Wheeler’s Treasury Legacy Had High Costs Compared to Performance

Thursday, March 03, 2016

GoLocalPDX News Team and Kate Nagle and Brendan Murray

If Ted Wheeler’s leadership of Oregon’s pension system is an indication of how he will manage Portland, the City may have the high costs compared to performance.

According to a recent Maryland Public Policy Institute study, "pension funds with the highest fees, as a percent of assets, recorded inferior investment returns, on average, versus those in states with the lowest fees.” Oregon’s PERS had among the highest fee ratio paid to Wall Street under Wheeler’s leadership.

Under Wheeler, Oregon's Public Employee's Retirement System (PERS) has paid billions to Wall Street private equity firms and had the fifth highest Wall Street fee ratio in the country, according to the Maryland Public Policy Institute study.

“For the five years ending June 30, 2014, we were unable to find a positive correlation between high fees and high returns. In fact, we found a negative correlation. This is not a glowing endorsement for Wall Street advice, reminding one of author Fred Schwed Jr.’s critique of Wall Street, when he asked, 'Where are the customer’s yachts?” said the report.

Not only are the fees paid to Wall Street private equity firms in the billions, but both the Maryland Public Policy Institute Study co-author and a top pension watchdog raise concerns that the true amount being paid to Wall Street firms is not being disclosed.

Underreporting Fees

In an interview with GoLocalPDX, the Maryland study’s co-author Jeff Hooke said, “I think more than likely Oregon’s fees are understated. I don’t think they are disclosing performance fees or other things like that.”

The report states, “Based on our work, we conclude that a number of states are not reporting fees properly. Misreporting may be a particular problem with private equity and hedge fund investments, where managers often deduct fees before sending cash returns.”

The concerns about underreporting fees is echoed by former U.S. Securities and Exchange Commission (SEC) investigator and top pension watchdog Ted Siedle echoes the concerns about underreporting fees.

Each year Institutional Investor names the 40 most influential in the investment industry. The list includes Governors like Bruce Rauner of Illinois and Chris Christie of New Jersey, GE CEO Jeff Immelt -- and both Wheeler and Siedle.

Siedle in a phone interview agreed with Hooke that under Wheeler, there has been a lack of transparency of fees being paid to Wall Street. “It certainly looks to be a problem. Their (Oregon’s) Treasury ought to disclose all of the fees," said Siedle.

The amount withheld by Wall Street firms is unknown and is unreported by Wheeler’s office.

Oregon PERS Funding Level is Strong, But Performance Could Be Stronger

Three of the most important factors to the health of a pension system is the funding level of the liability of the obligation, the performance of the fund, and the cost of the investment. Each is inextricably linked to one another.

Pew Charitable Trust’s 2015 report which tracks each state system finds that as of 2013 (the most recent data available) Oregon’s system was 96% funded. Pew finds the average funding level of the state pension systems is 72%. The low unfunded liability level is functionally set by statute in Oregon.

As for the performance and relative cost, both Hooke and Siedle agree that the performance of the Oregon pension system could be dramatically improved by shifting away from high fees tied to private equity and hedge funds. Both advocate that Oregon’s PERS should consider shifting to an indexing approach.

“Most state governments should consider indexing," said Hooke. "That carries a lot less in fees and the returns are comparable, and perform often even better than investments with a lot of fees attached. Only one state does that now and that’s Nevada, and they’ve done well for themselves since they switched to an index."

“There are always alternatives to consider. Indexes would probably be a good metric to measure against to see whether Oregon should consider other investment ideas,” said Siedle who run the forensic pension firm Benchmark Fiancial.

The Maryland report found:

If a fund had invested $50 billion in the replicating index on June 30, 2009, by June 30, 2014, five years later, it would have had $98.2 billion, assuming reinvestment of dividends. The same $50 billion investment in the median state fund portfolio would have been worth $91.4 billion, indicating a $6.8 billion shortfall.

“Oregon is actually doing better than the average in terms of returns. They’re paying more but actually doing a little better than average in returns,” said Hooke. “The question for them is actually whether or not they could achieve the same results by indexing and not having to pay any fees, and the answer to that is yes they could.”

Missed Opportunity

Some might see Wheeler's approach as safe, but the experts argue the cost is too high and there is a significant missed opportunity. "They could be doing even better. They could be paying less fees. This is not an either/or proposition, keep in mind. By using indexes, state funds would be both getting better returns and paying less in fees," said Hooke.

"That's what they will use to try to say the investment fees are worthwhile. That, "Look we are paying high fees but we're above the average in terms of returns', but that doesn't really answer the question," said Hooke.