New Mexico panel adopts change in permanent fund investment strategy, hoping for steady return

NM adopts plan to boost state’s investment returns

SANTA FE, N.M. — A state panel is revamping the investment strategy for New Mexico’s $13 billion permanent funds in hopes of improving performance and ensuring they remain a stable source of financing for public education and other governmental programs.

The funds need to generate a long-term return of about 8 percent annually to make certain they can pay out money to operate state government and not have their assets eroded by inflation. The funds have fallen short of that target, however, and their investment performance plummeted in recent years because of volatility in the financial markets.

The Land Grant Permanent Fund averaged a 2.8 percent return in the past 10 years and 7.5 percent over 15 years. The Severance Tax Permanent Fund has a 10-year return of 2.2 percent and 7 percent during the past 15 years, according to State Investment Council records. That long-term performance ranks low compared with peer endowment funds.

To help reduce volatility and improve earnings, the council on Tuesday approved a new allocation of fund assets. The plan calls for reducing investments in equities, such as stocks, and shifting more to other investments, including fixed income and alternatives such as private equity. Hedge fund investments also will be trimmed.

“Ultimately we would like to reduce the peaks and valleys we’re seeing in performance by reducing that equity exposure,” Charles Wollmann, a spokesman for the council, said Wednesday.

The two permanent funds have 61 percent to 62 percent of their assets in equities. The council, which is responsible for overseeing management of the funds, decided that should be about 55 percent.

“When the markets are running well that’s where you get a lot of your performance, but when they are down that’s where you take the big hit,” Wollmann said.

Endowments nationally average about 35 percent of their assets in equities, council members were told at this week’s meeting.

The permanent funds are operated like an endowment, with the goal of providing benefits for current and future generations of New Mexicans. Annual distributions are based on a five-year average of fund balances.

The funds are expected to account for about $600 million, or 12 percent, of the revenues in New Mexico’s main budget account this year.

The state’s land grant fund had a market value of $9.5 billion at the end of March, reflecting a return of 5.2 percent for the first quarter and nearly 27 percent during the past year. The severance tax fund was valued at $3.7 billion, returning 4.9 percent for the quarter and almost 26 percent in the last year.

Quarterly performance ranked high compared to peer endowments, and council members were told that reflects the large share of fund assets in stocks.