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All Contents © 2020The Kiplinger Washington Editors
By Will Ashworth, Contributing Writer
| November 25, 2019
One of the simplest things that everyday investors can do to improve their performance over the long haul is to study the best practices and investments of the world's top investors. And while that typically invokes names such as Warren Buffett and Carl Icahn, don't forget the money managers overseeing billions of dollars at mammoth pension funds.
Understanding the secrets of large-scale investors can put you miles ahead of those people who simply wing it without first coming up with a long-term plan. One way investors can shortcut the process is to follow the top stocks of these top investors. Indeed, following the moves of Warren Buffett has become a quarterly ritual.
But while following the stock picks of big-name investors such as Buffett, Bill Ackman and Carl Icahn is an excellent way to hone your skills, another place many people fail to consider is pension funds.
Even the largest pension funds might not have the same recognition as Buffett or Icahn. Nonetheless, CalPERS and the New York State Common Retirement Fund manage billions of dollars for the public state and local employees of California and New York. They and other pension funds have a fiduciary duty to current and former employees who are saving for retirement.
As a result, it pays to follow pension funds' highest-conviction stock picks, too. Many of these funds have high concentrations in several of the same stocks, so just note that if a stock is a major holding in one fund, chances are it holds significant sway across numerous pension systems on this list.
Data is as of Nov. 24. Stocks listed in reverse order of their holding rank within the featured pension fund. Stock rankings within each portfolio are as of Sept. 30, 2019. Pension system/plan rankings courtesy of Pensions & Investments’ most recent rankings, published Feb. 4, 2019, based on assets as of Sept. 30, 2018.
Pension fund/system: Ohio Public Employees Retirement System
Holding rank: 9th
Market value: $363.4 billion
Dividend yield: 2.8%
The Ohio Public Employees Retirement System (OPERS) was established in 1935 and provides retirement peace of mind for millions of the state's retired public employees. OPERS, at $100.7 billion in assets as of Pension & Investments' rankings, was Ohio's largest state pension fund, the 10th largest public pension plan and the 15th largest retirement system overall in the U.S.
OPERS' investment team is led by chief investment officer Paul Greff, who has been a part of the pension fund's investment team since March 2009, and CIO since June 2018. The investment team oversees three funds for OPERS: the Defined Benefit Fund, the Health Care Fund and the Defined Contribution Fund.
Johnson & Johnson (JNJ, $130.23) was among OPERS' top 10 stock picks at the end of September. It owns 1.7 million shares of JNJ stock, or $219.4 million, which represents a 1.2% weighting within the pension's $18.7 billion portfolio of U.S.-listed stocks, making it the ninth largest holding.
The pension system invests its assets most heavily in domestic and international equities, which combined to make up 36.8% of the portfolio as of the end of 2018. Fixed-income investments are the second largest weighting at 26.0%.
Over the past 10 years, OPERS' average annual total investment return was 8.8% – 32 basis points higher than its benchmark. (A basis point is one one-hundredth of a percentage point.) The fund has had just two years with negative returns since 2008.
Pension fund/system: State of New Jersey Common Pension Fund D
Holding rank: 6th
Market value: $410.2 billion
The New Jersey Division of Investment oversees the state of New Jersey's seven pension funds that comprise the New Jersey Pension Fund and State of New Jersey Cash Management Fund. According to Pension & Investments magazine's 2018 list of largest public pension plans in the U.S., New Jersey's pension system was the 12th largest at $83.9 billion. The state's total pension assets were $76.9 billion as of Aug. 31.
The New Jersey Division of Investment's report for August showed $76.9 billion in assets. U.S. equities accounted for 29.6% of its entire portfolio, with developed international markets accounting for another 11.5%, and emerging markets an additional 6.3%.
Common Pension Fund D is the largest of the pension fund trusts holding New Jersey's retirement assets. Among its stock picks is JPMorgan Chase (JPM, $128.82) at sixth in the portfolio. It owns 2.5 million shares and has a market cap of $294.5 million, for a weighting of 1.1% based on the fund's $25.9 billion in U.S.-listed stocks.
The total pension system boasted a 10-year return of 8.3% as of the end of August – 42 basis points higher than its benchmark return over the same period. The cost to manage the overall pension fund assets in fiscal 2018 was 46 cents per $100 of assets (in other words, 0.46% in expenses).
Pension fund/system: Department of State Treasurer (North Carolina)
Market value: $532.9 billion
Dividend yield: N/A
North Carolina Retirement Systems is a division of North Carolina's Department of State Treasurer. It administers the pension benefits for state and local government employees. It also administers Supplemental Retirement Plans for public employees, including 401(k) and 403(b) plans.
