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Public Pensions Miss Fantastic Bitcoin Gains (#GotBitcoin?)

Trumponomics Fail!

Public pension plans fell short of their projected returns this year, adding to the burden on governments struggling to fund promised benefits to retired workers. Public Pensions Miss Fantastic Bitcoin Gains (#GotBitcoin?)

Public plans with more than $1 billion in assets earned a median return of 6.79% for the year ended June 30, the lowest since 2016

Public plans with more than $1 billion in assets earned a median return of 6.79% for the year ended June 30, the lowest since 2016, according to Wilshire Trust Universe Comparison Service data released Tuesday. Public pension plans project a median long-term return of 7.25%, according to data collected by Wilshire Associates in 2018.

Each year, pension funds must make this estimate on how much they expect to earn on investments.

The projection determines the amount the government that is affiliated with the pension fund must pay into it.

Robust returns reduce the need for government support. When returns fall short, however, the amount the government must contribute increases, potentially diverting money from other public services.

“I think a lot of plans fell a little bit short,” said Becky Sielman, principal and consulting actuary at Milliman. “Bonds generally did well, but there are other asset classes that didn’t do as well.”

Overall, a decades-long bull market in stocks has been good for pensions. Large public plans had five years of double-digit returns and a 10-year annualized return of 9.7% for the year ended June 30, according to Wilshire.

But those returns still haven’t brought pension funding levels close to what is needed to pay for future benefits. State and local pension plans have about $4.4 trillion in assets according to the Federal Reserve, $4.2 trillion less than they need to pay for promised future benefits. Contributing factors include increasing lifespans, overoptimistic return assumptions, and government decisions to skimp on pension payments. Record losses in 2009, when pension funds fell by a median 19.19% according to Wilshire, also played a role.

In hopes of reducing their unfunded liabilities, pensions have pushed further into riskier, less traditional investments over the past decade. Large public pension plans had a median 11.47% of their assets in alternative investments such as private equity for the year ended June 30 and a median 4.45% of their investments in real estate.

Updated: 11-8-2019

Pension Funds Double Crypto Asset Exposure in Morgan Creek’s Fund to 1%

Morgan Creek Digital now takes up around 1 percent of the assets of two Fairfax Retirement System pension funds – an investment which has more than doubled since taking their first position in the fund that closed in February.

Two of the three pension funds under the system from Fairfax County, Virginia, the Police Officer’s Retirement System and Employees’ Retirement System, invested $55 million in Morgan Creek’s second fund in October.

The new allocation came after seeing good preliminary results from the first fund, in part because of the performance of crypto, which makes up 15 percent of the Morgan Creek’s investments; the majority of the fund’s positions are in blockchain-related infrastructure companies.

“The final close for fund one was only in February of this year, and it is a short time frame admittedly,” Katherine Molnar, chief investment officer of the police officer’s fund, told CoinDesk.

“It’s gone well and part of that is because of Morgan Creek’s decision for how they’ve timed buying bitcoin. The liquid part of the fund has done quite well based on how they have timed ramping that up in the portfolio.”

The police officer’s pension fund contributed $22 million of the investment while the county employees’ fund put up $33 million. Molnar said $50 million of the investment went to the second fund raise while $5 million was a separate co-investment in a specific undisclosed project under Morgan Creek.

Those figures represent around 1.5 percent of the police officer’s fund’s 2018 total assets and around 0.8 percent of the county employee’s fund‘s total assets from the same year. For context, both pensions normally put up around 2 percent of their assets in a new investment.

This time around, convincing the board to re-up the investment was easier than taking the initial stake.

Molnar said:

“We didn’t have to do a lot of extra explanation or discussion, and people are generally pleased with the way the performance is off to a good start. It was a much easier legal process because the lawyers did a good job on the first contract.”

The Morgan Creek fund was characterized as a private equity venture capital fund, and a replacement for a small capitalization US equities fund in their portfolio – one of the higher return and higher risk parts of pension fund investing.

While the crypto part of the Morgan Creek Digital fund is performing well, the pension fund’s CIOs expressed the most interest in the blockchain side of Morgan Creek, which makes up 85 percent of the fund.

Andy Spellar, chief investment officer of the employee’s fund, told CoinDesk:

“Think about every time you go to buy a property and refinance – you have to pay title insurance for someone to figure out if there’s a lien against your property. If the ownership of your property is digitized and transferred instantly, in the way that this is done in a day, title insurance goes away.”

As pension funds suffer from low interest rates, technology venture capital funds become more attractive to funds trying to meet their return targets, Spellar added.

“It’s a problem across the board for everybody,” Spellar said. “The level of interest rates is a major component of your total return over time.”

Since all assets are priced off of cash, low cash rate affects the price of every other asset class, Molnar added. This hasn’t yet convinced the two funds to invest in purely crypto-focused funds, however.

“We’re not doing this for crypto exposure, but we do get some of that, and it does so far exhibit some uncorrelated behavior relative to other asset classes,” Spellar said. “To be honest it’s so early in its lifecycle that I don’t have a good idea of whether that will hold up or not.”

Spellar, in general, sees any kind of disruptive technology as a hedge against traditional investment.

“We’re looking for disruptive innovation – anything that can be negatively correlated to other things we own,” Spellar said. “So if we own a bunch of banks, this is a way to hedge against their monolithic and slow moving processes.”

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