Arizona pension funds consistently outperform benchmarks

The funds for state workers and police and fire personnel have each posted strong returns and were among the earlier adopters of the private credit asset class.

Two Arizona public pension funds with large private credit allocations continue to beat their benchmarks, according to meeting materials for both the Phoenix-based retirement plans.

The Arizona State Retirement System (SRS) and the Arizona Public Safety Personnel Retirement System (PSPRS) each outperformed their respective performance baseline by at least 2 percentage points for the one-, three- and five-year time frames, as of 30 June.

The SRS returned a 10.41 percent internal rate of return for the 12-month period ending in the second quarter, outperforming its 7.08 percent benchmark, according to August meeting documents. The 36-month time period posted 10.82 percent, clearing its 7.39 percent indicator.

For the five years ending 30 June, the private debt category returned 10.98 percent, exceeding its 7.10 percent benchmark. Performance since the allocation’s inception has exceeded its metric by almost 4 percentage points, reporting a 11.16 percent return versus a 7.2 percent baseline.

The meeting materials did not specify whether those figures were net of fees.

SRS reported 10.9 percent of its portfolio dedicated private debt as of 31 December, according to June meeting materials – below the 12 percent allocation target it set last year. Documents from the pension plan’s meeting did not include a precise allocation figure, though credit at large was overweight because of expected strong performance from private debt.

SRS’s largest commitments include the $1.1 billion Sonoran Private Credit Opportunities Fund, a separately managed account with Cerberus Capital Management; the $750 million Cactus Direct Lending Fund, an SMA with HPS Investment Partners; and Monroe Private Credit Fund A, a $650 million SMA with Monroe Capital.

The SRS opportunistic debt bucket did not perform as well, with one- and three-year returns of 6.07 percent and 5.71 percent, respectively, against benchmarks of 7.08 percent and 6.95 percent.

The five-year return for the program was 6.56 percent, slightly below its 6.61 percent benchmark. Since inception, returns have been 9.40 percent, barely edging out the 9.24 percent baseline number.

For its part, the PSRS private credit portfolio has returned 6.6 percent, above the 2.9 percent benchmark, August meeting documents show. The three-year return posted a 6.5 percent return, beating its 4.5 percent baseline. Its five-year return and benchmark figures were 7.1 percent and 4.6 percent, respectively.

The largest commitments in the pension plan’s credit portfolio are the $130 million allocation to PNMAC Mortgage Opportunity Fund, $125 million allocation to the Apollo European Principal Finance Fund (EPF) and $100 million commitments to each TPG Opportunities Partners (TOP) II and III.

The OHA Strategic Credit Fund was the top performer over the five-year period, posting a net internal rate of return of 27 percent. Apollo EPF and TOP II returned 20.7 percent and 14.6 percent, respectively.

PSRS’s $1.55 billion private credit allocation makes up 15.9 percent of its portfolio against a 16 percent allocation target.