Thursday, February 28, 2013

Conflicting Portrayals of Risk for Pension Portfolios

We like most are steady consumers of media, but it’s important to keep perspective whenever you read anything. And we mean ANYTHING!!

Consider the alarmist headline on the front page of the Wall Street Journal, “Pensions Bet Big with Private Equity” followed by the tone-setting sentences in the third paragraph:

It’s a sign of the times. Numerous pension funds are still struggling to make up investment losses from the financial crisis. Rather than reduce risks in the wake of those declines, many are getting aggressive. They are loading up on private equity and other non-traditional investments that promise high, steady returns in the face of low interest rates and a volatile stock market.   

Hmm… There’s a lot to argue with in that paragraph:
  • Only people in New York, and on Wall Street might consider Wall Street investments to be “traditional” investments, whereas most people out in greater America still understand the value of investing directly, with up and coming companies, or their local farmer, or prime real estate, or popular restaurateurs, that fulfill the needs of people in regions, sectors, etc.
  • Risk is an acquired taste. Not everyone enjoys the stockmarket roller coaster rides that Wall Street has provided the last 12 years. There are far more conservative investment opportunities that provide steady income out beyond the Hudson river. Only those with a New York, Wall Street perspective might consider Wall Street to be a reducer of risk!
  • And given the track record of Wall Street investments over the last 10 years, which many call the “lost decade,” going off the Street could hardly be labeled “getting aggressive.” Others might term it “getting real” or “adjusting to lackluster results available through Wall Street.”
The story goes on to tell how Teacher Retirement System of Texas has dedicated about $30 billion of its $114 billion under management to “private equity, real estate and other so-called alternatives.”  By the time you get through the article – and you find that the TRS system is doing fine with its funding ratio and that it’s private equity holdings are doing a good job of providing income for retired teachers – you kind of want to say, “So what? If it’s working, why is this on the front page of the Wall Street Journal?”

We’ve been seeing more of these sorts of stories that micromanage and Monday morning quarterback Texas pensions’ investments. The Dallas Morning News had a long story about the Dallas Police and Fire pension’s use of luxury real-estate in its portfolio. We’ve heard of investigations into other pension’s investments. Dallas Police and Fire is one of the strongest performing pensions in the state, so again, at the end of the day, we say “So what?”

To confuse the average media consumer yet again, contrast all that with a Reuters story titled “Local pension plans punished by safe investments: study.”

The report notes how local pensions had, before 2007, invested too conservatively and fallen behind large state-run pensions in their funding ratios. The Boston College study then found that, after 2007, locally administered plans outpaced state-run plans using international stocks and alternative investments. Smaller pensions that didn’t have diverse asset classes fared the worse.

To all the confusion, we say this: Let local pensions do their job. They will find a way to make the money they need to pay their public servants. Texas has a very robust system that allows local pensions to pick investments that make sense and gain good returns. We’ll be releasing a survey soon that shows just how well they do. Don’t get confused by reports in the media that seem to conflict and confuse. Texas’ local pensions are doing well. – Max Patterson