London, 19 January 2010

U.S. state pension funds have invested only a tiny fraction of their assets in commodities, despite the hype about a "wall of money" descending on the asset class. Only two of the top ten funds have any direct exposure to commodities.

Public retirement systems, investing on behalf of teachers and other public employees, controlled almost $2.6 trillion dollars worth of assets at the end of Fiscal 2008, according to the National Association of State Retirement Administrators (NASRA). The ten largest systems accounted for almost half the total ($1.2 trillion).

While many retirement systems have adopted some sort of allocation for "alternative investments", most funds have been directed towards private equity, real estate and timber.

Only two of the ten largest systems have adopted an allocation towards commodities:

(1) California Public Employees Retirement System (CALPERS) is targeting an allocation of 1.5 percent to commodities (with a range of 0.5-3.0 percent) as part of a larger allocation to an inflation-linked asset class (ILAC). In theory, CALPERS could allocate $3.6 billion of its $239 billion assets to commodity futures and options.

As of June 2008, however, total investments in ILAC amounted to only 2 percent of the fund ($4.7 billion) so the commodity component is likely to be considerably smaller.

(2) The Teacher Retirement System of Texas (TRS) is the only other top-ten state pension manager with a formal allocation to commodities. It is targeting 2.0 percent of the fund, with a range of 0.0-7.0 percent of total assets. The actual allocation to commodities hit $3.214 billion in Fiscal 2008 (3.1 percent of the fund). But it had been cut to $1.697 billion in Fiscal 2009 (1.9 percent), close to the target neutral allocation.

Other major systems in New York, Florida, North Carolina, Wisconsin and Ohio have not so far adopted a commodity target, though most do have exposure to alternatives, notably private equity and real estate.

If the top 10 funds, with 46 percent of state retirement system assets, are representative of the other smaller systems, then the total allocation to commodities by state managers is likely to be no more than $12 billion, possibly less.

Ends --

John Kemp is a Reuters columnist. The views expressed are his own.