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Moore: Magaziner Must Embrace Filippi’s Pension Proposal

Monday, April 03, 2017

 

Blake Filippi

Rhode Island General Treasurer Seth Magaziner got himself back into the news last week with a new proposal that will likely help municipal pensions.

Magaziner’s proposal would make it easier for locally managed municipal and other pension funds to enter into the state managed Municipal Employees Retirement System (MERS). The proposal would help local communities, presumably, because it would cut down on the cost of managing the system due to the economies of scale it would generate.

In a way, the move is akin to regionalization, which isn’t a bad idea. However, pardon me for not getting that warm and fuzzy feeling about putting more money into the state system, which poured hundreds of millions of dollars into hedge funds under former General Treasurer Gina Raimondo’s (currently Governor) watch, which prevented the state from attaining hundreds of millions in investment returns thanks to their lackluster performance and ridiculous fees.

Colossal Waste

Last year, GoLocal reported that according to numbers compiled by Wilshire TUCS, the Rhode Island pension fund under-performed the median fund of similar sized plans, over a 5-year period, to an extent that if it had kept pace, would have made an additional $455 million in returns. That time period coincided with the fund’s move into hedge funds.

Hedge funds are also as opaque as they are expensive and ineffective. Managers do their best to keep their operations shrouded in secrecy, under the guise of “trade secrets”.

Still think hedge funds are great? Please don’t just take my word that they’re not. There’s a highly trusted investment professional who goes by the name of Warren Buffett who is also outspoken in his criticism of the ridiculously expensive and overrated hedge fund investment industry.

Buffett has an ongoing, $1 million bet with a hedge fund (proceeds to charity) that no hedge fund can beat the S&P 500 index over a ten year period. After 9 years, the results aren’t even close. Fortune Magazine recently reported. The S&P has an annual return of 7.7 percent. The hedge funds are returning 2.2 percent per year. Nuff said.

Listen to Buffett

(Last year, Magaziner began to reduce the Rhode Island pension fund’s hedge fund allocation--a move I appreciate, but continue to wonder why it took him a year-and-a-half to come to this common sense realization.)

In any event, Magaziner’s proposal to bring more locally administered plans into the MERS system garnered significant press coverage.

Seth Magaziner

But there’s another proposal however, unveiled last week, that would impact the Rhode Island Treasury even more, and in a completely positive way. The measure, put forward by state representative Blake Filippi--the Republican Minority Whip (Charlestown, Block Island), who is one of the body’s more thoughtful members--would make hedge funds less opaque.

The proposal would require that the State Investment Commissions provide a separate report including “information and supporting documents relating to the hiring of alternative investment consultants, alternative investment performance and confidentiality agreements with consultants are finally disclosed to the public,” according to a GoLocal report last week.

Best Legislation So Far

Yes, Filippi is a Republican and Magaziner is a Democrat. I get that. But it’s time to get past partisanship and start doing what’s right for Rhode Island. Magaziner fashions himself as a champion of transparency. If that’s true, he should embrace this Filippi proposal.

Magaziner won’t be General Treasurer forever, so let’s codify this pro-transparency legislation into law. Chance are, this legislation will help dissuade future hedge fund investments, and save us hundreds of millions into the future.

It’s not far-fetched to say that Filippi’s proposal is the best, and most important piece of legislation proposed this legislative session.

Folks should call Seth Magaziner’s office at (401) 222-2397 and tell him to support this common sense bill. (Remind him about how much he values transparency.)

Russell J. Moore has worked on both sides of the desk in Rhode Island media, both for newspapers and on political campaigns. Send him email at [email protected]. Follow him on twitter @russmoore713,

 

Related Slideshow: RI Pension System’s Highest Paid Investment Firms

Below are the highest paid investment firms by the state pension system. Two types are listed: hedge funds and private equity firms. Firms are listed in order of least to highest rate of pay. Firms at the same rate of pay are ordered according to the amount of the payment they received, from least to greatest. For each firm, the name, type, management and performance fee rates, and the amounts paid for each are shown, along with the total. In instances where a firm had more than one fund, information is provided for each individual fund. Data are from a newly published online report of investment expenses for the state pension system. Note that the Treasurer’s office has declined to disclose information for 18 private equity firms due to confidentiality clauses.

