Steve Buser’s speech to STRS Board, November 20, 2008
To Members of the STRS Board:
I am speaking to you today in the hope that you will relay my deep felt thanks to Steve Mitchell and members of his investment team at STRS who continue to add considerable value to the STRS fund despite increasingly difficult economic times.
The fiscal year ending June of 2008 was a challenge for investments in general. Financial markets declined across the board, and STRS investments suffered as well. Financial conditions for the second half of 2008 are proving to be even more difficult.
So why am I happy? I am happy because despite all the bad news, STRS could be worse off. Some might say STRS should be worse off. And even I agree that STRS would be worse off, if not for the remarkable performance of Steve Mitchell and his investment team.
To understand the paradox of good performance in a bad year, it is essential to understand that it is the STRS Board, all of you, who are responsible for general asset allocation. When I served on the Board, I was supposedly an investment expert, and the allocation of STRS assets was one of the issues that kept me awake nights.
In effect, the Board chooses a game plan when it decides how many eggs to place in each of the various investment baskets. The general economy then determines whether conditions will be favorable or unfavorable for a given game plan. Despite the bad outcome for the last hear and probably for the next year as well, I approved of the current asset allocation strategy when I served on the Board, and I continue to approve now. It is a game plan that will win in most years. Unfortunately, no strategy will win in all years. That is what risk and return are all about. Little risk means little expected return. So if we want and need the STRS fund to grow, we must be willing to take some risks.
But if the STRS investment team does not choose the game plan, and if it cannot control the economic environment, how are we to measure performance? With the assistance of objective outside consultants, we measure the performance of the STRS investment team by comparing their results to formal benchmarks that reflect the corresponding performance of all other managers with similar assignments. In effect, STRS grades on the curve. Whether a given test turns out to be hard or easy, it is relative performance, not absolute performance, that determines final grades for the STRS investment team.
It is these relative results for the STRS investment team that I wish to focus on. I was pleased and even astounded to discover that despite the difficult economic times, STRS outperformed its benchmarks in most areas and produced combined relative value in excess of $200 million. I want to say that again. As a direct result of the exceptional effort and success of Steve Mitchell and his investment team, STRS ended the fiscal year with $200 million more dollars than it would have had if investment results had simply matched the results for average professional money managers, who typically earn much higher salaries than STRS offers.
To put this savings for STRS in context, I note that the $200 million that the STRS investment team managed to save is roughly equivalent to two years of the entire budget of all aspects of STRS operations. In effect, we are all getting two years of free service from STRS.
In exchange for such remarkable savings, and to encourage such efforts in the future, the STRS Board offers an incentive package that rewards relative performance. As a former Board member and a continuing retired member of STRS, I strongly approve of the STRS bonus program, and I urge all members of STRS to join me in supporting this program. More generally, whenever you read that one or more members of the STRS investment team has earned a bonus for exceptional relative performance, please do not assume that STRS is taking money out of the pot for STRS members. Instead understand that many, many times the amount of such bonuses is going into the pot for each of us as members.
So in conclusion, let me say thank you Board members. Thank you Steve Mitchell, and thank you valued members of the STRS investment team.
I am speaking to you today in the hope that you will relay my deep felt thanks to Steve Mitchell and members of his investment team at STRS who continue to add considerable value to the STRS fund despite increasingly difficult economic times.
The fiscal year ending June of 2008 was a challenge for investments in general. Financial markets declined across the board, and STRS investments suffered as well. Financial conditions for the second half of 2008 are proving to be even more difficult.
So why am I happy? I am happy because despite all the bad news, STRS could be worse off. Some might say STRS should be worse off. And even I agree that STRS would be worse off, if not for the remarkable performance of Steve Mitchell and his investment team.
To understand the paradox of good performance in a bad year, it is essential to understand that it is the STRS Board, all of you, who are responsible for general asset allocation. When I served on the Board, I was supposedly an investment expert, and the allocation of STRS assets was one of the issues that kept me awake nights.
In effect, the Board chooses a game plan when it decides how many eggs to place in each of the various investment baskets. The general economy then determines whether conditions will be favorable or unfavorable for a given game plan. Despite the bad outcome for the last hear and probably for the next year as well, I approved of the current asset allocation strategy when I served on the Board, and I continue to approve now. It is a game plan that will win in most years. Unfortunately, no strategy will win in all years. That is what risk and return are all about. Little risk means little expected return. So if we want and need the STRS fund to grow, we must be willing to take some risks.
But if the STRS investment team does not choose the game plan, and if it cannot control the economic environment, how are we to measure performance? With the assistance of objective outside consultants, we measure the performance of the STRS investment team by comparing their results to formal benchmarks that reflect the corresponding performance of all other managers with similar assignments. In effect, STRS grades on the curve. Whether a given test turns out to be hard or easy, it is relative performance, not absolute performance, that determines final grades for the STRS investment team.
It is these relative results for the STRS investment team that I wish to focus on. I was pleased and even astounded to discover that despite the difficult economic times, STRS outperformed its benchmarks in most areas and produced combined relative value in excess of $200 million. I want to say that again. As a direct result of the exceptional effort and success of Steve Mitchell and his investment team, STRS ended the fiscal year with $200 million more dollars than it would have had if investment results had simply matched the results for average professional money managers, who typically earn much higher salaries than STRS offers.
To put this savings for STRS in context, I note that the $200 million that the STRS investment team managed to save is roughly equivalent to two years of the entire budget of all aspects of STRS operations. In effect, we are all getting two years of free service from STRS.
In exchange for such remarkable savings, and to encourage such efforts in the future, the STRS Board offers an incentive package that rewards relative performance. As a former Board member and a continuing retired member of STRS, I strongly approve of the STRS bonus program, and I urge all members of STRS to join me in supporting this program. More generally, whenever you read that one or more members of the STRS investment team has earned a bonus for exceptional relative performance, please do not assume that STRS is taking money out of the pot for STRS members. Instead understand that many, many times the amount of such bonuses is going into the pot for each of us as members.
So in conclusion, let me say thank you Board members. Thank you Steve Mitchell, and thank you valued members of the STRS investment team.
posted by Kathie Bracy at 5:16 PM
<< Home