How's Your State Pension Fund These Days?

The Wall Street Journal ran an article July 13 reporting that the Florida State Board of Administration, which manages the assets of the Florida Retirement System Trust Fund, bought a 10% interest in private equity firm Lexington Partners for $41.25 million. It's not a large deal for the $117 billion pension fund but it made me wonder about their equity investments. In addition to Florida, I'll examine recent investments by two other large state-pension boards. Perhaps there's an investment idea in the mix. IN PICTURES: 10 Reasons To Add ETFs To Your Portfolio

California Public Employees (Calpers)
Calpers is the largest public pension in the U.S. with $203.7 billion in assets as of July 12, 2010. U.S. equities represent almost 40% of its total global equities. Of the $40 billion or so invested in U.S. equities, 40% is actively managed by third-party investment management firms. The rest is both active and passively managed internally through a number of different index funds. (To learn more, see Index Investing: Index Funds.)

Its SEC holdings report shows 4,013 stocks owned as of April 30. There's no chance I'm going through a list this long. Instead, I think I'll find a couple of gems from the holdings of some of the managers in Calpers external manager development program. Quotient Investors of New York handle both large cap and small cap core investments for the fund. On the small cap side I'll go with Continucare (AMEX:CNU), a Miami-based outpatient medical center company. Its third quarter was the twelfth consecutive earnings improvement on a year-over-year basis. As for large caps, I'll go with its biggest holding at just over $3 million and that's Exxon Mobil (NYSE:XOM). The oil business has taken a pounding this year. Exxon Mobil's stock is down 12% year-to-date and close to a 52-week low. It'll come back.

CaliforniaState Teachers (Calstrs)
As of March 31, 2010, approximately 37.7% of the assets in the retirement plan were invested in U.S. equities. It reported a 2% interest in Indianapolis-based electronics retailer HHGregg (NYSE:HGG) at the end of the year although its latest 13F indicates it's down to 601,659 shares as of the end of April. I like the retailer and think its expansion plans in 2011 (opening 40-45 stores) will continue to erode Best Buy's considerable market dominance. Most importantly, they're hiring and in this economy, that's a good thing. My second pick is specialty commercial insurer First Mercury Financial (NYSE:FMR). While its combined ratio increased by 20.6% in the first quarter, the fact it was able to pay a $2 per share special dividend clearly demonstrates its capital requirements are more than plentiful.

FloridaState Board (FSBA)
As of the end of March, the Florida Retirement System's pension plan had $45.1 billion or 38.6% of its assets invested in domestic equities. Foreign equities accounted for another $23.2 billion or 19.9% of its total assets. One stock it won't be buying is BP (NYSE:BP), whose have cost Florida pensioners $87.8 million to date. Pension funds who've lost money on BP have put on a brave face, indicating it's a mere blip on the radar (Florida's loss is less than one-tenth of one percent). That might have been the case in better times but with the pension fund losing 19% in 2008-2009, it has to work that much harder to catch up and it's not going to be able to do so with passive investing.

One of its small cap managers is Houston-based Vaughan Nelson Investment Management. It has the largest chunk of Florida's small cap active management. Two stocks it holds that have some allure for me are Danvers Bancorp (Nasdaq:DNBK) and Prosperity Bancshares (Nasdaq:PRSP). Both are community banks operating in Massachusetts and Texas respectively. Danvers got its start in 1850 and now operates 27 branches north of Boston. Prosperity is a larger bank with 176 branches across Texas. Forbes named it the fourth best bank in America in 2010, citing its industry-low number of non-performing loans to total loans among America's largest 100 banks. Community banking is hot.

Bottom Line
While I was able to get an idea or two, pension funds probably aren't the best place to look for original ideas. Their entire mandate is about tracking indexes. It would have been a lot faster looking at the S&P Small Cap 600 constituent list. Pension fund annual reports might not provide any inspiration but they sure are interesting. (For more, check out Analyzing Pension Risk.)

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