AQR’s Asness Says Pensions Will Struggle to Return 7 Percent

AQR Capital Management co-founder Cliff Asness said the average public pension fund will have a “very hard time” achieving average annual returns of 7 percent to 7.5 percent.

A portfolio constructed of 60 percent stocks and 40 percent bonds will probably return 2.5 percent above inflation, compared with 5 percent historically, Asness said today at the Bloomberg Markets 50 Summit in New York. Most public pensions assume rates of return between 7 percent and 8 percent.

“It’s still going to be hard in a world where markets give you 5 percent to make 7,” said Asness. “For the next 10 through 20 years, I think the average pension fund is going to have a very hard time hitting that bogey.”

State public pensions had an $833 billion gap in fiscal 2011 between what they’ve promised retirees and assets, 10 percent wider than the previous year, according to a July report from Standard & Poor’s. Losses from the financial crisis, increased longevity for beneficiaries and a failure by governments to adequately fund retirement plans contributed to the gap.

Both stocks and bonds are overpriced, said Asness, whose Greenwich, Connecticut-based hedge fund oversaw $78.9 billion as of March 31. AQR’s clients include the Teachers’ Retirement System of Illinois and Ohio’s Public Employees Retirement System.

The median U.S. public pension returned 12.4 percent for the fiscal year ending June 30, according to Santa Monica, California-based Wilshire Associates.

New York City chief investment officer Larry Schloss, who oversees $145 billion in assets for the city’s five public pension funds, disagreed with Asness.

New York’s pensions, which returned 12.3 percent for fiscal 2013, benefited by increasing their stock holdings and lowering the allocation to bonds.

“Unconstrained, I think you can make it,” said Schloss. New York has increased its investments in higher-yielding bonds, Schloss said.

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