U.S. state and city pensions eked out a median 1.24 percent return in the first quarter as bond-market gains couldn’t overcome lackluster U.S. stock returns and losses on international equities, according to the Wilshire Trust Universe Comparison Service.
The results mean that public pensions, which typically target annual returns of 7 percent or greater, will have to make up ground the rest of the year. If they don’t, governments eventually have to pump more taxpayer money into the funds to make up for the shortfall. The modest returns following gains of 2.73 percent during the fourth quarter and a losses of 4.6 percent in the three months through September.
“You’d be going back to the contributor and saying we need to have more funding,” said Robert Waid, a managing director at Wilshire Associates in Santa Monica, California.
The Standard & Poor’s 500 stock index returned about 1.3 percent during the first three months of the year, while the MSCI index of international equities lost 3 percent. The Barclays U.S. Aggregate bond index gained 3 percent.
Public pensions with more than $5 billion in assets, which have more invested with hedge funds and private-equity funds, performed slightly worse than others. Large pensions logged a median 1.15 percent for the quarter, dragged down by their investments in hedge funds. Those investment vehicles lost 3.3 percent before fees for the quarter and 5.9 percent for the year ending March 31, according to Wilshire TUCS.
Some investors have lost patience with loosely regulated investment pools that typically charge fees of 2 percent of assets under management, plus 20 percent of profits above a certain benchmark. New York City’s pension for civil employees last month voted to pull $1.5 billion from them because of high fees and poor returns.