New York’s public pension funds have a pronounced taste for risk, typically plunging 70 percent of their assets into equities ranging from traditional corporate stocks to more exotic “alternatives.”  Fund managers say it’s the best way to hold down costs and to meet their ambitious return targets over the long haul, but the strategy has led to a wild roller-coaster ride for taxpayers.  New research suggests the funds would have been much better off if they had adopted a more conservative investment strategy during the five-year period ending in 2010.

John Murphy, former executive director of the New York City Employee Retirement System (NYCERS), has simulated a pension fund portfolio using a 50-50 mix of equities and fixed-income investments, which was the norm two decades ago, instead of the current 70-30 ratio of stocks to bonds.

If, in 2005, NYCERS had returned to its traditional 50% stock/50% bond allocation and used only indexed stock funds and core bond classes, the simulation showed that NYCERS would have had a closing balance of $43B in FY-2010 instead of $35B.

Fees paid to private investment advisors under the more conservative approach would have totaled only $15 million, compared to $175 million paid by NYCERS in fiscal 2010 alone, says Murphy, who thinks the NYCERS investment strategy (which is similar to those of other New York State and New York City pension funds) is “overly risky and expensive.”

**UPDATE — In response to the original post, Michael Kolesar points out in the comments section that the results of the simulation will differ based on the five-year period chosen.  This, of course, is true.  In fact, it seems to safe to assume that a 50-50 allocation would have significantly under-performed the 70-30 mix between, say, 1985 and 2000.   But remember: constitutionally guaranteed pensions are risk-free for the beneficiaries.  All the risk is borne by taxpayers.   This is quite apart from the issue of the discount rate used to calculate liabilities, which is what ultimately drives pension funds into riskier territory to begin with.