Dec. 2–The Massachusetts pension fund is poised to post its first year of positive gains since 2000, earning a 21 percent return through November and outperforming most of the other public pensionfunds in the country.
“We had to check these numbers three times,” said Stanley Mavromates, the pension agency’s deputy chief investment officer. If the heady returns continue at their current pace, the state agency running the fund will have its best year since 1997, and one of the best in its 17 years of investing.
Like most investors, Massachusetts is enjoying a healthy rebound in US stock markets. But the state fund is benefiting even more from its overseas investments, especially in securities of companies in emerging financial markets, which returned 46 percent for the fund in the first three quarters of the year.
For the nine months ending Sept. 30, the state fund had a 15.2 percent return, while the median return of all 71 public pension funds in Massachusetts’s peer group was 12.6 percent. That performance put the state ahead of 88 percent of its peers.
Wilshire Associates Inc., the investment advisory company that ranks institutional investors according to performance, said its confidentiality covenants prevent it from releasing ratings of other public pension funds during this period.
Total assets for Massachusetts, which were just over $27 billion at the start of the year, are now approaching $31 billion. The gains follow two straight years of dismal returns for the pension fund, which lost around 6.5 percent in 2002 and 2001.
“It’s been a pretty phenomenal comeback,” said state Treasurer Timothy P. Cahill, who is also chairman of the pension board.
It’s also a welcome development politically for Cahill, who stumbled in his first year at the helm of the pension board with his botched effort to oust the agency’s executive director, James Hearty.
Cahill had sought to replace Hearty with a handpicked successor, Steven Weddle, but Weddle withdrew just before a scheduled Oct. 7 board vote, when his support among pension trustees crumbled amid questions about Weddle’s qualifications and Cahill’s tactics.
Since then, Cahill agreed with fellow trustees on the nine-member board to have a national search conducted for qualified candidates. And at a meeting this morning Cahill said the board is expected to affirm the hiring of the headhunting firm of Russell Reynolds Associates to run the search. Hearty has agreed to stay on as executive director until a successor is seated.
The Cahill-Hearty affair also led to the resignations of Jack Meyer and Allan S. Bufferd from the investment committee that advises the pension fund on money-management issues.
Meyer, who runs Harvard University’s endowment fund, and Bufferd, who as treasurer of the Massachusetts Institute of Technology oversees that university’s investments, are both highly regarded in investment circles, and their resignations were seen as a blow to the state pension fund.
Yesterday Cahill introduced Meyer and Bufferd’s replacements, who are expected to be approved by the full pension board today. They are: Peter A. Brooke, a pioneer of the venture capital and private equity industry, who founded TA Associates and Advent International, where he remains chairman; and Glenn Strehle, who preceded Bufferd as MIT treasurer for 23 years before retiring in 1998.
Despite the handsome returns, the next few months will be a tricky time for the Massachusetts pension agency. In addition to looking for a new executive director, the fund will also be shifting billions of dollars to and from different investment pools as part of a reallocation of its overall investment mix.
For example, in order to smooth out returns and avoid the ups and downs of the US stock market over the past few years, the pension fund is lowering its allocation to domestic equities from 41 percent of the portfolio to 33 percent.
The rebalancing, targeted for next spring, involves moving $2.7 billion out of those stocks, and using the funds to increase assets invested in emerging markets, high-yield securities, and timber.
And at Cahill’s initiative, the state pension fund will also begin its first-ever investment in hedge funds, beginning with the selection of a money manager next spring who will invest state money in multiple hedge funds, a so-called fund of funds.
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