ADVERTISEMENT

U.S. state and local government pension investments gained the most in three years as stocks soared, according to a report released Monday by Wilshire Associates.

Public pensions had median increases of 16.9 percent for the 12 months ended June 30, according to data from the Santa Monica, Calif.-based consulting firm. It was the best performance since the funds rose 21.2 percent in fiscal 2011. Those with assets greater than $1 billion performed best, reporting median jumps of 17.4 percent, boosted by bigger allocations to private equity, hedge funds and other alternative assets.

Smaller state and local government pensions target more of their money to less-risky U.S. bonds, which hindered their performance relative to larger plans, said Robert Waid, a managing director at Wilshire.

Retirement plans with assets of more than $5 billion had a median allocation of 10.5 percent of their assets to alternatives, compared with 1.3 percent for all public pensions, according to Wilshire’s Trust Universe Comparison Service. Investment officers are turning to private equity and hedge funds to boost returns and diversify their portfolios after the stock market collapse in 2008.

In 2013, U.S. private equity had its best performance since 2006, returning 20.6 percent as buyout firms took advantage of a booming share prices to exit investments, according to Cambridge Associates LLC, a Boston-based researcher and consultant. Private- equity funds use borrowed money to buy companies, improve profitability and resell them.

By contrast, the Barclays US Agg Govt/Credit Index returned 4.28 percent for the year ending June 30.

The Federal Reserve’s policy of keeping short-term interest rates near zero and an improving economy boosted the Standard & Poor’s 500 Index of U.S. stocks by 24.6 percent in the 12 months through June 30, including dividends, helping to ease the strain on public pensions.

Assets of the 100 largest public funds rose to $3.2 trillion as of March 31 and have gained $1 trillion since the first quarter of 2009, according to the U.S. Census Bureau.

Most state and local government pensions count on annual investment returns of 7 percent to 8 percent to pay benefits for teachers, police and other employees. In the 10-year period through June 30, U.S. public pensions returned 7.3 percent, according to Wilshire.

“Fiduciaries are doing a pretty good job,” Waid said.