U.S. public pensions reported median gains of 16.1 percent last year, the fourth time in five years that the funds earned double-digit returns, according to Wilshire Associates Inc.
Smaller public pensions, which invest a greater share of their assets in U.S. stocks, beat plans with assets of more than $5 billion, the Santa Monica, California-based consulting firm said today in a report. The Standard & Poor’s 500 Index of U.S. stocks rose 30 percent in 2013, ending the year at an all-time high for the first time since 1999.
“U.S. equities trumped all other asset classes,” said Bob Waid, a managing director at Wilshire.
Assets of the 100 largest U.S. public pension funds rose to $3.06 trillion in the third quarter of 2013 from $2.94 trillion in the previous three months, the highest level since 1968, according to the U.S. Census Bureau.
State and local government funds with less than $1 billion of assets had a median return of 16.45 percent, while “mega” plans returned 15.76 percent, Wilshire said.
Nationwide, state and local pensions had a median allocation of 45.3 percent in U.S. stocks, according to Wilshire’s Trust Universe Comparison Service.
By contrast, mega public pensions with more than $5 billion in assets had a median allocation of 36.4 percent in U.S. equities. These funds had a median allocation to alternative assets such as private equity and hedge funds of 12.1 percent compared to 0.73 percent for all public pensions.
“The larger plans have been really good about diversification,” Waid said in an interview. “That, in theory and observed in practice, works good over the long term, but you’ll have short time periods where if you’re overweighted in one asset class and that asset class does really well, you’re going to do really well.”
Corporate pensions, which had a median allocation of 32.6 percent to bonds, returned about 13.1 percent for the year ending Dec. 31, while foundations and endowments returned about 15 percent, according to Wilshire.
Many state and local government pensions count on annual investment returns of 7.5 percent to 8 percent to pay benefits for teachers, police and other employees.
In the 10-year period through Dec. 31, public pensions with more than $5 billion in assets had a median return of 7.21 percent, compared with a 6.9 percent median for all public funds, according to the consulting firm.