The 20 million dollar decision
I was going to follow up with yet another rant on the lack of useful information made available by the City's pension fund. For the longest time the only interesting information there was a newsletter from 2007. Yet, low and behold, there is all of a sudden real and recent news including the detailed performance of the pension plan for the 4th quarter of 2010. It is indeed a brave new world.
Would be quite a step forward, except for what that report says. Be careful what you ask for may be the lesson learned. Ignorance is indeed bliss. The report has a comparative metric of how the city's pension fund did in the quarter compared to a large benchmark of other investment funds. The answer is that the city's pension plan came in at the 96th percentile.
So I would really love to know what were the 4% of funds out there that did worse. Give those folks bonuses, that is hard to pull off.
The reason for such a pitiful performance, as clearly noted by the investment managers, was that the pension board's decision to remove virtually all equity risk from the fund earlier in the year. Take away the risk, you also take away the reward and it turns out the 4th quarter of 2010 was a pretty good period for investment return... if you had exposure that is.
To remove all equity risk at a single point in time would be what is called a massive bet based on market timing. Go ask your own financial advisor if they would ever recommend such a course of action.
So how much did that decision cost is the real interesting question? A million or two? Again according to the same report, the comparable median return was 6% over the quarter, while the city came in at 0.3%. Given an assumption that the average asset value was around $300 million, the counterfactual loss of 6% is nearly $18 million.
That decision could become quite a massive irony if the actuarial calculation of where the pension fund is with the notionally dedicated parking revenue comes in short by an amount less than $18 million. Hold that thought for a future blog post I guess.
There are some real questions I would love to be in a position to get answers for. The primary one is whether they are still lacking equity exposure. At the end of 2010 it says they were 57% cash (I'd put that into that annoying html flashing tag if it was not just so annoying). That's what it says, really... I didn't make it up. 57% cash and 29% fixed income. Remember this is a fund that presumes a continual investment return of 8% annually if it has any chance of not falling further behind.
Then you wonder how much in fees it took to get a few hundred million in equities liquidated to cash.. and how much it will cost to get back into the market assuming they did so. Those fees could easily push up that notional $18 million 'loss' even further as a result of the decision last fall.
I really do wonder if they have remained out of equity markets. Given that the Mercer contract is winding down, you could see the logic in holding the cash to turn over to the new fund manager to invest... but I have no idea. If the new paradigm of data disclosure continues next quarter, then maybe we will see if and when they rebuilt an equity portfolio. One would hope they did buy back into equity markets because the 1st quarter of 2011 had a pretty good return. If they stayed in cash, that notional loss might be a fair bit larger still.