Bay State Fund Scores 14.4% 2004 Return

The fund’s 2004 returns reflected the benefit of a decision to diversify its holdings to be less reliant on domestic equities and fixed income – a strategy that paid immediate dividends with a US stock market that did respectably but not spectacularly during the year, according to a Boston Globe report.

“Our timing was excellent,” state Treasurer Timothy Cahill, chairman of the pension fund trustees and a leader in the portfolio diversification, told the Globe.

The best-performing investment for the fund was its real estate portfolio, which posted a heady 28.6% in the year and is now 6.6% of the fund’s holdings, compared to 5.4% the prior year. Meanwhile, the fund’s holdings in alternative investments, which include venture capital and buyout funds, returned 22%.

Ironically, the one area where Cahill pushed hardest for new investment produced some of the lowest returns for the state fund: hedge funds. So far, such investments returned just 4.9% in 2004, the second-worst among the fund’s 11 broad asset classes. However, the returns reflect only a small portion of investment activity in 2004, since Massachusetts began putting money into hedge funds only in the latter part of the year (See  Diminished Capacity? ).

The pension agency cut the amount it invested in domestic equities to 35%, from 41%, for example. Even so, the Massachusetts pension fund’s own US stock portfolio performed better than the general domestic stock market did in 2004, posting a 12.8% annual return, compared to 10.9% for the Standard & Poor’s 500 index.

The year-end results for Massachusetts were more than 2% higher than the 12.3% median return of US public pension funds with assets of more than $1 billion, according to a data service run by Wilshire Associates and fund representatives.

One reason for such performance is that Massachusetts has more money invested in overseas markets and less in US stocks than many other US public pension funds. Overseas stocks, for example, represent 21.4% of the Massachusetts fund, compared to the median 14% allocation among all public funds.

At Cahill’s prodding, the pension agency is shifting 4.5% of its assets into so-called absolute return vehicles. Generally speaking, these are hedge funds, or a fund of hedge funds, which can pursue riskier or more unconventional investment strategies than a generic mutual fund is able to. These funds also command high fees.