Russell Moore: Rhode Island’s Gina Raimondo Turns Opaque
Monday, July 29, 2013
The General Treasurer, who admirably took up the fight for pension reform after her predecessor—Frank Caprio—lost his campaign for governor thanks to his leadership on the issue, named her report describing the need for pension reform “Truth in Numbers”. It was a brilliant move, as she successfully separated the issue from emotional politics over the promises made to retirees that the state couldn’t keep.
While Raimondo certainly deserved the credit for her leadership on that issue, the days of truth in numbers have faded faster than the New England Patriots receiving corps.
How much $ went to Wall Street fat cats?
I’d been waiting with anticipation for the July State Investment Commission meeting to take place (yes, I need a life). It’s the first one since the 2013 Fiscal Year ended, and I wanted to know how much money Rhode Island retirees and taxpayers shelled out to Wall Street money managers last year. Last year’s fees are so important because it’s the first full year that the fund became heavily invested in “alternative” investments (hedge funds, private equity, real estate)—about $1.9 billion worth.
Hedge funds and other alternative investments usually charge a premium of 1.75 percent up front, and then, here’s the kicker, 20-percent of the profits. I swear the people who convince others to accept these terms could sell water to a well.
I called and emailed Raimondo spokeswoman Joy Fox—a competent and experienced communications professional by anyone’s estimation—asking for the public documents about the meeting in advance so that I could read the data and ask more informed questions. Her answer couldn't have been more direct, “no”. This became a recurring theme throughout the next couple of days.
I was frustrated by the lack of accommodation.
So imagine my frustration when commission member Marcia Reback, a former President of the Rhode Island chapter of the Rhode Island Federation of Teachers and Health Professionals who has been critical of the state’s high level of investment in hedge funds and other alternative investments, was given a non-answer when she asked what the pension fund paid in fees to Wall St. money managers last year.
An Artless Dodge
“We don’t have the comprehensive numbers yet, just because it takes a little while to get everything together and finalized,” said Anne Marie Fink, the state’s Chief Investment Officer. “They had good performance, so you should expect reasonable fees.”
That sounds like someone who knows more than she’s letting on.
So it was a nice touch, moments later, when Raimondo went on to brag about the pension fund’s return on investment of just over 11 percent last fiscal year—even after fees are included.
“Our strategy is working and with lower risk. So I think we should proceed as we have,” said Raimondo, a former alternative asset manager. When all you have is a hammer, everything tends to look like a nail.
How is it possible that we don’t know what we've paid the hedge fund cowboys, when the meager 11-percent yield we received takes fees into account? Who is mistaken—Raimondo or her CIO or both? My suspicion here is that the hesitance to tell the public pertains to the fact that we’re talking about some ungodly number—something in the many tens of millions.
I asked Fox for a range of what the fees were. “No”, she said smiling. “I like to be more precise than that.” But what could be less precise than telling me nothing, I wondered?
In the end, I fail to understand how stalling the release of these numbers does any good for the Treasurer. You can run, but you can’t hide.
Truth in numbers
I would be remiss if I didn't point out that the 11 percent return (11.07, to be precise) stinks. At first blush, I’m sure people will think that that’s some great shakes, but don’t be fooled. Over the same exact time period, the major indexes didn't just outpace our 11 percent return, they obliterated it. The S&P 500 increased by 20.6 percent. The Russell 3000 increased by 21.5 percent.
That means that the “unsophisticated” investor who sat back and bought the index funds did almost twice as well as the wise and prudent hedge fund managers, the new alchemists, who got us 11 percent.
Let’s not forget that according to Stephen Beale’s report last week, back in FY 2010, Caprio’s last full year in office, the state pension fund yielded a 13 percent return—about 86-percent of what the Russell 3000 index yielded. If the pension fund mirrored the stock market this past year, the same way it did in 2010, it would have earned $530.2 million more.
Further, out of all the data that was released by state pension systems, Rhode Island had among the lowest returns—bested by CalPERS and the Massachusetts retirement system, to name just two. What’s more and no surprise to anyone who follows hedge funds, the pension system that didn't invest in hedge funds—the Oklahoma Teachers Retirement System—had the best performance, raking in an impressive 16-percent return on investment.
And contrary to what the alternative asset managers say, they really don’t decrease risk. There’s a reason why the Rhode Island pension fund outperformed the Harvard and Yale endowments (both of which were heavily invested in alternatives, RI wasn't back in 2008-09. Don’t confuse volatility with risk—they don’t mean the same thing.
Raimondo still talented
None of this should be taken as a blanket rejection of Raimondo or everything she’s done. Raimondo is, without doubt, a smart, talented, and qualified politician. Her educational background (LaSalle Academy Valedictorian, Harvard undergrad, Rhodes Scholar, Yale Law School) is second to none. She deserves all the credit she’s gotten, and more, for her work on pension reform. And when all is said and done, she may very well be the best candidate for Governor next year.
But those facts aside, Rhode Island ought to reconsider its approach to investing. We should stop weighing ourselves down with counterproductive hedge funds and other “alternative investments.”
And Raimondo should remember what made her so popular in the first place—her commitment to honesty, transparency and relentless pursuit of reform. We could use some more of that from her office these days.
In any event, you can call Treasurer Raimondo at (401) 222-2397 and ask her how much the state pension fund paid Wall St. money managers last year. It’s your money and you deserve to know. Maybe you’ll have more luck than me.
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