Weak private equity returns force US pensions to rely on stocks
The slump in private equity returns has increasingly pushed US pensions and endowments to lean on an old and familiar investment: Stocks.
Large public pension funds including California Public Employees’ Retirement System, Alaska Permanent Fund, and Teacher Retirement System of Texas, and endowments at Ivy League schools such as Columbia University, have been heavily reliant on public market investments to both bolster performance and free up cash.
But chief investment officers concede they’ve partly been playing for time, leaning on stocks until private equity starts to pay out again. It worked for the fiscal year that ended June 30 for most big institutional funds, but the recent selloff is a reminder of the risks.
In Alaska, for example, the state’s $80 billion fund will draw entirely on equities to make its next payment to the state treasury. It would typically rely on returns from all asset classes to do so, but not this time, said Marcus Frampton, the fund’s chief investment officer.
“It’s so nice that stocks have been up so much — that’s freed up the money needed,” he said, noting that their private equity investments haven’t made a meaningful contribution since 2021. For Alaska and its peers, that raises the stakes for stocks, he said: “If you have a 10% or 20% correction, it’ll be really painful.”
The S&P 500 gained 22.7% from July 2023 to June 2024, and pensions with higher proportions of stocks are expected to report better performance for that fiscal year, according to a projection by Markov Process International, a research firm that studies pension fund and endowment investment returns.
Funds are just beginning to report performance for the 2024 fiscal year that ended June 30. Calpers, the largest
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