Friday, December 10, 2010

Holding out for a hero

Seemingly a very minor news item: Pittsburgh's pension funds up, but not nearly enough which says the combined assets went up $18 million between July 1 and Sept. 30. Given all that is going on, you would think it would be the biggest news item all around since at this point virtually all local politics (city and beyond to some degree)  now revolve on the fiscal state of the city's pension fund. 

That gain works out to a gain of 6-7 percent on the assets of $272. Not enough detail in that to break out how it all worked out between investment gains and net outflows from the funds, but roughly speaking the city is close to pay-as-you-go at this point with rough symmetry in terms of current inflows and outflows from the fund.  So for sake of argument we will say that represents mostly investment gain, but I would be glad to hear the specific breakouts if anyone wants to provide them.  Realize the stock market went up 10 to 11  percent over the time and this quote in the article from the fund managers add: "Mercer representatives said the pension funds could have made a little more, but money was moved to safer investments.".  I make note the deliberate use of the work "little". 

In reality, 6-7 percent is not bad for a pension fund invesment gain over the quarter.  It is less than the overall stock market gained, but you expect if not want that to be the case.  Few pension funds, expecially those so minimally funded, should all be in equities and will have a diversfied portfolio with safer, but lower performance assets like bonds.  So the numbers look to me about right in terms of performance.. certainly within a reasonable band.

But still... something does not add up.  There really should not have been any gain over the period if they had really implemened their plan to hedge away all risk over the summer. If that had really happened, then how is there an meaningful investment gain over the quarter?  Why do I keep harping on this .  Read that last link and it sure says to me the pension board wanted the fund managers to buy some large put options to completely hedge all risk in the fund and to completely freeze it at the value it was at at the time.  It is an awfully good thing they didn't or else even that $18 million dollar gain would likely have  not happened if that plan had been implemented in any significant way. 

But I have a theory... no, let's call it merely a hypothesis... or in Nimitzian fashion an 'educated guess'.   See, I think the pension board fully wanted to implement its valuation 'freeze' via some sort of put option or other investment vehicle.  I really suspect (this would be the hypothesis) that some functionary along the line just refused to fulfill such an ill-conceived order.  It really constituted a big exercise in 'market timing' which almost any reputable investment professional would advise against for your invesment portfolio.. and would find aghast as a plan for a public pension fund so minimially funded as it is.  It would literally have been a big big bet.  The numbers imply that it just didn't happen at least to the scale the original story implied it was going to be.  If there is some invesment the funds could have made that truly 'froze' the funds and protected it from any further losses from where they were in the summer, yet still gain $18 million over the last quarter (so no downside which was the stated goal, yet still be able to move up) then someone is a sheer genius in term of invetment portfolio  management.   I don't think such a portfolio is even possible. 

If my theory is true then some investment professional fulfilled his or her professional responsibility in a way awfully rare around here.  I would say that would make them a veritable hero since it likely resulted in the city not losing out on the investment gain last quarter of the 18 million which at this point is a big deal for the pension fund.  My investment banker friends would get a huge bonus for a decision that resulted in an 18 million dollar gain that was otherwise not supposed to happen.  As it is here, for all I know, it could have gotten someone fired.  It is some corollary to all of our other pathologies that those who do their jobs really well never get noticed, just as those who don't rarely get crticized.  I think we get madder at those who do their jobs actually.

One way or the other... the whole episode encapsulates why the pension fund is in the mess it is in.  What decision process would have made the pension board even want to engage in a massive exercise in market timing, a virtual slots pull bet, putting at risk the entire pension funds assets? Extrapolate that one decision to all the decisions over the last 50 years in the pension fund and you get what you get.  It gets to the whole question of how the city will ever resolve its pension funding problem.  There will be a solution mind you, of that I am sure.  Getting to it will only begin when we stop digging the hole deeper. 

We'll end with the astute comment again from the current investment fund manager in today's article:
"You are at a crossroads today," Boucek said. "It is a very precarious position."
The 'you' is us and the crossroads is not about the literal $ amount in the pension fund.

10 Comments:

Anonymous BrianTH said...

Maybe the illiquid investments paid off big!

But yeah, this speculation seems pretty solid to me (meaning it couldn't have been hedged as previously reported). It sounds like they instead just shifted some assets to lower-risk holdings--which is also market timing, but less egregious. I'm not sure about the act of heroism speculation, but you never know.

Friday, December 10, 2010 7:58:00 AM  
Blogger Bram Reichbaum said...

"There will be a solution mind you, of that I am sure. Getting to it will only begin when we stop digging the hole deeper.."

"The 'you' is us and the crossroads is not about the literal $ amount in the pension fund."

The koans, it hurtses! Is this you coming out in favor of state takeover a la carte (or a la Bill), or bankruptcy?

Friday, December 10, 2010 8:55:00 AM  
Anonymous MH said...

I think we should put the recently resigned PWSA head on probation and make him use his bill-padding genius for the common good. The parking kiosks could have a screen that says, “Click here to avoid paying an extra $5 to park” and he’s probably know how to make it so confusing/vaguely threatening that few people would avoid the extra charge. Maybe the $5 buys “we don’t key your car” insurance or something.

Friday, December 10, 2010 10:24:00 AM  
Blogger rich10e said...

Bankruptcy!!We've been ignoring the elephant in the room since 2004!Confront it and move on!!

Friday, December 10, 2010 1:23:00 PM  
Anonymous Rex said...

CB:

Nimitz' "educated guess" allowed 2.5 U.S. Navy aircraft carriers to sink 4 top-line Japanese aircraft carriers in an hour one sunny day in the Pacific during the great Unpleasantness.

LOL

Friday, December 10, 2010 3:05:00 PM  
Anonymous Rex said...

CB:

Nimitz' "educated guess" allowed 2.5 U.S. Navy aircraft carriers to sink 4 top-line Japanese aircraft carriers in an hour one sunny day in the Pacific during the great Unpleasantness.

LOL

Friday, December 10, 2010 3:05:00 PM  
Anonymous MH said...

I'm not sure how all the details would work for this analogy, but the taxpayers must be either the American pilots in the hopelessly outdated torpedo planes with nonfunctional torpedoes or the Japanese arming crews standing in gasoline and TNT?

Friday, December 10, 2010 3:17:00 PM  
Blogger C. Briem said...

I'm the guy who was floating around in the raft all day as things were sinking all around him.

Friday, December 10, 2010 4:30:00 PM  
Anonymous MH said...

I thought you already claimed Henry Fonda.

Friday, December 10, 2010 4:36:00 PM  
Blogger C. Briem said...

Bram: I think I am 'coming out' for achieving a bare minimum of government transparency.

MH: no Fonda here. Nimitz sank carriers. I seem to be unable to blow away a spar on a garbage scow.

Friday, December 10, 2010 6:48:00 PM  

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