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20

MHR Institutional Partners III

Firm Type: Private Equity

Pension Assets Invested: $20,000,000    

Management Fee Rate: 1.75%

Performance Fee Rate: 20%

Management Fees: $243,171    

Performance Fees: None

Total Investment Expense: $243,171

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19

Oaktree European Principal Fund

Firm Type: Private Equity

Pension Assets Invested: $20,000,000

Management Fee Rate: 1.75%

Performance Fee Rate: 20%

Management Fees: $300,687

Performance Fees: None

Total Investment Expense: $300,687

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18

W Capital Partners 

Firm Type: Private Equity

Pension Assets Invested: $15,000,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees:$65,790

Performance Fees: None

Total Investment Expense: $65,790

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17

Nautic Partners IV

Firm Type: Private Equity

Pension Assets Invested: $20,000,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $84,442

Performance Fees: None

Total Investment Expense: $84,442

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16

W Capital Partners II

Firm Type: Private Equity

Pension Assets Invested: $15,000,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $107,549

Performance Fees: None

Total Investment Expense: $107,549

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15

Kayne Anderson Energy Fund IV

Firm Type: Private Equity

Pension Assets Invested: $15,000,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $108,970

Performance Fees: None

Total Investment Expense: $108,970

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14

Thomas, McNerney & Partners

Firm Type: Private Equity

Pension Assets Invested: $15,000,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $143,862

Performance Fees: None

Total Investment Expense: $143,862

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13

Paladin III

Firm Type: Private Equity

Pension Assets Invested: $10,000,000

Management Fee Rate: 2.00%

Perfomance Fee Rate: 20%

Management Fees: $150,000

Performance Fees: None

Total Investment Expense: $150,000

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12

Lighthouse Capital Partners VI

Firm Type: Private Equity

Pension Assets Invested: $15,000,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $210,600

Performance Fees: None

Total Investment Expense: $210,600

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11

Thomas, McNerney & Partners II

Firm Type: Private Equity

Pension Assets Invested: $15,000,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $169,053

Performance Fees: $96,512

Total Investment Expense: $265,565

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10

Bain Capital Fund X 

Firm Type: Private Equity

Pension Assets Invested: $25,000,000

Management Fee Rate: 2.00%

Performance Fee Rate: 30%

Management Fees: $361,635

Performance Fees: None

Total Investment Expense: $361,635

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9

BlueCrest Capital LP 

Firm Type: Hedge Fund

Pension Assets Invested: $20,981,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $419,000

Performance Fees: $0

Total Investment Expense: $419,000

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8

Riverside Capital Appreciation Fund VI

Firm Type: Private Equity

Pension Assets Invested: $25,000,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $489,102

Performance Fees: None

Total Investment Expense: $489,102

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7

Brevan Howard LP

Firm Type: Hedge Fund

Pension Assets Invested: $77,047,000

Management Fee Rate: 2.00%

Performance Fee Rate: 25%

Management Fees: $1,588,000

Performance Fees: $0

Total Investment Expense: $1,588,000

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6

Capula Global Relative Value Fund

Firm Type: Hedge Fund

Pension Assets Invested: $55,791,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $1,097,000

Performance Fees: $1,027,000

Total Investment Expense: $2,124,000

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5

Third Point Qualified LP

Firm Type: Hedge Fund

Pension Assets Invested: $0 *

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $1,029,000

Performance Fees: $2,423,000

Total Investment Expense: $3,452,000

NOTE: Figures are end of year figures. The zero here means that money was invested earlier in the year but then withdrawn. 

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4

OZ Domestic Fund II LP

Firm Type: Hedge Fun

Pension Assets Invested: $98,918,000

Management Fee Rate: 2.00%

Performance Fee Rate: 20%

Management Fees: $1,907,000

Performance Fees: $2,142,000

Total Investment Expense: $4,049,000

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3

Point Judith Venture Fund II

Firm Type: Private Equity

Pension Assets Invested: $5,000,000

Management Fee Rate: 2.50%

Performance Fee Rate: 20%

Management Fees: $71,496

Performance Fees: None

Total Investment Expense: $71,496

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2

Focus Ventures III

Firm Type: Private Equity

Pension Assets Invested: $15,000,000

Management Fee Rate: 2.50%

Performance Fee Rate: 20%

Management Fees: $263,633

Performance Fees: None

Total Investment Expense: $263,633

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1

DE Shaw Composite International Fund

Firm Type: Hedge

Pension Assets Invested: $73,443,000

Management Fee Rate: 2.50

Performance Fee Rate: 25%

Management Fees: $1,725,000

Performance Fees: $2,965,000

Total Investment Expense: $4,690,000

 
 

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