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.
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:
Courtesy
of GQ:
