State funds firing Wall St. managers
Asset managers getting booted for poor public pension fund performance.
January 15, 2003: 6:37 AM EST
NEW YORK (Reuters) - U.S. state pension fund managers have decided to cut their ties with Wall Street asset managers whom they blame for allowing already-bad stock market losses to grow even bigger.
State employee retirement funds lost more than $150 billion in the fiscal year ending June 30, 2002, according to Federal Reserve data, and many outside fund managers are paying the price.
Led by California's behemoth $133 billion CalPERS state employee pension fund -- which let go of Merrill Lynch and Credit Suisse and cut the assets managed by Goldman Sachs in 2002 -- states around the country are firing asset managers left and right.
While state pension fund managers decide how much of their assets to invest in stocks versus bonds, asset managers are responsible for choosing the specific securities to buy.
Gail Stone, executive director of the $3.4 billion Arkansas Public Employees Retirement System, put several managers on watch last year. Stone, whose fund's assets dropped 15.8 percent in the last fiscal year -- the worst showing of states surveyed by Reuters -- said the message to them all was: "I'm watching you and if you don't straighten up, I'm going to fire you."
A Reuters survey of the biggest public pension funds, which includes plans for everyone from state employees, teachers, and judges to police officers and firefighters in each of 39 states -- found an aggregate loss of about $90 billion. Every one of them dropped in total assets.
The 11 remaining states either did not return calls for comment or do not have public pensions.
Credit Suisse and Merrill Lynch declined to comment, and Goldman Sachs noted that it continues to manage CalPERS assets, though $60 million less than it did previously.
A slumping stock market, coupled with the fact that many funds paid out more in retirement benefits than contributions collected over the last three years, stung most major public pension funds.
Thinking the salad days of the late 1990s -- when stocks looked unstoppable -- would never end, public pension funds made the mistake of reducing employee contributions. Most public pension funds are now increasing the amount of money employers pay into the pension funds to replace assets lost in the stock market.
Frustrated by heavy market losses, Maryland released six portfolio managers, the Illinois' teachers fund let go of four and Massachusetts showed one outside investment adviser the door.
Given the poor returns, "there is less tolerance for underperformance," said Kevin Leonard, an investment consultant with Seagal Advisors in Boston.
Shape up or ship out
The stakes are high because investment companies, which pull in fees equal to 0.5 percent of assets under their management annually, oversee as much as several billion dollars in a public employee retirement fund.
Underperformers who have escaped the ax have been told to shape up.
Arkansas pension chief Stone said regular reviews of money managers' performance are a necessity because "It telegraphs to the membership that we are taking this seriously and we are watching it."
Leonard, who advises public pensions on the hiring and firing of outside managers, said he has never seen so many changes in portfolio managers in his 10-year career.
"When the market is down 29 percent and you are down 30 percent, there is a lot less understanding," he said.
To compensate for losses, some public retirement systems brought in new managers who specialized in alternative, and sometimes riskier, investments such as hedge funds, private equity, venture capital and distressed debt, according to Portland, Oregon-based investment consultant Jerry Davies, at R.V. Kuhns & Associates.
For example, Oregon, a long-time private equity investor, upped the portion of its $40 billion public pension that can be invested in that sector to 17 percent from 15 percent.
Despite the huge stock market losses, public pensions are not flooding into safer bond investments because the returns are just too low, several state officials said. Most states need an 8 percent annual return to keep up with the growing number of retirees.
Go alone?
Some states, like Alabama and New Jersey, eschew Wall Street counsel and oversee all public pension funds internally, with mixed results.
For the Garden State, the tactic proved very successful throughout the tech bubble of the late 1990s. But after that, the pension's many Internet company investments crashed, and in part led to a drop of more than $25 billion in assets in the last two and a half years.
The state is now revamping its investment policy and considering hiring outside managers.
Alabama's acting chief investment officer, Darren Schulz, said internal management allows for more nimble investing, with the ability to make quick shifts in asset allocation when needed.
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