Monday, February 24, 2014

Unnecessarily Stirring the Pot: Rhode Island

Unnecessarily Stirring the Pot:  Rhode Island

If there’s one thing that investing has taught me, it is how to make mistakes.  Apparently my talents as a blogger are as fraught with miscues as my career in money management.  Last fall, I lauded the efforts of Ted Siedle in exposing Rhode Island’s foray into alternative investments.  After Mr. Siedle posted his critique on his website, he was hired by American Federation of State, County & Municipal Employees (AFSCME) to conduct an investigation of Rhode Island’s pension practices.    The report, “Rhode Island Public Pension Reform: Wall Street’s License to Steal”[1] is misguided, as I have discussed in previous posts.[2]  I should not have praised Mr. Siedle’s efforts in the first place.

In the last week, Rhode Island reached a settlement between the State’s public employees and government officials concerning pension reforms enacted in 2012.  The reforms, championed by Treasurer Gina Raimondo, are designed to reduce the pension’s deficit over the next several decades.  The settlement rolls back some of the reforms, while preserving most of the long-term savings.[3]

In the wake of the settlement, Mr. Siedle renewed his attack on the pension plan and Treasurer Raimondo.  His assertions are designed to undermine the confidence of state employees and retirees in the management of the pension plan.  These comments highlight why I was wrong to laud his earlier analysis.  Mr. Siedle now claims:

Workers will have no way of assessing whether the risks related to future benefit payments are acceptable; the most fundamental investment information will be withheld from them. That’s an outrageous oversight, in my opinion, and a benefit to Wall Street that many (but not all) parties to the pension negotiations probably never intended.[4]

This statement is completely wrong.  While not perfect (what report is?), the monthly reports[5] issued by the Treasurer’s office for the State Investment Commission provide a great deal of information about the performance and risks of the pension plan.  I didn’t study these reports closely when I first looked at Rhode Island. In going back to take a closer look, I found that the reports show exactly how much current and future exposure the pension has to individual real estate and private equity managers.[6]  It also details the investment performance of its hedge fund managers.[7]  The fees of prospective managers are revealed[8], and the risks of the portfolio are well documented.[9]   

In the Treasurer’s Annual Report[10] the performance of all the pension’s managers are revealed[11], and the fees for each asset class, including performance fees, are shown in detail.[12]  The fees for all the hedge fund managers are also displayed.  The annual report isn’t nearly as current as the monthly reports, but the overall level of disclosure is greater than the vast majority of pension plans in the United States. 

Mr. Siedle also attacks the State Treasurer’s investment credentials.[13]  While I’m in no position to judge Treasurer Raimondo’s previous experience as a venture capitalist, Mr. Siedle’s comments are off the mark.  Virtually no one who assumes oversight of a public pension plan has had previous experience managing at such a large scale.  Neither Mr. Siedle nor I should be second-guessing the voters of Rhode Island, especially since Treasurer Raimondo is not a sole fiduciary.  The investments are approved by the State Investment Commission, which includes a number of experienced investment professionals.[14]  Rhode Island also has a very experienced Chief Investment Officer, Anne Marie Fink.[15]  While the Treasurer wields a great deal of authority as Chairman of the SIC, Rhode Island has a great deal more relevant experience weighing in on investment decisions than the average pension plan.

In my view, the investment issues in Rhode Island are two-fold.  First, there’s the efficacy of alternative investments in driving performance and managing risk in pension plans.  As most of my readers know, I am a major skeptic.   When one large investor after another pursues the same basic strategy, the strategy seldom works.  Moreover, since alternative investments have high and asymmetric performance fees, the odds simply do not favor Rhode Island or any other pension investor.  Money managers will do very well at the likely expense of the pension plan.  However, Mr. Siedle is incorrect when he asserts that there’s something nefarious buried in the bowels of Rhode Islands relationships with Wall Street money managers.  What’s going on in Rhode Island is readily apparent.  They’ve made an expensive investment bet.

Second, pension plans become more difficult to manage when incumbent officials run for re-election or higher office.  Treasurer Raimondo is running for Governor, and inevitably critics and opponents will see politics behind every investment decision.  For example, the SIC recently terminated the pension’s relationship with Third Point, a hedge fund managed by Daniel Loeb.[16]  Mr. Loeb is an advocate of charter schools, so critics suspect that Third Point was fired in order to shore up the Treasurer’s political support.  As expected, the Treasurer’s spokesperson denies that politics came into play.  I don’t know how the decision was made, but it’s easy to see how this decision looks through a political lens. 

It always amazes me that people are shocked that politics come into play.  Everyone injects politics into the investment process.  Unions, retiree groups, legislators, money managers, and public officials try to insert politics into the investment process.  In fact, I have never seen a pension plan or endowment that didn’t involve some level of politics.    The combination of elections, money, and influence inevitably brings politics into the equation.  We should be shocked if politics didn’t make an appearance.  The goal of any investment organization is to try to keep the politics to a minimum.  Politics are bubbling around Rhode Island public pension plan, and Mr. Siedle’s report and commentary are helping to raise the political temperature to a boil.





[2] See, “Looking for Fire Where There’s No Smoke: SEANC Commissions a Pension Study,” January 17, 2014
[6] See, Monthly Report, January 2014 at 19-20, 22.
[7] Ibid, page 34.
[8] Ibid, page 3.
[9] Ibid, pages 24-27.
[11] Annual Report, page 39-42
[12] Ibid, page 37-38
[13] Siedle Blog, page 2.
[14] For example, J. Michael Costello is a senior professional with Endurance Wealth Management and has previous experience with Fleet Investment Advisors and Provident Group; Thomas P. Fay is a regional president of BNY Mellon and was CIO at Private Bank and Trust; Robert Giudici is a CPA, Paula McNamara is with the Murray Family Foundation and worked at Fidelity; and Andrew Reilly is a senior executive at Accretive Capital.
[15] Ms. Fink was managing director and portfolio manager at JPM Morgan Private Bank before becoming Rhode Island’s CIO.  Her response to Mr. Siedle’s report (see, http://www.treasury.ri.gov/documents/SIC-REPORT-10-23-13.pdf) is far more reasoned and informed than the original report.
[16] http://www.providencejournal.com/breaking-news/content/20140130-r.i.-state-investment-commission-drops-hedge-fund-criticized-by-unionized-teachers.ece

1 comment:

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