(Bloomberg) — 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 over $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.
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 four months earlier and under its target of 8 percent.
Chris Santarelli, a spokesman for the New Jersey Treasury Department, 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.
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.