RI pension fund again lags its peers with return of 11.1%

August 27th, 2013 at 1:36 pm by under Nesi's Notes, On the Main Site

By Ted Nesi

The investment performance of Rhode Island’s pension fund continues to lag behind its peers under the new mix of assets adopted at Treasurer Gina Raimondo’s urging that relies more heavily on hedge funds.

Rhode Island’s $7.6-billion pension fund earned 11.07% during the 12 months ended June 30, according to Bank of New York Mellon Corp., the state’s custodial bank. The median public-sector pension plan with assets of at least $5 billion earned 12.43% over the same period, Wilshire Associates Inc. reported this month.

Rhode Island’s pension investments also grew more slowly over the three years and five years ended June 30 compared with the median plan of at least $5 billion, according to Wilshire and BNY Mellon. But Rhode Island’s return over the 10-year period ended June 30 was 7.42%, better than the median plan’s 7.23%.

Rhode Island’s plan also beat the internal benchmark it uses for comparison purposes over the last 10 years and the last five years, but lagged it over the last three years and the last 12 months:

Pensions_Wilshire_RI_6-30-2013

Raimondo has acknowledged her new investment strategy, approved unanimously by the State Investment Commission in 2011, could reduce the upside potential for Rhode Island’s investments, but she argues the state will benefit over time because of a reduction in the risk and volatility of the portfolio.

“The State Investment Commission’s goal is to make sure that pension checks are there for when people retire,” Raimondo spokeswoman Joy Fox told WPRI.com. “The SIC strategy is working, delivering strong long-term return, while minimizing risk to provide retirement security.”

The median performance published by Santa Monica-based Wilshire comes from its Wilshire Trust Universe Comparison Service, which tracks more than 1,700 public and private investment plans that control more than $3.4 trillion in assets. Wilshire doesn’t disclose how many of those are public plans with at least $5 billion.

Ted Nesi ( tnesi@wpri.com ) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

• Related: Taveras’s 13.4% pension return in Providence beats Raimondo’s 11.1% (Aug. 13)

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15 Responses to “RI pension fund again lags its peers with return of 11.1%”

  1. Gillie says:

    This reminds me of the tortoise and the hare – and I like being the tortoise. We’re not looking for a get-rich-quick strategy, we’re looking for steady and safe growth.

    Ted — I would love to see one of your famous charts that shows what the pension fund would look like today if the current asset allocation were in place for the last 10 years. I have got to believe that this safer approach would have made the bad years a bit better.

    1. J M Paras says:

      If you look at the top university endowment funds like Brown, Harvard, and Yale, which are more heavily invested in alternative investments (including hedge funds) than the RI State Pension Fund did in 2008-2009 when the drop in equities occurred, you will see that they suffered GREATER losses than RI did. According to Ernie Almonte who was RI Auditor General at the time, RI Pension Fund lost -19.18%. In an online article on Bloomberg.com written by Gillian Wee in Sept. 2009, Harvard lost -27.3%, Brown lost -27% and Yale lost -30%, all significantly greater losses than RI. The Treasurer incorrectly and repeatedly states that the endowment funds like Brown, Harvard, etc. which have hogher allocation to alternative investments
      (definitely true), are less susceptible to these dips when there are downturns in the equity market because alternative investments reduce risk and volatility. The stats do not support this. I will mail Ted Nesi my articles so he can verify and do further research. The Treasurer’s numbers need to be verified by reporters because the public assumes she is correct.
      Important investing decisions should be based on verifiable empirical data.

  2. Matt D says:

    I think that it’s a waste of time to give Ted anything for further research, he loves the Treasurer and from what I’ve seen she can do no wrong as far as he’s concerned. It’s all about writing positive stories about her no matter what the actual result is.

    1. Ted Nesi says:

      How do you see this as a positive story for her?

      1. Matt D says:

        My bad, this one is not, it’s more middle of the road, but majority of the articles written in the past have been nothing but supportive of everything that she has done. The only ones that seem to be reporting both sides are Go-Local and RI Future, between here and the Pro-Jo, it’s been nothing but a Raimondo love fest.

  3. rinoldo says:

    Remember someone is indebted to the hedge fund managers who help fund that someone’s reelection campaign….As general treasurer…she should be fired..based solely on performance…I know…she always has some excuse….but of course she is the darling of the right wing anti-union propaganda machine….also did the numbers of her so called pension reform ever add up? were they reality based?….I will let you decide…and then look at her reelection campaign fund…where is most of the money coming from….give me Frank Caprio back…at least he was truthful.

