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Robert Trigaux

Is Florida's public pension fund 'going to Vegas' seeking higher risks for higher returns?



TightropebyAlexandraBeier.Bongarts.GettyImages Wake up and good morning. Lots of rumbling out there in stories about how public pension funds, including the Florida Retirement System, are thinking about taking on higher risks such as investments in hedge funds to try and boost their returns. So how risky are we talking about? (Photo by Alexandra Beier/Bongarts/Getty Images)

Florida’s pension system, the fourth-largest state retirement plan, has been debating how big to make its first hedge-fund investments as it tries to close a 7 percent benefit-payments deficit. A Bloomberg story examines the thinking behind that possible trend. Florida's State Board of Administration, which oversees the public pension fund, issued an update on March 1 signaling a 16.3 percent gain in the fund from June 2009 through the end of last year.

In a twist, a New York Times story indicates that while public pension funds are reaching for higher returns, many corporate pension funds are doing just the opposite. They starting to move more money out of stocks and into safer, long-term bonds. Notes the New York Times:

"Though they generally say that their strategies are aimed at diversification and are not riskier, public pension funds are trying a wide range of investments: commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing. And some states that previously shunned hedge funds are trying them now."

What's driving public pension funds take take on more risk? Trying to preserve that magic "8 percent" return. Most funds believe they can average an 8 percent a year return, assuming stocks will pay 9.5 percent on average, and bonds will pay about 5.75 percent, in roughly a 60-40 mix. I don't know about you, but I have not talked to an investment expert in a long time who says stocks will generate 9.5 percent annually.

To get even more exotic, the Federal Deposit Insurance starting to encourage public retirement funds that control more than $2 trillion to buy all or part of failed lenders. That's in anticipation of a lot more bank failures coming down the pike and a clear lack of capital among potential buyers. Here's a Bloomberg story discussing this trend.

-- Robert Trigaux, Times Business Columnist

[Last modified: Tuesday, June 1, 2010 11:27am]


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