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Pension giants out of sync with alternative investments

Moves in and out of alts seem to be based on market volatility and fees rather than a long-term strategy

Sep 3, 2015 @ 2:00 pm

By Jeff Benjamin

When multi-billion-dollar pension funds start darting in and out of alternative-investment strategies, it should raise some questions about what really represents so-called smart money.

Regarding the report this week that the board of the $191 billion California State Teachers' Retirement System, known as Calstrs, is considering a $20 billion move out of traditional investments and into alternatives, Morningstar Inc.'s Jason Kephart called the timing “very curious.”

“It seems like they're making the move into alts after you've seen all this market volatility,” he said. “Alternative investments make sense for a long-term approach because the performance is driven by different factors, but this looks like they're chasing alternatives after a dislocation.”

To be fair, it could just be the timing of a board meeting, but it still looks awfully coincidental to see one of the country's largest pension funds suddenly get religion in the wake of a 6% August decline in the S&P 500 Index.

“I find it somewhat amusing because it looks a little reactionary, but I guess it's better late than never,” said Dick Pfister, president and chief executive of AlphaCore Capital.

“My mindset when it comes to alternatives is that they should be in the portfolio all the time, and not something you move in and out of based on the winds of the markets,” he said. “I suppose it's good that they're doing it, because it will be better for the pensioners in the long run, as long as they don't have another knee-jerk reaction when we enter another bull market.”

Calstrs' media representatives did not respond to requests for comment.

'REVALIDATION'

While alternative-investment proponents like Mr. Pfister view the Calstrs move toward alternatives as a “revalidation” of alternative strategies, the Calstrs report is also curious because it appears contrary to a recent move by neighboring pension giant, the California Public Employees' Retirement System, or Calpers.

A year ago, Calpers' board said the $300 billion fund would eliminate its $4 billion allocation to hedge fund investments. Calpers representatives did not respond to a request for comment, but reports at the time stated that a primary motivation for the move out of hedge funds was to reduce management fees, which totaled $135 million to hedge funds alone during the fiscal year ended June 30, 2014.

It would be interesting to know how the Calpers board, as well as the 1.6 million public employees depending on the pension fund, might feel today about paying those extra fees for some downside protection.

Across the five alternative mutual fund categories tracked by Morningstar, the August performance beat the S&P by a range of 2 to 5.6 percentage points.

In very different ways, it looks like a rude awakening for two very large pension funds.

“I find it all very interesting, because this volatility is scaring people to death,” said Bradley Alford, chief investment officer at Alpha Capital Management.

“Unfortunately, you can't wait until your house is burning to buy fire insurance,” he said.

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