Riley: Magaziner Drowning in Raimondo’s Hedge Funds Gone Wild
Tuesday, May 31, 2016
The results are in. Both the Providence Pension Plan and the State of Rhode Island Pension Plan were gainers as the S&P500 benchmark index has now rallied 13% from its February lows to a whisker away from new all-time record highs. Pension funds in general have improved but have trailed the performance of the market. Rhode Island is no exception.
Despite near record highs and a 5 year S&P 500 index gain of 57.69% or 9.54%, the State Pension Fund designed by Governor Raimondo and now managed by the inexperienced Seth Magaziner has negative returns over the past fiscal year and the Raimondo /Magaziner Portfolio returned just 5.3% since Raimondo took charge 5 years ago. No doubt 5.3% is a horrible return, given both the plan return assumption of 7.5% compounded and the tail winds of the last 5 years of a major bull market.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST
Time for Magaziner to throw Raimondo completely under bus?
A few weeks back Magaziner touted his recent competitive bond auction as an obvious fix saving RI taxpayers millions of dollars. He said it had not been done in 10 years. OUCH!
That backhanded criticism of Raimondo’s debt management in the years prior to Seth Magaziner had to sting. Didn’t Raimondo understand competitive auctions or did she prefer to direct underwritings to donors or future donors?
Now Magaziner is drowning in her hedge fund experiment gone wild. I have huge doubt that Magaziner can produce great results on his own but, If I were in his spot I would substantially change the current portfolio and rid the fund of all high fee hedge funds, Private Equity funds and high fee Real Estate investments.
I don’t expect Magaziner to ask me but I would again recommend firing the consultant CliffWater. As far as the CIO Anne Marie Fink goes she shows no creativity or guts in portfolio management preferring to hide behind consultants and an ugly reliance on JP Morgan style “Modern Portfolio Theory” that both Fink and Raimondo are devotees of. Magaziner should take charge and live or die on his own decisions.
A word about Modern Portfolio Theory
Clearly Fink was hired by Treasurer and now Governor Raimondo out of JP Morgan because of her devotion to Modern Portfolio Theory. Unfortunately it hasn’t worked and Magaziner should consider the advice of some of the world’s greatest investors. I am referring to Warren Buffett and Charlie Munger. As a fan and frequent shareholder of Buffett, Munger and their philosophy of investing, I have attended many of the Berkshire Hathaway confabs in Omaha. I have heard them repeatedly criticize the very theory being used by Rhode Island, known as MPT. The Raimondo interpretation of MPT has us exposed to Puerto Rican debt and high yield energy debt. Does that sound prudent or appropriate for our retirees? Additionally Buffett and Munger have railed against high management fees of Hedge Funds and Private Equity Funds alike. Raimondo got that wrong. They would also laugh at the discount rate of 7.5% as unrealistic. Magaziner remains delusional.
Here are some favorite quotes of mine and a link to a 2009 article about Modern Portfolio Theory (MPT) and Efficient Market Hypothesis(EMH):
Mr. Buffett said he was once asked by a student from the University of Chicago, a hub of modern portfolio theory, “What are we learning that’s most wrong?” To which Charlie Munger quipped, “How do you handle that in one session?”
"...Berkshire's whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form. And not one ounce of attention to the descendants of that idea, which came out of academic economics and went into corporate finance and morphed into such obscenities as the capital asset pricing model, which we also paid no attention to," said Charlie Munger at UC Santa Barbara back in 2003.
"Naturally the disservice done students and gullible investment professionals who have swallowed EMT has been an extraordinary service to us and other followers of (Benjamin) Graham. In any sort of a contest -- financial, mental, or physical -- it's an enormous advantage to have opponents who have been taught that it's useless to even try. From a selfish point of view, Grahamites should probably endow chairs to ensure the perpetual teaching of EMT," said Warren Buffett.
Lawrence Summers, President Obama’s special economic advisor, in a prior position was part of the team brought in to unwind and bail out Long Term Capital Management. He stated on several occasions that the Efficient Market Theory is the worst thing that has ever happened to the investment process.
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.
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
Related Articles
- Riley: Governor Raimondo Aware of Providence Lies
- RILEY: EXTREME Market Stress This Week
- Riley: Providence and Rhode Island Pension Funds Hemorrhaging Money
- Riley: Troubling Facts in Providence Pension Plan
- Riley: Puerto Rican Debt? Treasurer Magaziner Must Fire Cliffwater
- Riley: Puerto Rico Hedge Fund “Bailout” to Follow Rhode Island Law
- Riley: RI Pensions Returns Raimondo Style 2011-2015
- Riley: Why Does Hoyle Allow Providence to Cheat Retirees and Other Cities Can’t?
- Riley: Junk Bond Collapse Hits RI Pension Fund
- Riley: Spin Doctor Seth at it Again
- Michael Riley: 15 Who Made a Difference in 2015
- Riley: Why Does NY Have Funded and Honest Pension Plans?
- Riley: Top 10 Signs Providence is Bankrupt
- Riley: Puerto Rico and Providence on My Mind
- Riley: Progressive Magaziner and the Discount Rate
- Riley: Mr. Magaziner, No More Spin - Just the Facts
- NEW: Magaziner Rolls Out RI “Transparent Treasury” Initiative
- Moore: Will Magaziner Protect Rhode Island or Wall St.?
- Critics Say Magaziner’s Reforms are Public Relations, Not Substance
- GoLocalTV: Magaziner Announces New Incentive for RI Families to Save for College
- RI Retired Teachers Willing to Pay $10K Demand from Magaziner for Pension Investigation
- Magaziner Demanding $10K for Public Records Request from Forbes’ Siedle
- Guest MINDSETTER™ Norman: The Amazing Magaziner, the Prince of Prestidigitation
- RI State Pension Has Not Grown Under Raimondo and Magaziner
- Will Magaziner Divest from Firm Charged by SEC?
- Magaziner Announces RI’s New CollegeboundFund Managers
- No Magaziner on Clinton Host Committee - Is There a Family Rift?
- Seth Magaziner: 16 to Watch in 2016 in RI
- Magaziner Offers Nominations for State Investment Commission, State Retirement Board
- Magaziner Should Return $10K to Retired Teachers for Withholding Key Documents, Says Siedle
- Russell Moore: Magaziner Must Be Tough on Wall Street
- NEW: RI Treasurer-Elect Magaziner Announces Two New Hires
- 31-Year-Old Magaziner Wins General Treasurer’s Office
- Treasurer-Elect Magaziner Names Transition Committee
- Riley: Default, Theft, and Renewed Call for SEC Providence Pension Investigation
- Riley: Magaziner Throws Raimondo Under the Bus
- Riley: Magaziner & Elorza Pension Assumptions Ridiculed by Special Master Feinberg
- Riley: Elorza - Providence Has Plan to Make Pension Payment on Time
- Riley: Wainwright Issues Cash Flow Report That Points to Providence Asset Fraud
- Riley: Dear SEC, Say Hello to Mayor Elorza & Governor Raimondo
- Riley: RI Treasurer & Hedge Fund Debacle – Worst Returns in a Decade
- Riley: The Odds That RI Pension Plan will be Fully Funded by 2040
- Riley: A Lively Thought Experiment
- Riley: Mr. Achorn Do You Still Want Door Number 1?
- Riley: RI Pension Shortfall Far Outweighs Budget Surplus