an example of this dependence, although I’m sure other states follow their model as well.
South Carolina has almost half of its assets invested in hedge funds, private equity and other alternative investments, and now they are considering the fact that it may be time to cut back on these kinds of investments. Curtis Loftis, the South Carolina state treasurer, is tired of the high fees and complex terms associated with the state’s alternative investments, and has recently requested a review of their dealings with private equity firms and hedge funds. Ultimately, Loftis would like to reduce the state’s exposure to these types of investments.
This is easier said than done, however, since most public pension funds are pressured to hit a specific annual return in order to “satisfy pension obligations to thousands of teachers, clerks and other state employees without having to increase contributions from the state.” In the end, it seems that alternative investments offer the best chance at hitting those targets. On the flip side, it is difficult to assess if alternative investment strategies are working because they involve less liquid assets and can take years to produce big payoffs. Investment fees are also rising steadily year after year.
So what is the answer? Should public pension plans eliminate alternative investments from their portfolio or increase their alternative investments in order to reach their annual return target? I believe it is a balance between the two. Public pension plans should scrutinize any type of investment made and make sure it is the best possible one. Alternative investments are needed in order to see a large return, but anyone should be wary of putting all of their eggs in one basket. Check out the article for yourself and let us know what you think.