The Investment Management division of the Department of State Treasurer managed a total of $116.6 billion at the end of 2018 – up from $111.3 billion in P&I's report, which made it the ninth largest public system at the time. Approximately 17% of those assets are for North Carolina's Short-Term Investment Fund (STIF), which includes the state's General and Highway funds. Another 2% of the assets are for The Ancillary Investment Programs, which includes many of North Carolina's smaller funds.
But the majority of the assets managed by the investment division (81%) are for the Teachers' and State Employees' Retirement System and other worker-related pensions in the state.
North Carolina's pension system is leaning on the wisdom of at least one top investor. Warren Buffett's Berkshire Hathaway (BRK.B, $217.96) was the North Carolina Treasurer's sixth largest holding at the end of September, with 865,619 shares worth $180.1 million. While the pension system did sell off more than 359,000 shares, don't take that as an indictment of BRK.B; it also sold off considerable portions of most of its top stock picks. Berkshire accounted for 1.6% of the Treasurer of the State of North Carolina's $11.1 billion in U.S.-listed public equities – the same percentage it held in the previous quarter.
Like most of the pension funds in this article, the North Carolina's Investment Management division invests in various asset classes, including public equities, fixed income securities, real estate, private equity and inflation-linked investments.
Pension fund/system: Virginia Retirement System
Holding rank: 4th
Market value: $399.0 billion
Dividend yield: 0.7%
The Virginia Retirement System (VRS) is the 19th largest pension fund in the U.S., public or private, and the 41st largest in the world. It serves the current and future retirement needs of 705,000 members. In fiscal 2018, it paid out more than $4.6 billion in benefits to more than 206,000 retirees and beneficiaries.
At the end of June, the VRS had $82.3 billion in total assets, 40.1% of which was invested in public equities, including U.S.-listed stocks. Visa (V, $179.47) was the pension fund's fourth largest stock pick as of its most recent 13F filing at the end of September, at 790,200 shares. That translates into a worth of $136.7 million at the time, or 1.5% of its $8.9 billion U.S.-listed stock portfolio.
While VRS' public equity strategy has managed to deliver a 10.7% return net of fees over the past 10 years – 50 basis points higher than the benchmark – it still hasn't performed as well as private equity and real assets over the same period at 14.5% and 11.2%, respectively.
Once you factor in all its other strategies, VRS has delivered an annual total return of 9.4% net of fees and 9.7% excluding fees over the past decade. Note that Virginia Retirement System manages 33% of the fund internally, which helps it save $45 million annually in fees, hence the reasonably small difference in returns with and without fees.
Pension fund/system: New York State Teachers' Retirement System
Market value: $567.0 billion
The New York State Teachers' Retirement System (NYSTRS) is the seventh-largest public pension plan in the country. It boasts 265,000 active members and 166,000 retirees and beneficiaries, and it had total assets of $122.5 billion as of the end of June. Over the past 30 years, it has generated an annualized total return of 8.8%, making it one of the better-funded public pension plans in the country.
One of the ways in which NYSTRS delivers higher returns is by internally managing 60% of the plan's total assets. NYSTRS spends just 25 cents to manage $100 in assets – well below the 60 cents or more it costs to manage the same $100 in a 401(k).
In terms of asset allocation, public equities account for 54.5% of NYSTRS' portfolio. Fixed-income investments are a distant second at 18.2%.
Mark Zuckerberg's Facebook (FB, $198.82) is 1.6% of NYSTRS' $39.6 billion equity portfolio. The fund held 3.6 million FB shares worth $641.4 million as of the end of September, placing Facebook fourth among its stock picks.
Pension fund/system: Teacher Retirement System of Texas
Holding rank: 3rd
Market value: $487.7 billion
As the name implies, the Teacher Retirement System (TRS) of Texas is the pension plan that provides for the retirement of current and former public education employees in the state of Texas. It started in 1937 with 38,000 members, and has grown to include almost 1.6 million people.
In 2018, TRS paid out more than $10.1 billion in benefits to more than 420,000 retirees and their beneficiaries. The lion's share of these benefits (94%) went to residents of Texas, directly benefiting the state's economy.
The pension plan's $146.3 billion in assets make it the sixth largest U.S. public pension fund. According to its most recently available data – Aug. 31, 2018 – public equities accounted for 43.6% of the fund's assets, by far TRS's biggest asset class. Private equity and real assets are second and third with respective weightings of 13.8% and 11.9%.
Chinese e-commerce giant Alibaba (BABA, $186.78) is the fund's third largest holding, and it's a rarity – few U.S.-listed international stocks tend to rank among the larger pension funds' top-10 stock picks. TRS holds 1.5 million BABA shares worth $247.0 million, accounting for 2.2% of its $11.4 billion in publicly traded, U.S.-listed stocks.
