When investing becomes a political beast, what happens to the participants’ money? You know, the ones whose money is being invested? I’ve always felt public pension managers are too eager to be seen as doing the right thing. They invest in what I refer to as a “job security” approach. Their own job security, that is. They’re horses out of the barn investors chasing the pack. They can’t just stand there and do nothing. Stay tuned. Heather Gillers reports in The Wall Street Journal that pension managers are looking at offloading some stocks and adding private credit to their portfolios. She writes:
Some of the nation’s largest pension funds are looking at pulling back on stocks and adding private credit, while grappling with the possibility of a prolonged economic slowdown.
Board members of the $307 billion California State Teachers’ Retirement System voted Thursday to reduce the fund’s stockholdings to 38% from 42%, a shift staff and consultants said would lower the fund’s risk level without bringing down returns. The public pension fund, the nation’s second-largest, is closely watched by other retirement managers.
Calstrs will also increase inflation-sensitive holdings such as commodities and investment in private infrastructure to a 7% target from 6%. It will bump the target for private equity to 14% from 13%, making it a closer reflection of the amount Calstrs actually holds. The value of private equity holdings had swelled to 15.5% of the fund as of March 31.
The remaining money from stocks—2% of the fund—would go into private credit, an increasingly popular holding for pension funds as interest rates have risen. Pensions typically invest in a pool of loans to middle-market companies whose yields fluctuate with market rates.
Similar discussions are on the docket for the other funds that control around $5 trillion in retirement savings for America’s teachers, firefighters and other public workers. These jobs still come with promised future benefit checks for retirees, as opposed to 401(k)-type plans in which savings rise and fall with the market. States and cities have to find a way to pay out the expected amount, whatever the market environment.
That meant making more-aggressive bets during a decade of low rates and a stimulus-fueled, postpandemic economic boom. While pension funds can now earn just as much at lower risk, recession concerns are mounting. Behind those changes is what helped fuel the demise of three U.S. regional banks since March: the rapid rise in interest rates in response to a post-Covid acceleration in inflation.
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