Cranston Pension Investigation Finds "Dramatic Underperformance" & Troubling Scaramucci Investment
GoLocalProv News Team and Kate Nagle
Cranston Pension Investigation Finds "Dramatic Underperformance" & Troubling Scaramucci Investment
Siedle recommended that the pension go with a “new pension advisor…without a myriad of conflicts.”
In his 52-page report, Siedle outlined how now former investment manager Janney Montgomery Scott was hired in 2009 as the “non-discretionary investment consultant to provide independent, objective advice regarding investment objectives and restrictions, allocation of assets, selection of asset managers, monitoring performance of asset managers, and making recommendations for changes.”
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST“However, it does not appear JMS has ever served as a truly non-discretionary advisor to the pension. To make matters even more confusing, with respect to substantial assets that JMS-recommend affiliates manage, in accounts clearly designated as discretionary, the firm claims to have always consulted with the board for the approval of JMS’ investment recommendations,” wrote Siedle.
“I can tell you I was hired after the fund had put out a request for proposals to replace Janney. The fund was looking to review the consultant relationship before I was involved,” said Siedle. “Their concerns were about fees, and performance.”
Siedle focuses in part on the fund’s 2012 investment of $3 million in Skybridge — founded by Anthony Scaramucci, the former Director of Communications for President Donald Trump.
"Scaramucci's SkyBridge hit with heavy redemption requests as fund fell," reported Reuters in April.
Hard to Exit "Hedge Fund of Funds"
As of July 31, 2019, the pension fund's Skybridge investment was valued at $3,397,178. Had these funds been invested in a low-cost, lower risk, fully transparent S&P 500 index fund, writes Siedle, the $3 million investment would have more than doubled to $7,293,333.
For the year, the Skybridge fund is down 21.9% through March — some of those hedge funds have blocked SkyBridge and other investors from withdrawing money as they grapple with redemption pressures.
Siedle said the situation is the same as the state pension fund’s investment in Raimonod’s Point Judith Capital. As Siedle wrote in March, the state “May Never Be Able to Exit Gina Raimondo Loser.”
“The state pension is stuck in Gina’s fund exactly the same way — that fund had no obligation to terminate,” said Siedle. “If the fund is in real trouble, they don’t have to redeem at all.”
Siedle zeroes in on Skybridge's performance in his report.
Fee Structure Questions
In his report, Siedle writes that the fee structure JMS originally proposed to the pension was “70 basis points all in.”
"It appears that ‘all in’ was understood to mean all custody, investment consulting, and investment advisory expenses were included in the 70 bps fee,” wrote Siedle. “However, if the pension’s investment fees ever were limited to 70 basis points, it appears that they quickly escalated at least with respect to certain accounts or assets.”
According to Siedle, in early 2016, Janney provided [pension] trustee Edward Veazey with additional information at his request about the 2015 expenses associated with the portfolio.
“Based on the information provided, Veazey calculated the expenses to be approximately 88 basis points, as opposed to the 70 basis points all-in costs discussed at Commission meetings,” wrote Siedle.
Going in New Direction
Siedle in his report comes to the following conclusion:
"Since inception June 15, 2009 through December 31, 2019, while JMS has been both the investment consultant to the pension and a discretionary asset manager, the pension has drastically underperformed its blended benchmark," wrote Siedle. "For all other periods the pension has significantly underperformed. The worst performance by far relates to the highest cost alternative investments."
"As noted earlier, the performance of the Skybridge investment has reportedly substantially deteriorated," he continued. "The recommendation is for the pension to retain a non-discretionary investment consultant who expressly acknowledges its fiduciary status to provide solely objective advice and who is not subject to myriad conflicts of interest."
"The new investment consultant should review historic performance reporting. Given the longstanding poor performance of Skybridge, the related fees and expenses, as well as limited redemption rights, the pension should consider redemption from this hedge fund of funds a soon as possible," Siedle goes on to write. "There is no secondary market for the Skybridge shares and the only way out of the investment is for SkyBridge to repurchase the shares bought by the pension."
Cranston Mayor Allan Fung told GoLocal on Tuesday the board voted to start the process to try and redeem its Skybridge investment.
"I am certainly appreciative of the comprehensive and thorough report that Ted did for the city. It’s needed for many pension funds across the county, and it certainly has awoken my eyes to how pension funds need to operate," said Fung.
"We were looking before [for a new advisor]," said Fung, who confirmed the city has now retained Canton Hathaway. "But Siedle outlined how the fund should be set up to avoid conflicts and hidden fees, and the extent of disclosures necessary from who's handling these precious funds."
“It should be clear from the review of the state — and Cranston — every pension in Rhode Island would benefit from a forensic review, whether it’s me or someone else,” said Siedle. “As I wrote in ‘Who Stole My Pension,” in most cases are not well-managed and need to have a review.”
Company Responds
Janney Montgomery Scott provided the following statement on Tuesday night.
"The final report contains numerous inaccuracies and we disagree with its conclusions. We have clearly and consistently disclosed all fees to the board and the performance has been on par with recognized pension benchmarks. We are proud to have worked with the city for over a decade and wish them well with their new advisors.
- Overall performance has been strong and on par with appropriate benchmarks. In fact, the account has generated $50 million in profits for the fund. The annualized return is nearly 8%.
- The fees have been fully disclosed verbally and in writing to largely the same board, including the Mayor, for over a decade
- The single investment in Skybridge accounts for less than 5% of the overall allocation.
- Skybridge, even measured through the market bottom in March, was at a gain."
Updated 7:54 AM Wednesday August 26