Grossman, who is chairman of the pension fund’s board, said he and the staff were “pleased and gratified’’ with the performance for 2011. Still, he remained cautious amid worries over the national debt crisis and the economy.
“We recognize that it’s a tough year and interest rates are doing what they’re doing, and the markets are volatile,’’ Grossman said. “Everybody’s got their head down, and they’re working hard.’’
Massachusetts outperformed the nation’s largest public pension fund, the California Public Employees’ Retirement System, which reported a preliminary 20.7 percent return for the 12 months ended June 30.
Despite a falling market in May and early June, the Massachusetts pension fund regained ground in recent weeks and notched its second-best year. The fund’s best performance ever, in 1986, was a 28.1 percent return, according to pension officials.
The latest year’s performance was led by a strong stock market, as the Standard & Poor’s 500 index rose 30.7 percent. For the pension fund, global equities led the way, following by private equity and real estate - areas that suffered during the downturn - and alternative investments such as timber.
Last year was a transition period for the fund, with Grossman and executive director Michael Trotsky both in their first year on the job.
It was a year in which officials reexamined the way the state invests in hedge funds and launched a program to invest in them directly, instead of through middleman funds. They also are taking measures to better manage risk and are looking harder at underperforming investment managers.
Trotsky attributed the year’s gains to sticking to the board’s plan and not taking a knee-jerk reaction to losses in the financial crisis.
“We just stuck to our knitting and took a long-term view and evaluated managers that were underperforming,’’ Trotsky said. “We did stabilize the organization and kept key employees. Stability is key.’’
Pension board member Alexander E. Aikens III said he is concerned about some employee departures over the past year. Turnover is a problem, he said, as seasoned pension officials can earn more in the private sector, taking experience with them.
In addition, Aikens said that while many of the changes at the fund are positive, the board needs to be vigilant in monitoring them, from new consultants to the shift to investing directly in hedge funds.
“It’s just different, and any time you start engaging in something different you’re taking a level of risk,’’ Aikens said.
Similarly, he noted, if the board considers reducing some of its equity exposure, it should be careful how it diversifies.
Beth Healy can be reached at bhealy@globe.com.
