PA state pension fund shifts from 'illiquid' private equity

Revised: Last year's markets collapse left the Pennsylvania State Employees' Retirement System under-invested in stocks, and over-invested in venture capital and other private equity, chief investment officer John Winchester said in a statement yesterday.

"As of June 30, publicly traded stocks represented 23% of the fund, versus a target of 47%; conversely, the illiquid private equity class represented 15.8% of the fund, versus a target of 9.3%."

The recovering stock market helped boost the system's total investment value by nearly 6 percent, to $22.6 billion, in the three months ended June 30.

For the quarter, the system's holdings in U.S. stocks gained 16%, foreign stocks 25%, commodities 10%, and hedge funds 4%. SERS also lost 3.5% in buyout funds and other "private equity", lost 4.3% in venture capital, and lost 6.2% in real estate.

SERS plans to accumulate more stocks, and rely less on alternatives. That doesn't mean Pennsylvania will be dumping a lot of underperforming funds wholesale: "Rebalancing will be a gradual process," and "will be done without sacrificing the liquidity that could be needed to ride out any potential further market disruptions."

SERS used to be one of the nation's biggest alternative investment buyers, with as much as 40% of its money invested in buyout, venture, real estate or commodity firms -- many of them run by campaign donors to Gov. Rendell and other state officials -- as of 2007.

The system stopped buying more alternative investments when the credit markets collapsed last year.

"What's happening now is not a retreat from strategic targets, but rather a matter of getting back to the targets," spokesman Bob Gentzel told me. "Historically, the illiquid asset classes have performed well and any suggestion that the board is giving up on them as under-performers is just wrong."