  4. Keith Andrade says:

    I have yet to see anyone break it down like this but here goes (I really hope the table formatting doesn’t get messed up when I hit “Enter”!)…

    The following table is from the 7/24/13 Investment Commission minutes and it breaks down the FY13 portfolio performance of 11.07%. The data is from page 9 of the 79 page PDF, and the only change I have made is to sort the line items in descending order of Fiscal YTD performance. Coincidentally, this order ends up segmenting the various asset classes into (loosely) “Equity” (48% of the value), “Alt Investments” (26% of the value), and “Fixed Income/Cash” (27% of the value).

    The US Public Equity performance was 20.81%. When you compare pension performance to the Dow, S&P, Russell etc., this is what you compare it to. Not 11.07%.

    As a group, “Alt Investments” performed worse than “Equity” but much better than “Fixed Income/Cash”. Theoretically this makes sense, since “Alt Investments” should be less risky than “Equity” but much more risky than “Fixed Income/Cash”.

    For anyone who disagrees with the plan’s investment mix…in your expert opinion…if you divested your “Alt Investments”, would you put the money in “Fixed Income/Cash” or “Equity”? If the former, do you think investment goals could me met with investment returns <1%? If the latter, were you alive in 2000-01 and 2007-08?

    Mkt Value Fiscal YTD
    US Public Equity 1,843.37 20.81%
    Non-US Public Equity 1,736.81 48% 13.57%

    Equity Hedge Funds 586.20 13.27%
    Real Return Hedge Funds 496.66 8.70%
    Private Equity 568.39 8.36%
    Real Estate 265.02 26% 6.39%

    Traditional Fixed Income 1,071.64 1.10%
    Inflation Linked Bonds 262.11 0.31%
    Total Cash 275.07 0.13%
    Credit Aggregate 398.13 27% 0.00%

  5. Keith Andrade says:

    hopefully this is more legible…

    Asset Class – Mkt Value – Fiscal YTD

    US Public Equity – 1,843.37 – 20.81%
    Non-US Public Equity – 1,736.81 – 13.57%

    Equity Hedge Funds – 586.20 – 13.27%
    Real Return Hedge Funds – 496.66 – 8.70%
    Private Equity – 568.39 – 8.36%
    Real Estate – 265.02 – 6.39%

    Traditional Fixed Income – 1,071.64 – 1.10%
    Inflation Linked Bonds – 262.11 – 0.31%
    Total Cash – 275.07 – 0.13%
    Credit Aggregate – 398.13 – 0.00%

  6. Maggie says:

    So Rhode Island took a hit when the Market crashed and then did not reap the rewards when the Market rebounded because we want to HEDGE against the next crash. How is this not a lose/lose and a completely idiotic short term – medium term plan??

  7. Keith Andrade says:

    Here’s the other detail no one talks about.

    A pension fund has future obligations. The fund’s investment goal is not necessarily maximizing returns. The fund’s investment goal is meeting the future obligations.

    If a pension fund has $100M of future obligations, but it only has $80M today, it has to be very prudent about how much risk it takes on. If a pension fund has $100M of future obligations but it has $120M today, it can be pretty safe with $100M and then roll the dice with the extra $20M (hyperbole). Therefore, it is not enough to compare endowments of similar size (plans of $5B mentioned in the article), you also need to consider their relative funding status so you can understand the amount of risk they’ve chosen to take on. You also need to account for this when comparing pension funds to university endowments.

    Of course, RI does not have the luxury of an over-funded plan, therefore you would expect its portfolio to have less risk than other plans. Over the long term (the real measure for pension investing) less risk genrally equates with lower returns.

  8. barry says:

    is there info on fees earned by these fund managers and how that compares with alternative approaches and/or peers?

    1. jm paras says:

      We’re still waiting for the Treasurer and staff to get the info on fees together. Supposedly she’ll have them for the Sept meeting. However, she was able to get the 11.1% rate of return, NET FEES, in July. Go figure?!

  9. Tom C. says:

    the banskters just needed a pool of cash to steal. retirement accounts are really the only wealth most americans have at this point. if you think “pension reform” is anything other than that you are kidding yourselves. multiply the number of state workers by the bi-weekly fees, then think if every state in the nation does the same and we’re talking about serious guaranteed money. google “bny mellon scandal” you want them handling the states finances? Gina may be complicit in this, but i get the sense she believes she’s doing the right thing.

  10. SteveD says:

    What? She may be complicit in this? This is her baby. Filling her coffers at the expense of the retirees. How low can you go?

  11. [...] 4) Speaking of higher fees and worse performance: “RI Pension fund again lags its peers” [...]