• State pension system portfolio is rebounding
    By David Taube
    VERMONT PRESS BUREAU | November 29,2012
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    MONTPELIER — A $3.57 billion portfolio for the state’s pension systems is still recovering as the Vermont Pension Investment Committee continues tweaking the diversification of the state’s portfolio.

    The market value of the entire portfolio is still below the level where it peaked in 2007. As a consequence of the recent financial downturn, by January 2009 it had been reduced in value to $2.1 billion and has been inching its way back ever since.

    As part of the recovery, restructuring steps have been gradually implemented. A traditional portfolio of 60 percent equity, as in common stocks, and 40 percent in bonds is much more diversified now — more conservative and cautious, leveling out dramatic dips and spikes depending on the market, the committee’s chairman, Stephen Rauh, said after its meeting Tuesday.

    “High volatility is kind of destructive for long-term rate of return,” Rauh said.

    As of Oct. 31, equity investments, which include common stock, were 33.7 percent of the portfolio, and fixed income — which includes bonds, emerging market debt and securities protected from inflation — was 34.9 percent. The rest consisted of 20 percent in multi-strategy investments and 11.4 percent in alternatives.

    Given the approach, the plan will tend to underperform in good markets but perform better in bad markets, committee members say.

    Part of that approach includes a $65 million contract for private equity, a new area to diversify the state’s pension portfolio. The committee gave its approval for the state to negotiate in May with the global firm HarbourVest Partners, and the state is beginning to invest the money over a long-term schedule.

    The total portfolio covers pension funds for state employees, teachers and municipal employees and has had a rate of return of 9.8 percent during the last year as of Oct. 31. The rate was 10.5 percent over the last three years and 6 percent since 2001.

    “We kept assets and we held them and waited for them to recover. So part of what you’re seeing is a rebound,” committee member Vaughn Altemus said afterward.

    Alternate committee member Tom Golonka said after the meeting that the portfolio’s recent returns were a good sign, pointing to the fund’s performance being in the top quartile of its peer group.

    But it’s unclear how that will continue given forecasts, Golonka said.

    Committee members recently received a copy of an analysis by Clifford Asness of the Greenwich, Conn.-based investment firm AQR Capital Management, which provides a bleak outlook.

    The report suggests that, based on a Shiller price-earnings ratio, the average real stock market return over the next decade will be 0.9 percent, ranging from a worst-case scenario of negative 4.4 percent to 8.3 percent in the best case.

    Rauh said after the meeting that some investors expect to have portfolios invest their way out of market failures but that the teachers plan can least afford risks at this time. According to sunshinereview.org, the plan is around 65 percent funded.

    david.taube @timesargus.com
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