Riley: Puerto Rican Debt? Treasurer Magaziner Must Fire Cliffwater
Tuesday, February 16, 2016
A few weeks back we exposed the fact that certain “hedge funds” in the expensive and complicated Rhode Island pension portfolio were not in fact hedging risk. Instead they were taking losses because of leveraged exposure to junk bonds. In fact, several of the choices implemented by now Rhode Island Governor, then General Treasurer Gina Raimondo have not been hedges at all but rather leveraged ways to lose even more money than would be lost in a plain vanilla stock market correction or bear market.
This weeks Barron’s Magazine has an interview of the manager of Brigade Capital Management. Brigade was the selection made by Raimondo and Cliffwater in March 2012. Read the article and interview carefully and asks yourself if this investment seems like a good “hedge” for a pension fund.
The fact that the State Investment Commission headed by Raimondo chose this vehicle in March 2012, and Magaziner maintains the investment today despite the funds venture into junk bonds and Puerto Rico debt, brings into serious question whether Raimondo, Magaziner and the commission have any idea what they are doing. Brigade has negative returns since 2012 and more recently big losses. There is no way this strategy should be part of the de-risking of the Rhode Island State Pension Fund.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTDoes Magaziner Even Know he’s Investing in Puerto Rican Debt ?
Treasurer Magaziner, who is behaving like a deer stuck in the headlights, is the new head of the SIC yet has been paralyzed and the performance of the pension fund shows it. January 2016 was the worst January in stock market history and the only communication we have received from the treasurer was how he won’t lower the discount rate. Our estimate of RI Pension losses for FY2016 year to date is nearly half a billion dollars and the shortfall over the last 14 months is over $1 billion dollars.
Cliffwater will be fired
Since taking office over one year ago, Treasurer Magaziner has not changed his asset allocation, not even during this sell off. This paralysis was predictable given his lack of experience. After all, teaching kindergarten is no way to learn how to effectively manage $8 billion pension dollars. Now that we are in a bear market, his misrepresented and nearly non-existent experience is a huge negative. Where is that fresh idea genius that was endorsed by Ed Achorn?
Mr. Magaziner showed much bravado and backbone during that 2014 campaign and Projo bought deeply into his lies. But even the “stuck on Democrat “ Providence Journal has to wonder why Mr. Magaziner continues to employ Cliffwater LLC as adviser? Cliffwater is paid half a million dollars a year to pick appropriate hedge funds for the "Raimondo Strategy". Or, is it really Raimondo making the calls? In either case, these hedge fund picks are failing miserably and regardless of whether its Raimondo or Cliffwater or both, its high time for Rhode Island to boot Cliffwater just like Massachusetts did over a year ago. I predict Cliffwater is gone by July. Our comments below from the December 15 article, show that Magaziner has had time to act but he chose not to.
Our December 15 comments on Raimondo failed picks
“Why did Magaziner hang on? Claren Road losses totaled -15.08% over the last 12 months, before redemption last month. Blue Crest was down 3.57% before redemption. Brigade Leveraged Capital Structures Fund LP is down 8.41% in fiscal year 2016 and acting suspiciously like the high yield funds that were recently hit with huge losses. The losses that hit the now shuttered Third Avenue Focused Credit Strategies Fund accelerated over the last 6 weeks, so we don’t even know yet how bad the losses in Rhode Island will be. Another hedge fund picked by CliffWater and Raimondo was Brigade Leveraged Capital Structures Fund LP.”
Do Raimondo and Magaziner even care?
Does Rhode Island's Governor or Treasurer even care about the condition of the pension fund? After talking about the math of the pension fund for years Raimondo barely utters a word about pensions. She never did anything about the Cities and Towns as she promised and now the State Pension Fund is sinking into the abyss again and remains among the worst 10 states. Magaziner promotes new and rehashed ideas while losing money consistently.
In the end this is about a state pension fund that grows more unfunded nearly every month. Retirees and state taxpayers have a right to be concerned. Rhode Island has never escaped “crisis” despite the highly touted reforms of 2011. It’s a real shame to see the sacrifices employees made in COLAs and compensation wither away due to a faulty, expensive and complicated investment paradigm. It’s clear that Raimondo and Magaziner are much better politicians than they are asset managers.
The billion dollars lost over the last 14 months is inexcusable and RI Treasury should not only tell us what went wrong but also deliver a safer, simpler and less expensive portfolio. Or is that too much to ask? I could do it in a heartbeat.
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.
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