Riley: Providence Pension Fund is Risky Business

Tuesday, March 03, 2015

Michael G. Riley, GoLocalProv MINDSETTER™

 

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Relative to the State of Rhode Island Investments of Pension Assets, Providence investment allocation is much less complicated. Providence, however, is in big trouble and the new Mayor has a lot to consider about how the liabilities are funded and how current assets are deployed.

Providence has roughly $57 million it carries every year as a liability to the pension fund. The Pension fund calls the present value of this annual rolling loan an “asset”. I think the accounting treatment is highly suspect and not seen anywhere else in the United States. Lawrence Mancini does not and has apparently ignored Segal (the Auditor) and their warning of January 2014 to discontinue the practice.  In addition to this “asset” the pension fund has about $280 million invested in equities, hedge funds and fixed income securities. One reason for not knowing the exact amounts is that the Board of Investments had not met in 2015 and has not disclosed performance since 2014. The State of Rhode Island has met twice and we know the performance. It is not clear why the Board has not met or disclosed results. We do know the advisor of 20 years is located in Boston and weather could explain some delays. 

Providence allocation of investments is Risky

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The advisor with the explicit consent of the mayor and Investment commission is extremely aggressive in its investing choosing to invest in small cap stocks and international equities and bonds. They also have significant hedge fund exposure of over 14% with Renaissance Tech representing the largest investment in the portfolio of 11% . This portfolio is built for high risk and high returns and is very vulnerable to a downturn in markets. Not only does Providence take more risk than the state does it has almost no exposure to Private equity except curiously a position in Point Judith Capital II from which Governor Gina Raimondo receives a fee.

Providence Board of Investment Commissioners have only 16 investments almost all have been recommendations of their 20 year advisor Wainwright Investment Counsel LLC. It’s worth pointing out once again that there appears to be no competitive or “rfp” process in choosing the same advisor every year. Since Providence hasn’t reported returns since early December 2014 we are forced to estimate. For the fiscal year that ends June 30 2015, Providence is badly trailing its own prediction of 8.25% and is also trailing the S&P 500 by a whopping 1000 basis points or 10%. Normally this kind of miss would produce management changes and adviser changes but Providence continues its lackadaisical approach to pension finance. If they do ever meet in 2015 the Mayor should closely examine the results and make the appropriate changes to benefit the plan holders. Retirees should expect fiduciary care ion their investments and appropriate Funding going forward. Given the lousy returns thus far in Fiscal 2015 the city should consider allocating an extra $15 million to the plan for fiscal 2016. An 8.25% return on a $350 million dollar portfolio is $29 million dollars. So far, with 4 months to go in fiscal 2015, the city has earned zero in the pension plan. 

Correction for last week Brevan Howard

Last week’s column described the poor performance ratings of two hedge funds in the State of Rhode Island Portfolio:  Brevan Howard, and Blue Crest Capital.  While Brevan Howard has earned well over $6.5 million in fees since November 2011, they “only” earned $5.2 million in fiscal year 2012, 2013, & 2014. I have supplied a chart below for clarity. 

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[1] Michael Riley: From Page 35 of the July 2014 Investment Commission report for the state of Rhode Island.

 

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Michael G. Riley is vice chair at Rhode Island Center for Freedom and Prosperity, and is managing member and founder of Coastal Management Group, LLC. Riley has 35 years of experience in the financial industry, having managed divisions of PaineWebber, LETCO, and TD Securities (TD Bank). He has been quoted in Barron’s, Wall Street Transcript, NY Post, and various other print media and also appeared on NBC news, Yahoo TV, and CNBC.

 

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