The Kentucky Teachers’ Retirement System and the Kentucky Retirement Systems significantly underperformed when compared to other large US institutional investors over a 10-year period, partly because of small alternatives allocations, according to a report commissioned by the Kentucky governor’s office.
The $15.6 billion teachers’ system and the $17 billion retirement systems, which combined manage the pension benefits of more than 400,000, lost out on $3.5 billion and $1.5 billion in investment gains, respectively, the study said.
The study, conducted by Missouri-based pension adviser Hammond Associates, found that for the 10-year period ending 30 June 2008, the retirement system returned 5.6 percent on its overall portfolio compared to the medium of 6.6 percent. The teachers’ retirement system, which ranked in the fourth quartile for the one, three, five and 10-year periods, trailed the median by 2.1 percent.
Hammond accounted for the $5 billion figure by calculating the “opportunity cost” of not meeting the median return each year for the last decade. The median performance was calculated using the Russell Mellon Public Plans Greater than $1 billion universe.
Along with an overhaul of both the teachers’ and the retirement systems' investment committee structures, Hammond recommended that both pensions review their asset allocation policies with a view to diversifying their portfolios and possibly increasing their exposure to alternatives.
The retirement systems currently maintains a seven percent target allocation to private equity and special situations, while the teachers’ system maintains a two percent allocation. The median allocation for public plans greater than $1 billion stands at 14 percent, according to the study.
The teachers’ system began investing in alternatives in the last 12 months; the retirement system began allocating toward the asset class in 2007.
Both pensions have been hit hard by a pronounced downturn in the public markets, prompting concern from many Kentucky politicians that the retirement systems were underperforming.
The teachers’ system holds 53 percent of its total assets under management in US public equities, while the retirement systems holds 34 percent. In contrast, the Harvard Endowment invests only 12 percent of its portfolio in US stocks.