Moore: Raimondo's Pension Fund Experiment Fails

Moore: Raimondo's Pension Fund Experiment Fails

When you’re in a hole, stop digging, so goes the old saying.

It might be trite, but there’s definitely some wisdom packed into there. To that end, I’m suggesting that the state of Rhode Island stop digging its pension fund into a hole. Given the lackluster returns in recent years when compared to other staets and funds, and this year's negative return, it's clear as crystal that the state needs a new investment strategy.

I reported in GoLocal in March of this year that the state pension fund has, for the last 5 years, seriously, under performed the under-performed the median pension in the Wilshire TUCS, a key benchmark that measures pension funds against one another. If the pension fund had merely performed in the middle of the pack of that benchmark, the fund would have earned over $450 million more than it did during those bull market years.

GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLAST

Lagging Behind

This year, in a slow market year, the pension fund appears to once again be lagging behind its peers. The pension fund actually lost money last fiscal year, which ended on June 30th of this year, and began on July 1st of last year. The fund ended .27 percent lower than it was at the beginning of the fiscal year. (If the state had pulled all of its investments and converted it to cash, we’d be much better off than we are.)

Yes, it was a down year in the market. I get that. But while we were losing money, other states were making money.

According to a report from The Boston Globe, the Massachusetts state pension fund returned 2.3 percent on its investment. The Oregon State pension fund returned 1.17 percent over the same time period, according to Pension and Investments Online. And California’s largest pension fund, often called CALPERS, returned .61 percent on its investments, according to Pension and Investments Online.

The number 1-percent can be quite deceiving, and it’s hard to comprehend the value of $1 billion dollars. To simplify the situation, and to illuminate how high the stakes are in pension fund investments, we should look at it this way. One percent of $7 billion is $70 million.

Lacking Gains

That means if the pension fund had gained just 1 percent, instead of losing .27 percent, the fund would have grown by $70 million dollars.

Here’s another way to look at it: the people of Rhode Island are still enraged over the loss of a $75 million loan guarantee to the infamous 38 Studios Company, and rightly so. But what about the investments gains that we’re not achieving due to pension mismanagement? That’s at least one 38 Studios every single year.

It’s now long become apparent that the hedge fund allocation is weighing down the fund.

According to Pensions and Investments magazine, the state’s investments in equity hedge funds returned -6.94 percent—a major factor that contributed to the pension fund’s total loss of .27 percent.

Snow Tires?

That means the funds expensive hedge fund investments, which are costing the fund tens of millions of dollars in fees, not only didn’t protect the fund in a down market, but instead weighed it down further. So much for the whole “snow tires” analogy that Raimondo infamously used to defend those investments.

Did anyone ever really believe then-Treasurer Gina Raimondo, now our Governor, when she said that hedge funds protect an investment fund from bad markets?

If they did, it’s now painfully obvious that they were wrong. In the first somewhat down market year since Raimondo gained control of the pension fund, the Rhode Island state pension fund, which supports the pension plans of state workers, local teachers, and many local city and town employees, the highly opaque, convoluted, and expensive investment vehicles have proven themselves just as useless as in bull markets.

Put plainly, the state shouldn’t be investing in hedge funds. But even if we’re going to invest in them, we’re clearly not picking the correct funds. As former SEC lawyer, Forbes Magazine Contributor, and Rhode Island pension fund critic Edward “Ted” Siedle points out, most of the pension funds in the country are investing in alternative investments at this point. Yet most of them are still outperforming Rhode Island by simply picking better hedge funds.

Sense of Urgency?

Current Rhode Island General Treasurer Seth Magaziner claims he is conducting a review of the state pension fund to potentially reallocate the investments to make them stronger. There needs to be far more of a sense of urgency on his part. Thus far, he’s been far too willing to act like he’s still Raimondo’s intern. (Magaziner was an intern at Raimondo’s old company, Point Judith Capital, several years ago).

That’s why, at this point, I’ve seen enough. The time has come to take a more passive investment strategy that follows the tried and true methiod of investing in relatively simple index funds that deliver strong returns over the long run. 

We’ve dug ourselves deep enough already.  

Russell Moore has worked on both sides of the desk in Rhode Island media, both for newspapers and on political campaigns. Send him email at [email protected]. Follow him on twitter @russmoore713.