Pennsylvania State Fund Returns 6.5% in 2016

Fund hires new real estate consultant, replaces hedge fund asset class with a multi-strategy asset class.

The Pennsylvania State Employees’ Retirement System (SERS) reported that it ended 2016 with a 6.5% net-of-fees return on investments, which produced earnings of $2.1 billion for retirement benefits. This is up from a 0.4% net-of-fees return, or $116 million in earnings, for 2015.

Global public equity investments were the fund’s top-performing asset class for the year, returning 8.4%, followed by private equity, fixed income, and hedge funds, which earned 6.8%, 5.6%, and 4.2%, respectively. In 2015, alternative investments was the fund’s top-performing asset class, earnings 7.8% for the year


The $26.3 billion fund slowed down toward the end of the year, earning 1% in the fourth quarter, compared to 3.4% in the third quarter. However, this was up slightly from the same quarter last year, when the fund returned 0.9%.


According to SERS, long-term returns over the past 25- and 30-year periods ended December 31, 2016, were 8.1% and 8.6%, respectively, net of fees. 


The Pennsylvania SERS also moved $534 million of non-traditional fixed income portfolios to this new multi-strategy asset class, and reallocated $368 million in assets from the multi-strategy asset class to low-cost index strategies in the fixed-income and global public equity asset classes.  


It also invested $400 million from cash for investment in two low-cost index funds. It put $250 million of that into the MCM World ex US Index, which fit within the fund’s global public equity asset class. The other $150 million was put into the MCM Bloomberg Barclays Aggregate Bond Index, which fits within the Fund’s fixed income asset class   


The fund said that the investment and reallocation will result in a net decrease to the cash and fixed-income asset classes of $400 million and $234 million, respectively; and a net increase to the global public equity and new multi-strategy asset classes of $468 million and $166 million.  


In a move to further diversify the fund’s investments, the board also decided to replace its hedge fund asset class with a multi-strategy asset class. The multi-strategy asset class will include opportunistic credit-driven strategies, non-traditional opportunistic fixed income, distressed credit and equity strategies, equity, and hedge funds.  


The fund’s board also hired Boston-based NEPC, LLC, as the system’s real estate consultant to a five-year contract that begins June 1, 2017. The fund’s contract with current real estate consultant The Townsend Group expires on June 30..  NEPC serves more than 300 retainer clients, with total assets of more than $900 billion.


By Michael Katz