Friday, June 24, 2016

Pension Fund investment performance worsens. Are we paying attention yet? 24 June 2016

On 5 June 2016 we posted an article about the Fund’s failing investment performance, based on information publicly available on the Fund’s IMD (Investment Management Division) website. Results are now available for May and the Fund’s performance has lagged even further.

Performance worsens: You’ll recall from the last article that by the end of March 2016, the Fund was lagging its benchmark by 0.93 per cent. By the end of May, the Fund lagged the benchmark even more, by 1.2 per cent (benchmark 3.26 per cent, Fund 2.06 per cent).

A $624 million lost opportunity: In dollar terms, the Fund started the New Year, 1 January 2016, at approximately $52 billion and gained 2.06 per cent for the year, i.e, approximately $1.071 billion. If the Fund had just kept up with its own benchmark it would have gained 3.26 per cent, roughly $1.695 billion (a difference of $624 million).   

Not the fault of the market or hedge funds: Let’s be clear; this underperformance is not about market volatility. Market volatility during this period was well below historical averages of approximately 20, which any financial website will confirm. (Market volatility spiked by 38 per cent today, following the Brexit vote). This report refers to a period during which markets were exceptionally calm. 

And it’s not about hedge funds or other risky investments either. Recall that the Chair of the AFICS Pension Committee reported at the AFICS annual assembly on 19 May 2016 that the Fund has largely divested itself of hedge funds. The current underperformance stems solely from public equities and public fixed income.

IMD performance in the last five years: To put things in perspective, we checked the Year to Date performance for the last five years. For the sake of fair comparison, we measured the same time period, January to end of May, for each of those years, based on reports published on the IMD website:

2012: Fund lagged the benchmark by 0.2 per cent (Fund 1.0 per cent, benchmark 1.2 per cent).
2013: Fund led the benchmark by 1.2 per cent (Fund 5.8 per cent, benchmark 4.6 per cent).
2014: Fund lagged the benchmark by 0.8 per cent (Fund 3.4 per cent, benchmark 4.2 per cent).
2015: Fund led the benchmark by 0.29 per cent (Fund 2.90 per cent, benchmark 2.61 per cent).

Based on the available published data, we found no year as far back as we could go where the Fund had underperformed to current levels.

Why benchmark? Reliable sources say that the RSG claims that the Fund’s uniqueness renders the benchmark irrelevant and all that matters is that the Fund achieves 3.5 per cent real rate of return and 6.5 per cent nominal rate of return. Not so. The benchmark is custom designed according to the Fund’s historical data of assets and liabilities and accounts for every aspect of the Fund’s uniqueness including its risk appetite. IMD has always compared the Fund’s performance to its benchmark and there is every reason to continue to do so. By lagging the Fund’s own customized benchmark, IMD places the Fund’s long term sustainability at risk.

Maryland redux: The Maryland State Retirement and Pension System under the RSG’s leadership (as Chief Investment Officer; 1999-2003) fell to last place in the United States, The above article (October 2001) illustrates the dismay expressed by Maryland lawmakers, aptly summarized by the comment of the Chairperson of the Budget and Taxation Committee: “You come in dead last, I have a problem with that”. The Maryland trustees replaced the RSG as CIO in 2003 and she did not land another pension fund gig until the UN handed her the keys to our $52 billion Fund.  If the RSG’s leadership is causing the Fund to lag in calm markets (reiterating that the underperformance addressed here is pre Brexit) what might we expect in the case of a return to anything like the 2008 turbulence (again, market volatility is up by 38 per cent today, post Brexit). Some observers also point with concern to IMD’s seeming preoccupation with BlackRock Investments, which it is said, appears to have more access to IMD than any other financial organization. Our Fund now has over $2 billion invested in BlackRock, which is lobbying for more.

IMD operating outside established procedures: Recall the grave concerns expressed by the Acting Chair and Chair of the Pension Board Assets and Liabilities Monitoring Committee in their letters addressed to the Secretary-General, dated 11 February and 7 March 2016, respectively, that the RSG is operating in an administrative vacuum without reference to proper recruitment and investment procedures, participation by other members of the administration, and proper oversight. Recall too that IMD has lacked a Director for Investments, D2, and a Chief of Compliance and Risk Management, D1 (both posts vacant for the past several months) and that the Investment Committee has had a system of rotating Chairs since its long-serving and experienced Chair, Ivan Pictet, resigned under duress in April 2015 (reportedly elbowed out by the RSG).

Calling on the RSG: release the comparison report: As mentioned in our 5 June article, IMD receives the well-known quarterly industry market report, TUCS Wilshire, which compares and ranks the performance of the Fund and other similar funds. We are repeating here our request that the RSG make the report available soonest on the IMD website for the benefit of participants and beneficiaries.  (The RSG, as CIO of the Maryland fund, raised the argument that the TUCS report should not be used for comparison given the uniqueness of the Maryland fund, an argument she is likely to make about our Fund. Maryland lawmakers swiftly rejected that argument – see above article.)

Calling on the Secretary-General and Investment Committee: While attention is focused on the backlog of benefit payments  (see CCISUA’s letter of 13 June 2016 to the Secretary-General posted on the blog) is IMD being overlooked? What accounts for the Fund’s underperformance in a calm market environment? When might we expect remedial action on the part of the Secretary-General who has the fiduciary responsibility for the Fund? Where is the Investment Committee’s intervention in the face of this underperformance?

Calling on the Pension Board: The Pension Board meeting is fast approaching in July and it’s the only opportunity for Board members to put questions directly to the Investment Committee. We only hope for the sake of our Fund’s health that they will make full use of this opportunity.

This article was prepared by using publicly available data.

We would welcome any comments or explanation by the RSG on this article.

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