New Jersey Backs Off $3.2 Billion Emerging-Markets Bet

No other U.S. pension, endowment or foundation manager has invested as heavily in emerging-market ETFs as the New Jersey Pension Fund, a $3.2 billion gamble at its height. Now the state’s reversing course.

The $76.8 billion fund, the 12th largest public pension manager in the U.S., has cut its holding of developing-nation exchange-traded funds to less than $1.8 billion, according to filings through March 31 compiled by Bloomberg. The fund’s managers had boosted the position from just $115 million in 2009 to more than $3 billion by the end of 2012.

New Jersey is souring on the trade just as the market is showing signs of rebounding following the worst annual performance relative to developed equities since 1998. The MSCI emerging-markets index has gained 10 percent from a five-month low reached Feb. 5 as demand picks up for riskier assets after an economic slowdown in China and a reduction in U.S. monetary stimulus shook investor confidence at the start of the year.

Emerging markets have “been a loser for a few years; I understand why people are ramping down their allocations,” Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York, said by phone yesterday. While the market has “improved a little bit,” stocks still “look like they’re stuck sideways,” he said.

Asset Allocation

The New Jersey Pension Fund, with 767,000 beneficiaries, pared holdings in Vanguard Group Inc.’s $43.3 billion developing-nation ETF to about $109 million from $1.9 billion in 2012. Emerging-market equities made up 6.56 percent of the pension fund’s assets as of February, down from 7.65 percent at the end of October. The MSCI emerging-markets index fell 6.6 percent in that four-month period, compared with a 4.5 percent return for developed-market stocks.

The fund’s target allocation to emerging markets of 8 percent, as listed in the February director’s investment report, was scaled back to 6.5 percent before the end of the month, according to Chris Santarelli, a spokesman for the New Jersey Treasury Department.

Brazil, India

Santarelli said in an e-mailed response to questions that the declining allocation is the result of both a decision to reduce overall holdings in developing-nation stocks as well as a shift from passive strategies to actively managed investments. He declined to comment on why the fund cut its position.

Gains for the pension fund of 14.6 percent last year were limited by losses of 2.94 percent on emerging-market equity investments, according to the New Jersey State Investment Council’s 2013 annual report. That compares with a 4.98 percent decline in the MSCI developing-nation gauge and a 29.6 percent advance in the Standard & Poor’s 500 Index, the benchmark for U.S. stocks.

In March, developing-market equities traded at their lowest level on a price basis against the MSCI World Index of developed-nation stocks in more than five years. The ratio between the two indexes has since rebounded as emerging-market stocks rallied in the past three months, led by gains in Brazil and India ahead of national elections.

The MSCI Emerging Markets Index slipped 0.1 percent to 1,007.36 at 9:51 a.m. in New York.

ETF Exits

The New Jersey Pension Fund had plenty of company as it pulled money from developing-nation ETFs. In the five quarters through March, asset managers pulled $12 billion from Vanguard’s FTSE Emerging Markets ETF and $12.8 billion from BlackRock Inc.’s iShares MSCI Emerging Markets ETF, according to data compiled by Bloomberg.

Those flows are starting to reverse: Investors moved a total of $4.6 billion into the two funds since the end of March, the data show.

While ETFs are similar to passively managed mutual funds that track indexes of equities, bonds or commodities, they are bought and sold on exchanges during the trading day like shares of companies. The New Jersey Pension Fund still holds about $1.3 billion of BlackRock’s flagshipemerging markets ETF, the second-largest of its kind after Vanguard’s. It also has allocations in funds that track stocks from Indonesia, Poland, South Africa, South Korea, Turkey,Taiwan and India, according to filings.

Police, Firemen

The New Jersey Pension Fund, under the Division of Investment, is responsible for management of seven of the state’s public pension systems, including the Consolidated Police & Firemen’s Pension Fund, the Judicial Retirement System, the Police & Firemen’s Retirement System, the Prison Officers Pension Fund, the Public Employees’ Retirement System, the State Police Retirement System and the Teachers’ Pension & Annuity Fund.

The money manager, based in Trenton, New Jersey, has returned an average 7.1 percent annually over the last 10 years through Dec. 31, compared to a median gain of 7 percent for state and local government pension plans in the period, according to data from the National Association of State Retirement Administrators.