Pension fund/system: State Board of Administration of Florida
Market value: $865.5 billion
The State Board of Administration (SBA) of Florida, according to its website, is Florida's principal independent investment management organization. It's responsible for investing the proceeds of the Florida Retirement System Pension Plan and more than 25 other state funds. It's also America's fifth largest public retirement system.
The SBA has more than 200 investment professionals toiling to ensure the retirement of Florida's hardworking employees, including an executive director and chief investment officer.
According to the SBA's August report to trustees, the Florida Retirement System's investment plan allocated 54% of its $202 billion in total assets to global equities. The remainder went to other asset classes such as real estate (9.5%) and private equity (7.5%).
Amazon.com (AMZN, $1,745.72) is the SBA's third largest holding, with 545,313 shares worth $946.6 million as of the end of September. That's a weighting of 2.5% based on a $38.2 billion portfolio of public equities. The two largest holdings – also the two final stocks on our list – have a combined weighting of 6.5%.
Pension fund/system: State of Wisconsin Investment Board
Market value: $892.2 billion
The State of Wisconsin Investment Board (SWIB) manages the trust funds of both the Wisconsin Retirement System (WRS) and the State Investment Fund (SIF), as well as several smaller trust funds for the state of Wisconsin.
Overall, SWIB owns Google parent Alphabet (GOOGL, $1,293.67) across both its A shares and its C shares (GOOG), according to its 13F for the third quarter. Combined, they make up the investment board's fifth largest holding. At $918.2 million, that's good for a 2.6% weight, making it the third largest holding – behind a pair of technology-focused blue chips – in its $35.9 billion U.S.-listed equity portfolio.
SWIB's Wisconsin Retirement System is one of the only fully funded pensions in the U.S. It's also the eighth largest public pension in the U.S., and 25th largest in the world if you include private pensions.
The WRS accounts for 91% of the approximately $110 billion in assets SWIB manages. All WRS participants have at least half, if not all, of their retirement contributions invested in the Core Fund, whose assets include stocks, bonds, real estate, private equity, multi-asset, and inflation-sensitive securities. Approximately 20% of WRS participants contribute to the Variable Fund, which solely invests in domestic and international stocks. The stocks selected are identical to the Core Fund, but it's riskier because it doesn't hold other assets, such as bonds and real estate, to offset losses in the stock market.
Core Fund has a 10-year gross return of 8.8%, while the Variable Fund's 10-year gross return is 280 basis points higher, at 11.8%.
Pension fund/system: New York State Common Retirement Fund
Holding rank: 2nd
Market value: $1.16 trillion
Dividend yield: 1.2%
According to Pensions & Investments, the New York State Common Retirement Fund is the third largest public pension in the U.S. with $213.2 billion in total plan assets as of Sept. 30, 2018. As of March, its positioning hadn't changed, though its assets were trimmed just a bit, to $210.5 billion.
The fund's most recent 13F shows that it had $79 billion invested in publicly traded companies, with Apple (AAPL, $261.78) as its second largest holding. The New York State Common Retirement Fund holds a little more than 1 million shares worth $2.5 billion, or 3.2% of total assets. Interestingly, New York State Common Retirement Fund's top holding also happens to be top dog in the final pension system to be mentioned, which we'll get to momentarily.
In a nod to smaller portfolio managers and asset management companies, the fund has an Emerging Manager Program that invests in up-and-coming investment professionals. As of the end of March, the New York State Common Retirement Fund entrusted $7 billion to these investment firms, including $3.1 billion in publicly traded stock picks.
Pension fund/system: California Public Employees' Retirement System
Holding rank: 1st
Market value: $1.14 trillion
Dividend yield: 1.4%
The California Public Employees' Retirement System, better known as CalPERS, is the largest, by assets, of the 10 public pension funds listed in this article at just under $377 billion, according to P&I's rankings.
In late 2017, the CalPERS board voted on the asset allocation of the fund's investment portfolio for the next four years. Global public equities would account for 50% of the portfolio with fixed-income investments weighted at 28%, real assets (real estate, commodities, infrastructure, etc.) at 13%, private equity at 8% and the remaining 1% in liquid investments such as cash and cash equivalents.
The biggest chunk of CalPERS' biggest asset allocation is Microsoft (MSFT, $149.59). The tech giant was the largest holding at 18.5 million shares worth $2.6 billion as of the end of September, according to CalPERS' 13F. That's 2.6% of the $100.7 billion equity portfolio.
Coming in a close second at a weighting of 2.4% was Apple, with a market cap of $2.4 billion.