Mario Iacone: STRS must not invest itself into a worse problem

From Mario Iacone, May 1, 2009

The following information and comment is submitted to the STRS Board for consideration and review of the risk level of STRS investments. Also, it is hoped that the Board would consider allocating a much greater percentage of assets to low risk fixed assets to reduce future risk level.

Please review the chart shown below. It shows STRS Asset Value from 1998 to Present. The asset values were obtained from p3 of the October, 2008 newsletter and p1 of the March, 2009 newsletter.

There are years that show substantial returns, but such returns have been lost in subsequent years. It is also obvious the fund has been highly susceptible to the up and down swings of the economy and investment markets.

Click image to enlarge.

The 2009 asset value of 46.4 Billion does not include approximately 18 Billion paid out over that period of time to supplement the deficit resulting from member contributions amounting to less than benefits paid and STRS operating expenses. Considering the 18 Billion paid out, STRS investment return from 1998 to Present would average slightly over 3%.

Low risk guaranteed Fixed Income investments would have performed better, at least a 5% return, over that same period of time.

Low Risk Fixed Investments such as Treasury Bonds, Municipal Bonds, etc would not have been subject to the tremendous losses caused by the unprecedented 2008 downturn in the economy and investment markets.

Fixed investments would also be far less costly than the current 165 million, or so, currently spent in Investment Expenses, Advisory Fees, and fees to External Money Managers. Such investments would probably allow at least a cost reduction of 75 million per year, which when amortized over the 30 Year Funding Period would substantially help to stabilize the fund.

Several times, I have heard the comment “STRS will not be able to invest itself out of this problem.” I agree. But, I would also make this appeal, “STRS must not invest itself into a worse problem.”

The value of reviewing the past may provide information to set a more stable, consistent investment direction for the future. The past investment direction of the fund has clearly shown the ability to make more, but it has also demonstrated the reality of keeping less.