Public Funds Can Compete

Abstract

Public funds underperformed endowments and foundations over the period 1987-2002, as reported in Ennis [2003]. Since 2003, however, public funds outperformed endowments after accounting for fees and costs. Public funds' outperformance over this period occurred in the volatile markets since 2008. Endowments greatly increased their exposure to alternatives at the expense of public equity and fixed income; public funds did so to a much lesser degree. While alternative investments performed well over the period, the timing of endowments’ allocation shift hurt returns relative to public funds. Public funds’ emphasis of private equity over hedge funds within their alternative investment allocations helped relative returns. Public funds have a cost advantage due to their size (economies of scale); significant use of passive management, and lower allocations to more costly alternative investments. We believe that successful integration of alternative investments in public fund investment strategies will help them stay competitive in the decades to come.

Keywords: Public pensions, endowments, foundations, alternative investments, hedge funds, private equity, passive management

JEL Classification: G00, G10, G11, G23