U.S. public pensions ended the third quarter with a median gain of 4.67 percent as bond managers beat their benchmarks by buying riskier debt and fixed-income securities with longer maturities, Wilshire Associates said.
The gains raised returns for state- and local-government pensions with assets of more than $1 billion to 8.2 percent for the 10-year period through Sept. 30, the first quarter since 2007 that funds of that size surpassed 8 percent over a decade.
“It gives that strong message to stay the course and look to the long term,” because the returns came near projected results, said Robert Waid, a managing director at Wilshire, a consultant to investors and pensions. “The 10-year numbers are pretty close to what the actuaries give for a 10-year target.”
Most state and local-government pensions count on annual investment returns of from 7.5 percent to 8 percent to pay benefits for teachers, police and other employees. To make up for losses and poor gains in the past 10 years, reflecting the bursting of the Internet-stock bubble, the housing-market collapse and the financial crisis that ensued, public officials have had to pay more into pensions, straining budgets.
Estimates of deficits in the funds vary from $700 billion to more than $3 trillion, depending on assumptions. States have responded by raising minimum retirement ages, cutting benefits and asking workers to pay more into plans.
Active bond managers, who trade securities with the goal of outperforming an index, posted third-quarter median returns of 1 percentage point more than the Barclays U.S. Aggregate Bond Index, according to Santa Monica, California-based Wilshire. The index gained 1.58 percent for the three months ending in September, the report shows.
“These guys are either really good, or they’re just moving out on the fixed-income risk scale,” Waid said.
Fixed-income benchmarks, such as the Barclays index, don’t correctly reflect available opportunities because they’re heavily weighted toward U.S. or foreign government bonds, Waid said.
“Money managers aren’t going there,” he said.
Corporate bonds with ratings below investment grade, so-called junk, returned 4.6 percent in the third quarter, according to Bank of America Merrill Lynch indexes. Investors seeking alternatives to Treasuries poured $22.8 billion into the corporate junk-bond market in the year through last month, according to data compiled by the Royal Bank of Scotland Group Plc in Edinburgh.
High-yield company bonds have gained 13.3 percent this year through yesterday, according to Bank of America Merrill Lynch data. That compares with 10.4 percent for the total returns on a broad index of corporate debt.
Wilshire’s report, compiled by its Trust Universe Comparison Service, covers more than 1,500 institutional investment trusts, including corporate plans, foundations and endowments, union retirement funds and public pensions. They have combined assets of more than $2.9 trillion, according to the company.
State- and local-government pensions had the best returns in the third quarter, according to Wilshire. Taft-Hartley Health and Welfare Funds, the main source of health-care coverage for union members, had the worst performance, returning a median 3.6 percent for the period. Across all funds, the median gain was 4.49 percent.
The median public pension had 55.5 percent of its holdings in stocks, 25.7 percent in bonds, almost 3.7 percent in real estate and 1.9 percent in alternative investments such as leveraged-buyout or distressed-bond funds, according to Wilshire. About 2.5 percent was held in cash.