Bob Stein responds to Rich's Top 10

From Bob Stein, October 22, 2009
Subject: Re: Comments by Rich DeColibus

This line of discussion has to get past some things if we are to profit from it. I'm not picking on anybody. It is necessary and appropriate to ask these kinds of questions but I believe this current path has become unproductive.

The "bonds only for the last 10 years" proposition has been acknowledged. Steve Mitchell addressed this with graphs and a discussion at, I believe, the August board meeting. The gist of Mr. Mitchell's argument for a portfolio that includes equities has outperformed bonds over much longer time frames than 10 years. Mr. Mitchell did not choose to reinforce his argument with a discussion of uncorrelated asset allocation or the financial fundamentals of debt instruments relative to equity instruments. There is another supporting argument that involves purchasing power and currency fluctuations. There are probably other factors as well. Mr. Mitchell’s views and mine are not uniformly congruent but I do not see an informed and credible argument against his presentation on this point.

I would add that if we choose to discuss hypothetical situations in which we are able to roll back time, foresee the future, and choose a common asset class into which we should have put the entire STRS portfolio for the last 20 years or so it would have been real estate. Our real estate people returned an annualized 10 plus percent over the last 17 years -- even considering the most recent downturn. This department represents a success and I think it would be very useful to analyze how these people came to work for STRS.

For four days before the October board meeting I attended a conference on teacher retirement systems. One of my goals was to discover what STRS could do to improve the overall quality of its investments and its investment staff. I talked to a variety of pension professionals, executives of investment companies, chief investment officers, portfolio managers, trustees, and others. It appears that one of the primary problems all public pension systems, including STRS, face is their inability to escape from their tendency to prosecute schizophrenic compensation methodologies for their investment staff. For example, many public plans capriciously modify their compensation packages for reasons their trustees apparently think are appropriate at the time but are eventually revealed to be poorly understood at best. Look at how many times the STRS board has modified the compensation package of their investment staff in just the last two years. We still haven't completed our plan for the current fiscal year that we are almost halfway through. This, among other things, makes it very difficult for pension systems to retain higher ability investment personnel because the staff simply doesn't trust the people who have control of their professional lives. Money management companies benefit from this schizophrenia when they are able to hire high-quality or high potential investment people away from the public funds. One of the most important things we can do to improve our investment performance is to assure that we are running our investment department more professionally than any other public system. Even if you think that we are not getting the staff that we're paying for, we are not going to be able to recruit higher quality replacements for the people you think should be fired unless we get our compensation act together on a variety of levels.

This downturn provides us an opportunity to use an affordable and coherent compensation package as well as the benefits we are able to offer as a public pension system to acquire more highly skilled investment staff than we might otherwise be able to access. Unless I'm mistaken, this is how we acquired many of our most successful real estate people.

I continue to work on putting together an informed proposal for investment department compensation that will be compatible with appropriately adaptive investment strategies. This will take some time. I encourage anyone interested in becoming informed on staff compensation to attend the next board meeting.

Thanks
Bob Stein

From Molly Janczyk, October 21, 2009

From: Mario Iacone
Subject: Comments by Rich DeColibus
Date: Wed, 21 Oct 2009

STRS refuses to acknowledge the fact over the last ten years if it had simply eliminated the investment department and bought government bonds, it would be roughly thirty billion dollars better off. Since it rarely lets facts impact decision-making, insolvency is inevitable.

1. STRS insists on retaining its antiquated investment counselor bonus structure, ensuring investment counselors will continue to make high yield, high risk "If it goes up, we win; if it goes down, you lose" investments, thus ensuring the next market correction is another fiscal disaster. Insolvency is doubly-inevitable.

Check out Kathie's Blog for information, facts, and opinions.

http://www.kathiebracy.blogspot.com/