Investment returns for the state’s beleaguered retirement systems have totaled 4.68 percent during the fiscal year that ends June 30, well shy of assumptions

Hedge funds will play an even smaller role in the overall investment strategy for the state’s public-worker pension system under a new asset-allocation plan that was approved by a key oversight panel in Trenton yesterday.

Among other changes, the latest investment guidelines for the pension system will cut the allocation target for hedge funds in half, from 6 percent of all investments to 3 percent, when they go into effect in October.

Reducing exposure to hedge funds, a form of alternative investment typically involving higher risk and higher potential returns, has been a key goal of labor representatives who serve on the New Jersey State Investment Council, the panel that authorized the new plan during a public meeting yesterday. Several labor representatives highlighted the high fees that many funds have charged the state even in years when returns have been lackluster as they praised the decision to scale back yesterday.

“I’m happy to see this move in this direction,” said Eric Richard, an AFL-CIO representative.

But the drawdown will still fall short of the expectations that Gov. Phil Murphy set as a candidate, when the first-term Democrat urged the state in a news release to “get out of the hedge fund business” altogether.

Meanwhile, the new investment plan also did not include a full divestment of stakes in fossil-fuel companies, disappointing environmental activists who have been lobbying the SIC to take a firm stance in a response to global climate change. Under Murphy’s lead, the state has set a goal of being rid of fossil fuels as a source of power by 2050.

Continuation of an earlier trend

New Jersey’s $78.2 billion pension system covers the retirements of nearly 800,000 current and retired public workers, making it one the nation’s largest. While pension benefits are funded with contributions from workers and their government employers, investment returns are also a critical source of revenue for the retirement funds. But the state’s long history of underfunding its own employer pension obligation has also put more pressure on the SIC to maximize returns.

According to the latest performance figures reviewed yesterday, the pension system’s overall investment gains have totaled 4.68 percent during the current fiscal year, which ends June 30. But the rate of growth still trails the pension system’s assumed rate of return of 7.5 percent despite some impressive gains in recent months.

The asset-allocation plan approved yesterday is the first major redrawing of the pension system’s overall investment strategy since 2016. The prior plan also scaled back hedge-fund investments, from 12.5 percent to 6 percent. But at the time, appointees of former Gov. Chris Christie had largely defended the hedge funds and other alternative investments as a key part of a broader diversification strategy that was aimed at helping the state weather economic downturns such as the one experienced in 2009. They also said the alternative investments generated positive returns even when factoring in the fees.

The new investment plan further reduces the hedge-fund investments, down to 3 percent. Among other notable changes is an increase of investments in U.S. Treasury bonds, from 3 percent to 5 percent, and a bumping up from 10.25 percent to 12 percent of stakes in private equity, another former of alternative investment that typically offers higher returns for higher risk. Like hedge funds, they typically charge a general management fee as well as performance fees.

Concerns about a slowdown

The backdrop for the new asset-allocation plan is an expectation that overall economic growth will be slowing in the near term, including in the financial markets. Fear of an international trade war is also a factor, said Corey Amon, the director of the Division of Investment, during yesterday’s meeting.

“Anything that slows trade essentially slows global economic growth potential,” Amon said. “So a trade war in and of itself would be a negative in terms of potential economic growth.”

The new investment plan is the first to be adopted during Murphy’s tenure. It won votes yesterday from all of the SIC members who have been appointed by Murphy since he took office in early 2018, and his spokesman also praised the panel’s action yesterday when reached by NJ Spotlight.

But the SIC, which sets policy for the Division of Investment, will still have some work to do if it wants to live up to the standard that Murphy, a former Goldman Sachs executive, espoused as a candidate when he also took direct aim at the hedge-fund investments. At the time, hedge-fund managers were being paid an estimated $270 million in fees even as the pension system itself was experiencing year-over-year losses.

“The days of padding the pockets of a few lucky and connected Wall Street insiders with our money needs to end, and as governor I will see they do,” Murphy said in a 2016 news release.

Asked for comment yesterday, spokesman Matthew Saidel said Murphy “supports the objective, independent investment process followed by the State Investment Council and applauds its decision to reduce New Jersey’s reliance on hedge fund investments.”

A call for more shareholder activism

Meanwhile, the state will continue investing in companies tied to the fossil-fuel industry as state officials said they have an overarching fiduciary responsibility to maximize investment returns for the pension funds’ beneficiaries.

But a study released with the new asset-allocation plan yesterday suggested the SIC should start engaging more with the companies it’s investing in to encourage the disclosure of climate-change policies and greenhouse-gas and emissions reports. Working with other shareholders more to reduce emissions was another recommendation released yesterday.

Tina Weinhaus, a member of the DivestNJ Coalition, a group that has been calling on the state to drop its fossil-fuel investments, praised the SIC for conducting its analysis of the fossil-fuel investment issue. But she also told SIC members she was disappointed with the less-than-aggressive recommendations.

“There is no time to waste,” Weinhaus said when the meeting was opened up for public comments. “Developing a divestment plan now protects your members, our children and generations to come.”

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