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Stock board keeping state's nest eggs warm
Investing state workers' pension funds paying off
http://www.dailymail.com/news/Business/2000051530/
George Hohmann <business@dailymail.com
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Daily Mail business editor
Monday May 15, 2000; 02:59 PM
Imagine you're such a big investor you own stock in virtually everything. When the market
goes down, you lose some money in the stocks that fall but you also make money because, even on a down day, some stocks rise -- and you own some of those.
Of course, as a big investor, you're sitting pretty when
the market goes up because you own some winners. But even on an up day, some stocks decline -- and you own some of the losers, too.
If you are an active or retired West Virginia teacher, state policeman or
employee of a state or local agency, you and about 132,000 others have a combined pool of $5.4 billion in retirement money. Together, you and your fellow pension fund participants are one of the big guys, and you own
stock in almost everything.
Until three years ago, this was not so. At the time, West Virginia was the only state to prohibit investments in stocks. The state could invest pension funds only in bonds.
That changed in 1997 when voters approved a constitutional
amendment, allowing up to 60 percent of the state's pension funds to be invested in stocks.
The idea of allowing investments in stocks was simple:
Studies show that over the long haul, stocks produce a better return than any other investment. But critics argued that investing in stocks would increase risk.
The amendment allowing stock investments created
the 13-member West Virginia Investment Management Board, the overseer of your nest eggs. The board tracks each pension program; each is managed for its own needs and goals.
Craig Slaughter, executive director of
the board, said an analysis of the pension fund's future income and disbursements was done. Then a long-term investment strategy was developed, with the dual goals of obtaining maximum yield with minimum volatility.
With the theory that diversification reduces risk, the board decided it wanted to invest 60 percent of the Consolidated Pension Fund in stocks, and 40 percent placed in cash or fixed-income assets such as bonds. Of
the stock investments, 30 percent is in funds that buy stock in large U.S. companies, 15 percent in funds that buy stock in small to mid-size U.S. companies and 15 percent in funds that buy stock in international
companies.
It was determined that the investments would be made over a three-year period. The management board has hired a total of 16 investment management companies to make the purchases.
The
Consolidated Pension Fund will be fully invested to its target goals by this fall, "regardless of what the markets do," Slaughter said. "We've set a course, and the train is on the track."
The
management board will not pay attention to short-term ups and downs in the market, he said. "I think, as a rule, there are very few people who can consistently predict when to buy or sell a stock. We think it is
best to look at this in the long run, establish targets, get to those targets and hold steady."
Slaughter said if West Virginia were still limited to putting money only into fixed income investments, the
Consolidated Pension Fund would have had a March balance of $4.9 billion, instead of the actual balance of $5.4 billion.
Over the two-year period ended March 31, the pension fund enjoyed an overall return of 9
percent, not including management fees and administrative overhead. The two-year return was 8.97 percent after all fees and overhead is deducted, Slaughter said.
"Our target for most funds is about 8
percent," Slaughter said. "We've got to make that 8 percent target over the long run or we're not doing our job."
The biggest chunk of pension money invested in stocks -- almost $1 billion -- has
been placed by State Street Global Advisers in its S&P 500 Index Fund. The S&P 500 stock index is a widely followed index of 500 large stocks, maintained by Standard & Poors, a division of McGraw-Hill Cos.
The S&P has registered an actual return of 18.2 percent over the last two years.
Like any investor, the fund has enjoyed some big winners and suffered some losers. In the past year, the big winners have been
in small to mid-size U.S. companies and in international stocks. A pool of money managed by a company called Loomis Sayles scored a one-year rate of return of 111.1 percent; a pool of money managed by TT International
scored a one-year gain of 62.9 percent.
"The biggest loser in our portfolio has been the fixed income assets," Slaughter said. "The fixed income market has just been awful." Slaughter noted
that every time the Federal Reserve raises interest rates, the value of fixed- income investments, most notably bonds, declines.
Over the past two years, the state's fixed income investments have yielded a
paltry 3.6 percent rate of return. As of March 31, the state still had $1.6 billion in fixed income investments.
Slaughter said the management board's primary job is to control risk.
"We spend most of
our time trying to structure ways to control the risk in investing a portfolio like this," he said. "It goes all the way from analyzing the payment obligations we have, the cash inflows and outflows -- knowing
what they are and projecting into the future what they will be -- to designing policies for the managers."
The job of the managers hired to invest the money is "to go out and make money,"
Slaughter said. "Our goal is to try to control the process so they make money without getting out of hand, without risking what we have to an inappropriate extent."
Slaughter said the board pays
managers fees based on what they do and/or their performance. In calendar year 1999, the board paid out $4.7 million in fees to managers. That represents less than one tenth of 1 percent of the Consolidated Pension
Fund's 1999 average assets of $4.98 billion, he pointed out.
"Fees and transaction costs are very important to us," Slaughter said.
"The costs impact performance. The less you pay out, the
better your performance will be."
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