As Murphy administration assumes power, PE delivers 12.3 pct for New Jersey

New Jersey Division of Investment’s private equity program delivered a 12.3 percent return in 2017, contributing to the $76 billion pension system clearing its new 7 percent assumed rate of return.

“Private equity has been the best performing asset class over the last 10 years, with a return approaching 10 percent,” said Division Director Chris McDonough, speaking at the State Investment Council’s annual meeting on Feb. 1.

While PE never generated the top returns among all asset classes in any given year, “it’s just been a consistent performer,” he said.

The direction of New Jersey’s private equity program has been thrown into question by the election of Gov. Phil Murphy, a Democrat and former Goldman Sachs executive, whose campaign railed against the pension’s investments in high-cost private equity and hedge funds.

The former made significant contributions to the public pension’s performance over the past decade-plus. New Jersey’s aggregate investment portfolio delivered a 7.18 percent annualized return since its 2003 fiscal year, amounting to a cumulative return of 183.01 percent, according to an Division of Investment report.

Despite its recent performance, New Jersey’s pension system remains dangerously underfunded against its liabilities. An Aon Hewitt analysis of the pension system included in the council’s annual meeting materials found the state’s retirement system was slightly more than 50 percent funded as of July 1, 2016, assuming the pension’s older 7.65 percent discount rate.

The State Investment Council did not consider any new investments at its meeting. Council Chairman Thomas Byrne said he didn’t want to do anything that conflicted with the newly inaugurated Murphy’s “intentions or priorities.”

It’s unclear whether Byrne, a Democrat appointed by former Gov. Chris Christie, will remain on the Council. Byrne said he expects to meet with Murphy in the coming weeks to discuss the SIC and other matters.

Beschloss

In addition to reviewing its annual investment performance, the council also heard market commentary from Afsaneh Beschloss, founder and CEO of Rock Creek Group.

While the U.S. economy’s fundamentals remain strong, the popularity of get-rich-quick schemes — including some cryptocurrencies — is a sign “we’re in a very risky period,” said Beschloss, a former Managing Director at Carlyle Group. “It’s a time to be careful and to think about portfolios very very carefully in terms of asset allocation.”

In particular, Beschloss said Rock Creek is wary of interest rates rising more quickly than expected. In December, the Federal Reserve raised interest rates by 0.25 percent, signaling it would continue steadily raising rates over the next year.

Recent, significant changes to the U.S. tax code along with President Donald Trump’s efforts to deregulate many businesses might spur inflation, however, which could quicken the pace of rate increases.

In that event, Beschloss cautioned the Division to avoid certain segments of the real estate sector, or other markets sensitive to rate changes.

Furthermore, given the length of the market’s bull run and the pervasiveness of macroeconomic risks — including growing populist movements and a nuclear North Korea — the US economy may be due for a shock.

“One of the things that has happened in the U.S. is that saving rates have gone down from about 10 percent to about 3 percent,” she said. “People are feeling good because of the wealth effect … and that has trickled down to more people.”

“If the markets were to go down, and that wealth effect is erased, we’d have a huge problem. Because then you don’t have those savings.”

In that event, much like during the most recent recession, consumer-oriented or discretionary goods and services will likely falter, Beschloss said. The travel industry, which has boomed in recent years, would suffer.

“We’re in a situation where there’s a lot happening in technology, in politics, in social life, that as investors we need to be aware of,” she said, echoing comments made by Byrne earlier in the meeting.

“We can’t hide under a rock once there’s a warning. At the same time, we can’t bet the ranch every time because one day those predictions might be right,” Byrne said. “There’s always some trouble on the horizon, but as you advance, the horizon does, too.”

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