Cuomo Rejects Bill To Increase Alternative Investments By Pensions


New York Governor Andrew Cuomo on Thursday vetoed a bill that aimed to raise the percentage of assets New York City and state pension funds could allocate towards hedge funds and private equity.

From Bloomberg:

Governor Andrew Cuomo vetoed a bill that would have allowed New York state, city and teachers pension funds to allocate a larger percentage of their investments to hedge funds, private equity and international bonds.

The measure approved by lawmakers in June would have increased the cap on such investments to 30 percent from 25 percent for New York City’s five retirement plans, the fund for state and local workers outside the city, and the teachers pension. The funds have combined assets valued at $445 billion.

“The existing statutory limits on the investment of public pension funds are carefully designed to achieve the appropriate balance between promoting growth and limiting risk,” Cuomo said in a message attached to the veto. “This bill would undermine that balance by potentially exposing hard-earned pension savings to the increased risk and higher fees frequently associated with the class of investment assets permissible under this bill.”


A memo attached to the New York bill said raising the allotment for hedge funds and other investments is necessary for flexibility to meet targeted annual returns. A swing in the value of the funds’ publicly traded stocks can push the pensions “dangerously close” to the investment cap, the memo said. The change would also better enable the funds’ advisers and trustees to “tactically manage the investments to take advantage of market trends, react to market shocks and potentially costly rebalances or unwinds at inopportune times,” it said.

New York City Comptroller Scott Stringer supported the bill.


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Questions Raised About Return Assumption of Japan Pension


Some experts, including a senior economist at the Japan Research Institute, have questioned whether Japan’s Government Pension Investment Fund (GPIF) is being too optimistic by assuming a 6 percent return per year on its domestic equity portfolio.

From the Asian Review:

The managers of Japan’s huge Government Pension Investment Fund must have their heads in the clouds to expect domestic shares to return an impressive 6% a year, some observers say.

The $1 trillion fund’s new medium-term investment plan, released at the end of October, assumes that economic growth and other macroeconomic conditions will resemble the Japan of 1983-93. But its expected nominal return on Japanese equities is based on corporate earnings from 1983 to 1989 — the high-flying years before the nation’s asset-price bubble burst.

Japanese bonds make up 35% of the GPIF’s new asset mix, down from 60% in the old portfolio model. Meanwhile, the fund’s target allocations for domestic and foreign stocks have each more than doubled, from 12% to 25%, while its allocation for foreign bonds has risen from 11% to 15%.

When it comes to international bonds and equities, the GPIF expects nominal returns of 3.7% and 6.4% at best. But its “upside scenario” for domestic stocks has them rising at 6% — a rate at which an investment, if compounded, would roughly double in 12 years. To arrive at this number, the fund crunched share prices, dividends, earnings per share and other stock-related data from 1983 to 1989.

Although Japanese shares returned far more than 6% during the bubble era, they did so amid an unprecedented economic boom. The odds of such an earnings-supported-rally occurring again are debatable. As to why the fund’s baseline for domestic equity returns ends at 1989, not 1993 as in the economic assumptions, GPIF President Takahiro Mitani said it was to control for the effects of the bubble bursting.

Japan’s GPIF is the largest pension fund in the world with $1.1 trillion in assets.


Photo by Ville Miettinen via Flickr CC License