Feb 2, 2011|
State Treasurer Steve Grossman fills us in on why the state is using hedge funds to fund the pension system at all. Barry and Steve analyze the impact of hedge funds from last year
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-- -- -- -- -- -- -- Well good afternoon and welcome back to lunch money with Steve Grossman our state treasurer Steve are you don't today. And be better bury him. We'll be back with the. And I hope even -- the shovel year old snow today. Night yet the Kerry. For the cloud come around that left. I'm you know how you apply you -- out and -- -- that the plot that one more time you could -- put your driveway in the all the stuff you'd say. And it's all I can come to note -- like. Now again I think this one more one. One more -- you're gonna wait for. -- all right well Steve I wanted to talk to you about the state of our pension fund we have a lot of state troopers that listen to the show lot of teachers off school today they're listen into the show and we have 48 billion dollars in our pension fund right now. How much of that money of the forty billion dollar Steve how much of that is invested in hedge funds. About 8%. Which translates into something in the order of three point six billion dollars in hedge fund and the -- it invested. Is through an approach called fund of funds you now to explain what that means. It is this you have money in. Five different mutual funds we have five fund of fund managers yup and each of those managers. As a bunch of hedge fund that they and -- So if you take these. Mutual fund managers are -- fund managers. They have more than 200 individual hedge funds that we as a stake in those managers OK and we pay those I've managers. See. Which this year will be very very close to thirty million dollars to oversee -- to manage. Those monies and adequate. Managed the managers to manage the management and the managers are charging fees as well -- but the real question is. Is that the right approach and nothing left for the worker whether other people do yeah. What do competitive peer group. And public pension -- do you and it's -- different approach so yesterday. And our. Meeting of our board which I chair and we decided to embark on a pilot program. To go to somewhat different -- OK we looked at the and largest. -- we're just talking about the hedge funds right right -- can. We looked -- the ten largest public pension fund that as big and the big it's a movement where one of those and we found that of the up and only two of the ten have all their money with fund of funds managers can and Pennsylvania -- I've of the and have all the money directly invested -- is. It fund managers cutting out the middle of make believe that eight citizen says random by mutual fund on the buy individual stock for a cutting out the middleman in -- now. There are variety of reasons why we decided yet they do park on a pilot program. And put to work by the end of the year roughly. 500 million dollars of the three and a half billion in direct and -- programs merged. We think we can save money -- -- well -- over here of time we were. Thing we're going to but it we were to move all of that money. Into direct it's an investment. With Davis. That thirty million dollars. That we now and -- now with gonna do this slowly. -- pay for a few teachers. A few it'll it'll also get out right back into the fund and -- the back in the -- it increases the return on the fund. It will mean eventually. The taxpayers will have to put -- -- taxpayers dollars in funding our unfunded liabilities. Tell you got me so far. So. Again -- moved slowly up but. Would -- deliberately you know. We don't need to be invested over 200 hedge fund diversification risk. Not required that many individuals on. No it doesn't because they're all buying individual stocks and and what -- but why use funds hedge funds at all -- I'm Matt. 25 year of 27 year veteran of the investment industry. And you know as well cited in a lot of scandals associated with hedge funds. They deeply loose with the rules and and and frankly I look at them as a speculative investor why why -- the state. Used hedge funds I know other states do it to white guys using hedge funds at all. Because I think it is -- Why not just give it all the fidelity you know all too. -- it to a guy a company like fidelity highly regulated you don't hear about them having integrity issues you know. Well again that's really get it the issue oversight if you look at another part of our portfolio at the best in this way in the in the part of our portfolio. Which is the private equity portion that and percent Everett's entered private equity and those for a buyout firms. Those -- venture capital firms. We have 93. Individual investment. Only 10% of our portfolio. Every one of those is overseen by a person. At pension board who is the direct relationship so our feeling is. If we can have a direct oversight relationship. With each of our manager without a middleman you. I think that you are more oversight. Into their business practices and not at a side. That they're doing things in the wave that is absolutely conforms to the rules regulations. That you shouldn't be with them your money I think there's a I think that's a role for hedge fund. As one of many asset classes. They hedge risk if a hedge funds -- say as. Let's assume they are. Long. Mr. -- it the shortest certain portfolio dot. He if you eight mitigation board these balances off your -- I think it was a rule rich -- You know. You guys as a pension last year you had what about 14% return last year. We headache. Thirteen point six return. Thirteen point six what do -- hedge funds do. -- good hedge funds within your pension how did they returned last year. They were between exit 7% since they liked they did let out they were the heads that at. The good news is the hedge fund which we were invested it better than in the rest of the peer groups -- we did better than so to speak the benchmark you know but. We have not had you know the absolute greatest experience with hedge fund which is like going some -- different route and it's -- deliberate. Where a system with we share responsibility. Is the -- shows ago but if we we also a lot of hedge fund. Don't to this is -- under they don't want to go that route right they they they didn't wanna have the extra -- they worked directly with the pension fund and we figured -- Massachusetts as opposed to fifty million dollars. The pension funds to work if the -- to wrote that fund reduce our unfunded pension liability. EXP is obligation lowest possible that the best way to do it is -- direct oversight of every. Organization which we work to have a middleman in the air it up this money. -- it does not bring a close enough to the ultimate investor. And see we think that this is an approach that can improve our turn. Steve do you have January returns to the pension fund yet. Unofficial we'd probably be in January it about. 75 basis points all but. Recorded of 1%. That through the 31 that would obviously matters for yesterday's big day. Well we're gonna give you another month and we we we decided over here at lunch when you're gonna renew your contract for another month. Both those sorts of let devoted it to contract in November for four years but the good news is our thirteen point 6% return we head. And was on top of seventeen point 6% in 09 and we've we've we've made back. 90% roughly what we lost during that cataclysmic. Previous year that everybody would like to forget. When they when you guys and they introduce legislation to change the old for all pension -- we talked about this last month that you went Wendy you when you anticipate put that front of the legislature. You -- but the pension reform yes that's and that's up to the governor. -- it's been put by the legislature yet but again that is going to raise retirement. -- and its motive calculate them differently and eliminate the incentive for early retirement. And they've. -- billion dollars over the next thirty years reap billions of the state level two billion municipal level. And it's gonna require us to put more money every year into our budget. Get rid of that and for the pension liability eventually edit and its ability the good news is because we get it -- -- last year it -- around twenty billion. Eighteen and a half billion but that it yesterday and it -- eight at eighteen. At billion dollars more that it should be. -- Michael young and the problem Steve as your grandchildren gonna be pain right. You know maybe if we don't clean it up well. If we equipment investment return. Good solid wide heavy long term invest up at. He's at peace with little yet today but he's so I wrote this great piece about pioneer fund and idea fund started in 1928. If you would put a thousand -- to work side here on 1928. And you left it there you. You haven't returned with a 1000000%. -- thousand dollars -- -- -- over and million dollars if that's not the best. Evidence that in the best example of outlook sober solid. Thoughtful long term investing in benefited the and the interest. Brought to the highest level and so -- -- which is our pension fund. That approach that I think we use. And I hope to continue overseas something that -- successful it is successful people with well if we make the break with the past. And change the way we do our pitchman investment. And over here and they've thirty million dollars Oakley who return. That's a win win for the people who now. Well it sure -- Steve thanks very much for joining us make. -- state treasurer Steve Grossman draining us today on lunch money you too can join us every day here -- money from twelve to one. Our phone number is 6172666868. Up next on lunch money mr. Josh Peters from Morningstar is gonna stop Iowa couple of his stock picks so. Get your pen and paper ready stock picks are up next on lunch when he right here on am 680 WRKO.