Switch
from costly, risky hedge funds and “Back to Basics” announced by Magaziner
By
Will Collette
When
Seth Magaziner ran for General Treasurer in 2014, he promised his top
priority would be putting Rhode Island’s pension funds in a better
position by securing higher returns on investment at the lowest practical risk.
I
spoke to Seth this afternoon about his new plan (see news release) which
was unanimously
approved today by the State Investment Commission.
There
is approximately $7.6 billion total in the state’s public pension funds of
which about $1.1 billion has been invested in so-called “hedge funds” that were
originally intended to provide investors with good returns and security.
However,
as numerous reports have shown, hedge fund performance hasn’t matched hedge
fund promises, except perhaps for their managers who have become billionaires
while handling other people’s money.
The
Treasurer’s office conducted months of research and consultation with financial
experts. They also ran “thousands of
models and projections” to come up with a better way to get better returns
on investment without undue risk.
The
result was announced by Seth today - a “Back to Basics” plan to move about half
of the money the state has invested in hedge funds – around half a billion
dollars – into safer, better investments such as low-fee index funds.
This
will take place over the next two years.
I
asked Seth to talk about the challenges of coming up with such a plan, such as
public impatience with the pace of change.
“When you’re
moving this much money,” he said, “You
have to do it in an orderly fashion.” He noted that making such changes was “like
steering an aircraft carrier – you can’t turn on a dime.”
Then
there is the matter of exit fees involved when leaving investment vehicles such
as hedge funds. “We wanted to make sure
we avoided early redemption fees” which in some cases could be significant.
The
other factor requiring a careful, deliberate approach is the need to find solid
investment alternatives.
I
told Seth that the dream of many people, me included, is to see pension fund
money used to create local jobs and businesses. But I acknowledged the fact
that pension law doesn’t really allow that to be a major pension fund priority.
Seth
pointed out that the first duty of any pension trustee is to secure the best
rate of return for beneficiaries with the least risk.
That
said, among the alternatives they’ve explored are funds that invest in
infrastructure. He noted the infrastructure investment market is very “hot” at
the moment affecting the cost of buying in. Of course, the basic rule of
investing is “buy low, sell high” not vice versa, timing is a key issue.
Rhode
Island has used its pension
funds’ proxy voting rights to join with other public pension funds around
the country to support shareholder resolutions against excessive executive pay
and other abusive corporate practices. These pension funds control millions of
shares so they carry some weight at corporate annual shareholder meetings.
The
state pension fund is no longer in crisis, as it was six years ago. Since Seth took
office two years ago, the fund has run in the black, earning
more than $390 million and beating the fund’s goals.
Rather
than give back so much to hedge funds, the “Back to Basics” plan should reduce
costs and boost earnings while taking a cautious, prudent approach to
risk.
Here
is the Treasurer’s official new release about the plan:
General
Treasurer Seth Magaziner announced today that he will present a new "Back
to Basics" investment strategy to the State Investment Commission for
consideration and approval.
Among
the changes recommended by Treasurer Magaziner is a significant reduction in
the state's investments in hedge funds. Under the "Back to Basics"
plan, the state will reduce its investment in hedge fund strategies by more
than $500 million over the next two years, and reallocate these funds to more
traditional asset classes.
Back
to Basics is the result of an extensive review of the state's pension
investments launched earlier this year by Treasurer Magaziner, involving many
of the state's leading financial experts. Among those participating in the
review were the members of the State Investment Commission and Retirement
Board, Treasury investment staff, and Pension Consulting Alliance, a leading
national pension investment advisor.
"While
our pension system has achieved positive performance and beaten our benchmark
since I took office, I believe that we can do better," said Treasurer
Magaziner. "Our 'Back to Basics' approach will improve returns through
common sense investments that have proven they can deliver growth and
stability."
Performance
has been positive since Treasurer Magaziner took office in January 2015,
earning more than $390 million and beating the plan's own benchmark.
"I
am committed to bringing a steady and reliable hand to our state's
finances," said Treasurer Magaziner. "With pension costs comprising a
large percentage of state and local budgets, the stronger performance projected
under our 'Back to Basics' strategy can save millions for taxpayers and
strengthen retirement security for our public employees."
Under
Back to Basics, a majority of the pension fund will be invested in strategies
designed to produce strong returns over time. These growth and income strategies
mainly consist of low-fee index funds. The rest of the portfolio will be
invested in assets designed to protect the pension system against market risks
such as inflation and volatility.
August
2016 Investment Performance
The
RI pension fund saw positive performance in the month of August, earning
roughly $20 million in net investment returns, beating the plan's benchmark as
well as a traditional 60/40 benchmark. During the month, the pension system
returned 0.44% compared to the 0.33% return of the benchmark and 0.16% return
of the 60/40.
To
date in 2016 the pension has earned roughly $334 million in investment gains
and contributions, offset by $256 million in pension benefit payments for a net
increase of approximately $77 million.
About
the State Investment Commission:
The State Investments Commission (SIC)
oversees the assets of the state's pension system as well as non-pension
related investments such as the General Fund.
Chaired
by General Treasurer Seth Magaziner, SIC membership includes Robert Benson,
Chief Investment Officer, Amica Insurance; Michael Costello, Managing Partner,
Endurance Wealth Management; Thomas Fay, Regional Vice President, BNY Melon;
Marie Langlois, Former Managing Director, Washington Trust, and Chair of the RI
Foundation Investment Commission; Sylvia Maxfield, Dean, Providence College
Business School; Paula McNamara, President, Murray Charitable Foundation; Tom
Mullaney, Director of the State Budget Office; Frank Karpinski, Executive
Director of the Employees Retirement System; and Marcia Reback, Former
President, RI Federation of Teachers.
About
Pension Consulting Alliance:
Pension Consulting Alliance, LLC is a
nationally recognized consulting firm that provides thoughtful, conflict-free,
independent investment analysis. In addition to Rhode Island, PCA's public
pension clients include CalPERS, CalSTERS, New York, Washington, Oregon, South
Carolina, Kansas, and Hawaii.
