Strong internal team powers New Jersey fund

The $68 billion New Jersey Division of Investment (NJDI) has made claims to be the best performing public pension fund in the US in fiscal year 2009. This is made all the more impressive considering the internal investment team, which manages a large majority of assets, numbers only 16. Amanda White looks behind the scenes at the asset allocation and investment moves that benefited the fund.

With a financial year return for 2009 of -14.2 per cent, the New Jersey Division of Investment is well above its peer group in performance terms. The Wilshire TUCs average for all public pension funds for that period was -17.06 per cent, and of the 44 state funds that have reported returns the average is -19.6 per cent (although it should be noted North Carolina comes in par with New Jersey at -14.2 per cent).

What also makes NJDI unique is its very lean internal investment team. This team manages about 95 per cent of assets, and yet it numbers only 16, with a number of staff having dual responsibilities. On average each investment professional is responsible for about $4 billion of assets.

Consultant Strategic Investment Solutions says the division employs about half the average (63) and median (56) staff of large internally-managed peers. When analysts, traders, and portfolio managers are taken into account SIS reports NJDI has 32 staff, compared with CalPERS with 77 and Ohio STRS with 113.

There are also a number of asset allocation anomalies when compared with the large public pension peer group. For one, the exposure to alternatives is well below the peer group, as is US equities, and fixed income is well above the peer group. In addition New Jersey has a larger hedge to interest rate risk, with the inflation hedge increasing.

But probably the biggest investment play for the division in the financial year was its high strategic and tactical allocation to fixed income.

According to a presentation by William Clark, director, New Jersey Division of Investment one of the most notable portfolio moves during the fiscal year was the purchase of $2.5 billion of investment-grade corporate bonds in August 2008, which has resulted in an increase of 21 per cent from November 2008 to June 2009. Similarly additional investments of $243 million in several bank loans funds in October 2008 in response to margin calls to prevent forced liquidation of nearly $750 million in positions resulted in an increase of 19 per cent until the end of the financial year.

Another positioning investment during the year was a $2.6 billion purchase of Japanese equities as a means to capitalise on a likely global economic recovery. This remains to be tested.

The fund is also watching emerging markets equities closely, noting it was the asset class to rebound the most in 2009. Clark says the fund is evaluating whether it makes sense to increase its small exposure to the asset class (it now has 1.2 per cent allocated).

Going into the financial year the fund was relatively liquid, with a 7 per cent allocation to cash. While the cash allocation whittled down to about 5 per cent at the end of the year, a number of divestments were made to maintain liquidity. In January 2009 the fund cancelled five commitments totalling $365 million to private equity and real estate funds and redeemed $200 million from two hedge fund investments to reserve liquidity and take advantage of better opportunities in other asset classes.

According to SIS if anything, New Jersey was hurt by the J-curve in private equity and real estate and had poor opportunistic real estate returns.

Throughout the year the fund also reduced its allocation to US equities by about 5 per cent, with the allocation sitting at about 25 per cent at the end of June 2009. This was offset by an increase in US fixed income by about the same amount, and an increase in US high-yield by 1.5 per cent.

The other notable asset allocation was the reduction in international fixed income from 2.7 per cent at the beginning of June 2008 to a flimsy 0.1 per cent.

Since June the fund has made very slight increases to its exposure to US equities, international equities and US fixed income, which remains the highest allocation in the fund at 19.2 per cent.

Asset Allocation Comparison

(6/30/09) NJDI Targets large public plan median

Domestic Equities 23.0% 35.0%

International Equities 18.5% 17.0%

(Global Equities) (41.5%) (50.0%)

Total Fixed Income

(incl TIPS, Cash) 41.0% 28.3%

Real Estate 4.0% 9.0%

Private Equity 5.5% 10.5%

Absolute Return 5.0% 6.3%

Real Assets/

Commodities 3.0% 5.0%

Large Plan Sample = CalSTRS, Oregon, Washington, NYSCRF, Florida, IL TRS, Tx TRS, PSERS, North Carolina, Tennessee

Source: Strategic Investment Solutions presentation to the November board meeting