Tuesday, May 13, 2014

Even The Times Takes the Cable News Approach to the Public Pension Debate

Even The Times Takes the Cable News Approach to the Public Pension Debate

The New York Times has succumbed to the same formula that drives shouting matches on the cable news channels.  They’ve asked a ridiculously phrased and loaded question and then turned it over to four commentators: Edward Siedle, Money Management Forensic Expert; Michael Oliver Weinberg, Columbia Business School; Connie M. Razza, Center for Popular Democracy; and, Nicolas Galinas, Manhattan Institute City Journal.[1]  Here’s the question posed by The Times:

Should the multibillion-dollar state pension industry be more transparent and less prone to influence and corruption?

How can you have a debate on this question?  The answers are simply “yes” and “yes”.  There should be more transparency and the system should be less prone to corruption.

The predicate for this debate, according to The Times, is the much-critiqued shift of public pension plan assets into alternative assets.  It’s as if public pensions were managed beyond the reach of influence and corruption until the hedge fund and private equity managers showed up.  The Times also paints with an overly broad brush by inferring that every alternative manager is hiding behind opacity and influence peddling.  If this is the starting point for a debate in the “newspaper of record,” we’re never going to have a reasoned discussion on this subject.

This focus on alternative managers in this discussion is the first good news for traditional long-only money managers in a long time.  They haven’t had a great of success attracting or retaining public pension mandates in the last ten years.   Who do you think were the original beneficiaries of limited transparency and political influence?  Let’s be clear, many long-only money mangers came by their mandates honestly and avoided political influence.  However, plenty of large and small stock and bond managers perfected the very techniques under question long before the first hedge fund or private equity investment ever showed up in a public pension plan.   Over the past several decades, thousands of long-only managers underperformed their respective benchmarks, but kept their mandates because of some combination of limited disclosure and political influence.

The most vociferous critics are correct; alternative investments have a higher potential for greater abuse because of their fatter fees, more complicated structures, and lack of be hiding behind confidentiality agreements to limit public inspection.  As I’ve written
before (“The Real Public Records Revelation: Trying to Make a Commodity Look Proprietary [April 14, 2014]”), many alternative managers are making ridiculous arguments under the trade secret exemption to the public records laws.  However, as we have learned from the large public records request made by the North Carolina State Employees’ Association, some alternative managers are perfectly fine revealing all of their arrangements with a public fund.

A debate about the efficacy of making large-scale alternative investments is totally lacking from the discussion in The New York Times.  I’m afraid that discussion wouldn’t be as exciting as throwing around broad-based charges of secrecy and influence, but it would be far more helpful.  Moreover, the discussion would have to be specific.  While the term alternative investment is a convenient catchall, it encompasses multiple asset classes and dozens of investment strategies.  While we need to root out as much impropriety and influence as possible, in the end it’s the commitments to and actual investments in private equity, real estate, and hedge funds that will either aid or detract from investment performance.

Tomorrow, I want to talk about the limits of transparency. 

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