The New Jersey Division of Investment generated double digit returns in fiscal year 2024 while maintaining good liquidity and dry powder on hand with an overweight to cash and cash equivalents.
Last year, cash continued to provide a real return barbelled against a slightly overweight position to US equities in a “cautiously optimistic” strategy that afforded the investor exposure to the strongest performing asset class while maintaining maximum liquidity.
In the State Investment Council’s annual meeting held in January, director Shoaib Khan told trustees that the fund had been buoyed by a “constructive market environment” through the year. In 2025, the team expects interest rates to remain higher for longer, allowing the portfolio an opportunity to continue to benefit from higher yields on its holdings in cash. But Khan said the cash position is likely to decline through 2025 given the robust pipeline in new private market opportunities and pending closings.
The Division, one of the largest US pension fund managers, oversees the assets of seven public pension systems totalling approximately $78 billion as well as other pools of state capital that include the $41 billion Cash Management Fund, CMF.
Khan highlighted the variations between the actual allocation of the pension fund portfolio and its target allocations, explaining that the policy benchmark is a measurement tool but the team doesn’t always manage the portfolio to the benchmark. Sometimes it’s preferable to retain dry powder, alternatively the team will “put their foot on the pedal” in areas of greater return like US equity.
Asset classes that struggled last year included private equity. Real estate also continued to work through the continued cap rate adjustments. The fund returned 10.7 per cent last year while five-year annualised returns are 7.7 per cent and the ten-year return is 6.94 per cent.
In a “constructive environment” for markets, Khan said that diversity is crucial to adding value because returns from different asset classes differ. Private equity, US equity and international developed market equities are the best asset classes over the past decade. In another example of the importance of diversification, commodities was a star performing in 2021 and a laggard in 2023 and 2024.
A milestone for emerging managers
2024 was also a milestone in the division’s emerging manager program where the investor seeks to invest with smaller, off the radar managers in order to access a larger and more robust set of investment opportunities. The platform is also an opportunity to identify the next generation of managers at an earlier point in the cycle.
Last year the emerging manager roster expanded beyond private equity to include an allocation to private real estate and private credit managers. In 2025 the Division will look to expand the platform to potentially include selected public market asset classes.
Khan noted the importance of looking forward and the steady evolution of the portfolio since the division was set up in 1951. Back then the entire portfolio was invested in fixed income.
By 1975, 10 per cent of the portfolio was invested in US equity and today it is divided between global growth, real return, income and defensive assets comprising fixed income (24 per cent) US equity (28 per cent) international equity (20 per cent) risk mitigation strategies (3 per cent) private equity (13 per cent) real estate (8 per cent) real assets (3 per cent) and cash (2 per cent)
With an eye on the future, Khan discussed how AI will impact portfolio construction and risk management. Trustees heard from Sorina Zahan, founder and chief executive at Aiperion, a consulting, technology and scientific research firm focused on risk. She explained that AI will help investors deal with uncertainty and support portfolio optimisation around market, liquidity and liability risk.
Integrating AI will support investors integrate different factors simultaneously and harmonize processes to support portfolio construction. The conversation touched on the importance of adopting a new way of thinking and abandoning linear thinking to move to a systemic, total portfolio approach.
