May 19, 2008
After four years of gangbuster returns, Washington's public employee pension fund suffered losses in the first quarter of this year.
The market value of the fund dropped slightly from its 2007 average of $63.9 billion, to $63.1 billion.
"We've been explaining to people that 21 percent returns were not going to continue indefinitely. And that's exactly what we're seeing now," said Joe Dear, executive director of the state Investment Board.
The 21 percent return on investments last year was the best in the nation, according to the board's comparison with similar public pension funds. In 2006, the return was 16 percent, double the board's goal of an average of 8 percent a year.
After such lofty success, the essentially flat return rate so far in fiscal year 2008 — a loss of 0.1 percent — is striking.
"The market's down. And it looks to me like the country's in a little slump. But we're long-term investors and the market will come back," said George Matsen, the former head of the Washington Federation of State Employees.
The Investment Board decides how to invest the retirement money contributed by teachers, state workers, other government employees and by the public, through taxes used to make employer matches.
Matsen represents state workers on the board. He isn't worried about the slump.
"I've been on the board for 15 years and I've been through two or three of these," he said.
In fact, the pension fund fared worse in 2001-02, when it lost more than 5 percent both years.
Washington's system has done better in the latest drop than its peers, according to the board's figures. It lost 3.6 percent in the first quarter this year, when the average for similar funds was a loss of 5.2 percent. And in the past year to date, the state fund has gained 5.4 percent, compared to the national average of 1.3 percent.
Dear credits the superior performance to investments outside of the public stock market, in private equity and real estate.
The board's real estate holdings, which make up 14 percent of the fund, have not been rocked in the way the retail market for houses has, as a credit crisis began with a rash of foreclosures on risky mortgages.
"We're not investing in mortgages. We're investing in properties," Dear said. "Our exposure to U.S. housing markets has really been quite small: large manufactured home communities, apartment houses; and those haven't been battered nearly as badly as the single-family homes."
The state's real estate holdings are managed through contractors, and that sector has provided the best average returns over the last 10 years, at 15 percent.
Overall, the fund has managed 8.2 percent average returns for the past decade.
"The key message is that this is a major portfolio, of high-quality global assets, built for the long period," Dear said.
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