Posts filed under “Really, really bad calls”

Last August, we called out the San Diego County retirement fund for paying way too much in fees to Salient Partners, its outside pension-fund manager. Based on reporting by Dan McSwain, the San Diego Union-Tribune alerted readers to a dramatic increase in the use of leverage once Salient took the reins.

On July 16, the county fired Houston-based Salient, according to the Union-Tribune.

Last year’s events made for a great local comparison between San Diego County and the City of San Diego. The two local municipal regions each have a separate retirement system for employees.

The county system was highly leveraged, expensive and performed poorly. According to Wilshire Trust Universe Comparison Service, San Diego County’s returns ranked in the 84th percentile among public pension funds during the three years to Dec. 31, 2014, and in the 54 percentile for the five-year period.

The county had hired Salient to goose returns; it increased leverage threefold to 100 percent of the assets in the fund. For this high-risk strategy, Salient Partners was paid $8 million a year.

As we noted last year, contrast this with the local competition, the City of San Diego, which had its own pension problems a decade ago. After fraud and conspiracy indictments in 2006, and Securities and Exchange Commission charges in 2008, it cleaned up its act.

The City of San Diego simplified its pension plans. It barred the use of leverage in favor of a low-risk, asset-allocation approach. As we discussed last year, it is reaping the rewards. The city’s fund has outperformed the county’s, earning about 13.6 percent a year versus Salient’s returns of 10.1 percent since it was hired in October 2009 through June 2014. That’s before fees; the city’s net returns with its lower cost-basis, look even better after fees.

By contrast, San Diego County spent $103.7 million in investment and administrative fees in 2013. The $10 billion pension fund is one of the highest-cost plans in the country as a percentage of assets.

In April 2014, pension board members voted unanimously to approve the highly leveraged-investment strategy. Raising risk to increase gains seems contra-indicated for long-term investors who won’t have access to their funds for decades.

Pension fund directors Dianne Jacob and Samantha Begovich first proposed ending the arrangement 10 months ago but couldn’t win a majority vote of fellow board members to bring fund management back to in-house investment professionals.

The combination of high costs and even higher risks led to the termination. As reported by Union-Tribune:

 Salient had been collecting more than $8 million a year to manage the county portfolio . . . [The firm's] fondness for so-called alternative investments like credit default swaps and derivatives at one point exposed the fund to potential losses of more than double the portfolio value. A worst-case event could have lead the county to lose its entire fund and owe billions more. (Emphasis added)

To reiterate our conclusion from last year: A city, county or municipality that fails to appropriately fund its pension plan isn’t honoring its fiduciary obligation to its employees and retirees. Not saving enough to meet its retirement obligations shouldn’t be an excuse for risky behavior or using additional leverage.

There is no free lunch. Instead, pension funds should keep it simple, manage a basic global allocation of assets and watch costs. There simply is no reason to try to reinvent investing when there is a perfectly viable and preferable option.

(Note: Corrects fourth paragraph of article published July 17, which said that San Diego County’s pension-fund returns ranked in the 84 percentile among funds for the past three- and five-year periods. The fund’s three-year returns ranked in the 84th percentile for the period ended Dec. 31, 2014, while five-year returns ranked in the 54th percentile. Also corrects Salient Partners’ annual management fee in fifth paragraph to $8 million rather than $10 million, and the fund’s average annual returns in the seventh paragraph to 10.1 percent not 9.7 percent.)



Originally published as: A Pension Fund Comes to Its Senses



Category: Asset Allocation, Hedge Funds, Really, really bad calls

Here Comes the Debt Ceiling Debate

Fascinating discussion via Real Time Economics:   click for ginormous graphic Source: WSJ

Category: Digital Media, Really, really bad calls, Taxes and Policy

What China Can Learn from America’s Plunge Protection Team

Last week, we noted that China’s heavy-handed interventions had turned their stock markets into “a government bureaucracy.” Several other observers whom I respect echoed that perspective, suggesting there were problems with China’s efforts to prop up its stock market and that the effort was doomed to fail. The knee-jerk response to these thoughts came from people who asked how this…Read More

Category: Markets, Really, really bad calls, Regulation

China “Embraces” the Markets

Fantastic cover from this week’s Economist; I think we have different definitions of “embrace” . . .     Source: The Economist – China embraces the markets: A panicked response to tumbling stocks casts doubt on the pace of reform  

Category: Bailouts, Financial Press, Really, really bad calls, Regulation

Gold Can’t Find a Bid

This was the week Greece inched closest to chaos, as a bank holiday and a technical default caused markets around the world to erupt in turmoil. They recovered somewhat Tuesday, and futures looked stronger Wednesday morning, but on Monday, the NASDAQ Composite Index lost 2.4 percent, the Standard & Poor’s 500 Index lost 2.09 percent and the…Read More

Category: Gold & Precious Metals, Really, really bad calls, Trading

The Trouble with Macro

Markets around the world start the week bracing for trouble as Greece spirals further into crisis. Can the country avoid a full-blown default? Will there be a Grexit? Will it stay in the euro zone and keep the single currency? It all looks like an unknowable gamble. Which leads us to this question: How big a challenge is it…Read More

Category: Credit, Hedge Funds, Investing, Really, really bad calls

Shifting the Goalposts in Seattle Minimum Wage Debate

@TBPInvictus here It’s been a few months since the first increase in the Seattle minimum wage (see here for the schedule of bump ups). Even before the initial April 1 rise, we were treated to a chorus of conservative voices claiming that the restaurant business in Seattle was doomed. The nexus for many of the claims was…Read More

Category: Current Affairs, Data Analysis, Employment, Financial Press, Really, really bad calls, Wages & Income

Are Mutual Fund Managers Skilled?

  Jonathan Berk turns the efficient market hypothesis, which popularized the belief that mutual fund managers were “monkey investors” who consistently perform worse than the overall market, on its head to prove that mutual fund managers are in fact highly skilled investors. And he proposes a new way to accurately measure a mutual fund manager’s…Read More

Category: Investing, Mutual Funds, Really, really bad calls

Red State, Blue State: Kansas & Washington

@TBPInvictus here. We have interesting experiments going on in the state of Kansas and the city of Seattle. Herewith a brief update on both. Thanks to the following Tweet, I was made aware of the fact that – as you can see – the state of Kansas, under Sam Brownback’s awesome tax cuts, recorded the…Read More

Category: Bad Math, Cognitive Foibles, Current Affairs, Data Analysis, Really, really bad calls

The NY Post’s Financial Innumeracy

@TBPInvictus here: The New York Post ran a piece on Netflix (NFLX), written by Claire Atkinson, that was, to put it charitably, interesting. And by interesting I mean that it painfully misstated the very simple mathematics of stock splits. The piece implied that NFLX is wildly overvalued. I have no problem with that. Not that…Read More

Category: Bad Math, Cognitive Foibles, Data Analysis, Financial Press, Really, really bad calls