February 28, 2012

Analyst suggests fewer Wall Street investment managers would bring better pension returns

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By Megan Poinski
Megan@MarylandReporter.com

After officials from the State Retirement and Pension System shared a positive investment outlook with members of the Senate Budget and Taxation Committee on Tuesday, Jeff Hooke of the Maryland Tax Education Foundation told the senators about his idea for bigger returns: fire the Wall Street managers.

Pen and calculator.In fiscal year 2011, Maryland’s pension system posted a 20% rate of return. But over the last several years, volatile markets have brought much lower rates of return. As part of its budget analysis, the Department of Legislative Services looked at rates of return for other comparable pension systems and found that in the last three years, Maryland had outperformed them.

Between fiscal years 2009 and 2011, Maryland has posted an average rate of return of 3.07%, outranking 12 of 26 comparable pension systems which had an average 2.9% rate of return.

Hooke looked at rates of return farther out. Comparing Maryland to other states in the last five years and in the last 10 years, he found that the state’s average rate of return is about 1% lower than its peers in six nearby states and other large public pension funds.

While 1% is fairly small, Hooke said that with something as large as the state’s $38 billion pension system, it adds up to a lot of money.

“This is a very serious number,” he said. “It adds up to $3 billion over 10 years.”

In the last decade, Hooke said the retirement system has paid more than $1.5 billion to Wall Street managers to handle the system’s investments. Hooke said these substandard returns shows that the managers are not worth what they are being paid.

He suggested that the committee put a provision in the budget that indexes what the financial managers are paid to the returns the system brings in.

“Are these losses you talk about because the fees are too high or because of the markets?” asked Sen. Ed Kasemeyer, D-Howard, the committee chairman.

Hooke responded he thinks that both facets share the blame.

“We seem to be similar to other states, and I’m a little perplexed why we’re not doing well,” Hooke said.

  • Michael Golden

    On behalf of the Maryland State Retirement and Pension System, I would like to respond to the article, “Analyst suggests fewer Wall Street investment managers would bring better pension returns.”   Unfortunately, a number of misstatements and opinions in the article went unchallenged.  In the article, Mr. Hooke seriously overstates investment management fees paid by the pension system. The System recognizes the impact that investment management fees have on the net performance of the total plan.  Fees are aggressively negotiated at the time a manager is hired, and closely monitored on an ongoing basis to ensure market competitiveness.  The suggestion is made that the System should fire all of its active investment managers and index the entire portfolio.  This would require the elimination of five of the eight asset classes the System currently utilizes in its asset allocation, which cannot be invested on a passive basis.  These five asset classes are:  private equity, credit/debt, real estate, real return and absolute return.  The elimination of these asset classes would result in a less diversified, more risky portfolio.  The System would be limited to the three remaining asset classes which can be invested on a passive basis – stocks, bonds and cash.  Active bond management has consistently added value over the appropriate benchmark over the last ten years.  So, indexing the System’s entire bond portfolio would not make sense.  As arguably the most efficient asset class, the case for passive management is probably strongest in public stocks.  In recognition of this, the System currently indexes a large percentage of its public stock program.  However, there are portions of the public stock market that are less efficient where active management has been able to add value.  While indexation makes sense in certain areas of the investable universe, indexing the total fund in the context of the fully diverse current asset allocation would be both imprudent and impossible.