By Megan Poinski
Officials from the State Pension and Retirement System disagree with the potential cost savings that could come from firing Wall Street managers touted by an independent analyst at a budget hearing this week.
Jeff Hooke of the Maryland Tax Education Foundation testified before the Senate Budget and Taxation Committee after the State Pension and Retirement System had finished its hearing. CORRECTION
Officials from the retirement system left the committee room and were not present to hear Hooke’s presentation. Hooke asserted that the system does not have the investment returns it should, and is missing out on about $30 million in returns each year because of poor investment management. According to Hooke’s figures, Maryland makes about 1% below comparable states in its investment returns.
Retirement System spokesman Mike Golden said that Hooke seriously overstated investment management fees paid by the pension system.
“Fees are aggressively negotiated at the time a manager is hired, and closely monitored on an ongoing basis to ensure market competitiveness,” Golden wrote in an email. “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.”
The asset classes that the system uses managers for include private equity, credit/debt, real estate, real return and absolute return. It passively invests stocks, bonds and cash. Golden wrote that eliminating these asset classes would result in a less diversified, more risky portfolio. Active bond management, he said, has consistently increased the system’s portfolio value over the last 10 years.
Golden said that some of the system’s investments are indexed – mostly in public stocks. But it doesn’t make sense to do that for everything.
“While indexation makes sense in certain areas of the investable universe, indexing the total fund in the context of a fully diverse current asset allocation would be both imprudent and impossible,” Golden wrote.