New kid on the blog: Ray DeColibus (Welcome, Ray!!)

From Rich DeColibus, July 15, 2009
Subject: Blogging

"I marvel at the whole STRS management. How a pension fund could put most of its investments in risky assets like derivatives, emerging market stocks, real estate, hedge funds, private equity etc is nothing short of gross mismanagement. The board should fire them all and with a half dozen people invest in safe stuff like AAA bonds, Treasuries and S&P500 stocks."

~ Ray DeColibus

Hi Kathie,

If you're bored (and I know you're not, especially with Lakeside coming up), here's a potential bloggable. My brother (Ray) has zero connection to STRS; he's a retired Ph.D. chemist from Dow Company, but he's also an astute financial observer. Your readers might like to see how someone who has nothing to gain or lose from STRS sees it. He wrote:

"I marvel at the whole STRS management. How a pension fund could put most of its investments in risky assets like derivatives, emerging market stocks, real estate, hedge funds, private equity etc is nothing short of gross mismanagement. The board should fire them all and with a half dozen people invest in safe stuff like AAA bonds, Treasuries and S&P500 stocks.

The overall yield of a portfolio like that would be perhaps 6 - 10%/yr and only in the worst of situations would it lose money - perhaps 5% in the meltdown of 2008. The fact STRS probably lost 30 - 40% of its worth shows a distinct lack of knowledge of basic risk analysis which to my mind shows gross incompetence.

Does STRS put out a list of its investments on any sort of timely basis? I would guess they were disciples of the Yale/Harvard system of endowment investing where they have invested in all sorts of private equity, real estate, hedge funds etc which promise big returns in good times but which get crushed in a market collapse like we just had. To my mind not the type of stuff you should be investing people's retirement money in.

No doubt compensation was tied to returns though and big returns bring big bonuses. The downside for the management is low because if they lose big it's due to "bad markets" not bad investment decisions and like AIG maybe they'll get their bonuses anyway. Of course, it's not management's fault completely because the board had to know what was going on and didn't do anything to stop it so they have to share the blame for the fiasco."

He also added later:

"The people running STRS have basically fallen for a fad that no doubt hit many other pension and endowment systems. The pure and simple fact is that the higher the returns you make the higher the risk you take. You can get away with it for a while sometimes and the way the compensation for most of these investment managers is set up there is great incentive to take risk because the upside results in big bucks for them while the downside doesn't really hurt them that much.

Hence all the risky stuff like private equity, hedge funds, commodity trading, emerging market stocks, forex etc that is done with investors money. If it goes up you get a great big payday and if it tanks well too bad for the investor. In a way it's not all that bad for people in their 20s and 30s because with luck they can build a capital base and become more conservative with their money as they get older.

But for retirees (and pension funds) to risk your capital is a very bad idea because there is no way to build it back. You should ask what STRS's unfunded liabilities are and it will give you a feeling for how bad their losses really are. Make sure they tell you the rate of return they are implying when they give you the number - anything more than maybe 6 or 7% seems unrealistic (at least to me anyway).

If they have big unfunded liabilities they will have to do something to cover them - cut benefits, raise inflows from the state or teachers. This is good info to have when they go to cut your health care or COLA."