Moore: Magaziner’s Back to Basics Strategy Paying Dividends
Monday, June 26, 2017
Anyone who is interested in the issue, and we all should be since to a large extent, the state’s financial future is widely tied into the performance of the state pension fund. When the pension fund performs poorly, it will always be the taxpayers who are forced to step up and make sure that the retirees are getting their pension checks.
The state’s revenue isn’t infinite, so when that happens, it means there’s less money to pay for infrastructure, help those who are struggling, and invest in education.
That’s why it’s heartening that Magaziner ordered an extensive review of the state pension fund’s investments last year and, as a result of the findings, reduced the pension fund’s holdings in hedge funds.
All of my research on them has found that hedge funds are not transparent, do not reduce risk, and what’s worst, do not provide good shareholder value (to put it mildly.) They do not do a lot of good things. Hedge fund managers do, however, throw tremendous parties--so there’s always that.
Magaziner’s review of the state pension fund’s hedge fund investments came to similar conclusions--at least with respect to crucial issue of shareholder value.
And he made sure it was a data-driven process, to make certain that politics didn’t factor into his analysis. Magaziner concluded that many hedge funds weren’t delivering on their promises.
“Hedge funds were the only part of our portfolio where a majority of the value that was created stayed with the manager instead of the investors,” said Magaziner.
So he took action. The Rhode Island pension fund has already moved roughly $400 million out of its hedge fund portfolio. (Hedge funds are notoriously hard to get out of since their contracts usually specify that only a certain portion of the investment can be withdrawn every year.)
That’s already paying serious dividends. To make the point, the Rhode Island pension fund has already closed the gap with other pension funds that are of a similar size. In the year before last, the Rhode Island pension fund lagged the Wilshire median average (the return of the pension fund in the middle of the list with all the funds in that specific range ranked from top return to bottom) by 1.1 percent. This most recent year’s data shows that the pension plan lagged the median by just .3 percent.
That’s some serious improvement. When the Magaziner “Back to Basics Plan” is fully implemented, the returns should continue to improve. With so many other plans across the country having bought into the hedge fund mania, the state’s pension plan should be outperforming most of the other similar sized plans in the country sooner than later.
Magaziner offered no criticism of the previous Treasury administration. He is quick to stress that he understands that previous General Treasurer Gina Raimondo was intent on reducing volatility, since volatility makes it harder for the fund to garner strong returns.
“You don’t want to have poor returns and low volatility, but you don’t want to have higher returns and high volatility either,” Magaziner said.
Magaziner pointed out that the original intent of the strategy may have been to reduce volatility, but that the execution wasn’t effective.
“The folks from the previous administration weren’t looking for equity or private equity-like returns. They were looking for low-volatility diversification, like you would normally get from bonds,” said Magaziner.
Old Ideas are New Again
The idea behind the new strategy, he said, is to remove the fund’s investment in hedge funds that haven’t provided real value and to move the money into more traditional investments.
“When you net out the fees, the average returns hedge funds was actually lower than fixed income.”
Magaziner could have moved quicker to enact a strategy with a drastically reduced hedge fund allotment, but what matters now is that he’s got the fund on a path to garner greater returns. And for that, he deserves credit.
Related Slideshow: The Highest Paid Early Retirees in the RI Pension System
Below are the top 20 highest paid retirees in the state pension system who retired at age 45 or younger. Data are current as of June 30, 2014 and were obtained directly from the General Treasurer’s office. Estimates of age and annual pension are GoLocalProv calculations. Ages were calculated by comparing birth year with retirement year. The data did not include months and dates for either. The annual pension and total amount paid since retirement are provided for each. Retirees are listed in order of lowest paid, of the top 20, to the highest.
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- Moore: Magaziner’s Back to Basics Strategy Paying Dividends