State Treasurer Janet Cowell, the sole trustee for the fund, said the system needs the extra income to meet its target annual return of 7.25%, according to Bloomberg. The system had 37% of its assets in bonds at the end of first quarter.
“We have a fairly long-duration bond portfolio that’s been a wind at our back the last few years,” Cowell said in a telephone interview with Bloomberg. “As those higher yields expire it will be harder to reach the 7.25%, so we have a challenging investment climate ahead. We’re looking to curb some of the bond exposure.”
Bloomberg said North Carolina’s fixed-income allocation, authorized at 38%, is higher than the 29% average in fiscal 2008 at state and local funds surveyed for an October report by the National Association of State Retirement Administrators. Its stock portion, at 48.5%, is less than the 53% found in the survey.
The news report said the state is one of only four — along with New York, Connecticut and Michigan – with its pension system headed by a single trustee and needs legislative approval to change its asset allocation.
Lawmakers last year allowed North Carolina’s system to create two new asset classes with 5% allocations each – credit investments, such as high-yield bonds and Federal Reserve term asset-backed securities, and inflation-resistant vehicles such as commodities, timber and Treasury inflation- protected securities. Cowell said she will consider asking for authorization to invest in hedge funds and private equity next year.
The fund increased 3.3% in the first quarter, up from the 2.5% return in the fourth quarter of 2009. It has gained 17% in the fiscal year that began July 1, but Cowell said that is not enough to make up for the 20% loss in calendar 2008 without increased contributions from the state Legislature.