Missouri Pension Bonsuses Don't Add Up

Last year the global stock market was down 40% but according to the MOSERS website the Missouri State Pension plan “only lost 29.3%”. As a result the 14-member staff of the Missouri State Employees Retirement System was rewarded with almost $300,000 in bonuses even as the pension fund lost almost $1.8 billion!

The MOSERS website reports that its investment policy is to have 25% of the pension portfolio invested in “alternative investments” in the published annual report they are referred to as “limited partnerships”. Even though the balance sheet in the annual report uses the term “fair market value” assigned to these limited partnerships by definition there is no ready market for these investments. As citizens shouldn’t we be asking some tough questions?

With no market for these limited partnerships where do these fair market valuations come from? Does anyone on the payroll at MOSERS have the authority to determine these fair market values? How could the fair market value determination be anything but arbitrary? What would the margin of error be between fair market value and actual value? Should Missouri citizens pay for performance on something that can not be accurately measured? How can MOSERS or any party report investment performance to the first decimal point when there is no way to accurately value 25% of the entire portfolio?

On the MOSERS website the director says “What Gets Measured Gets Managed and What Gets Managed and Rewarded Gets Done”. Shouldn’t we be asking MOSERS exactly how they measure the value of these limited partnerships? One of these partnerships was called Silver Lake Partners – described as a fund of funds. The Post Dispatch reported this past January that buried inside Silver Lake Partners was an investment into Madoff’s hedge fund. MOSERS lost over $3.5 million because no one on their staff or their hired consultants was able to detect this fraud. Also last years the MOSERS staffed approved of investment fees of $2.9 million paid to Silver Lake partners. What other surprises are lurking for the Missouri citizens in these so called alternative investments? Aren’t we lucky to have these talented and dedicated managers working for us?

Now the MOSERS board wants to study its pay practices compared against other public pension plans. Does this make sense? All of the other states’ pension plans incurred big losses also. If these other states are stupid enough to pay bonuses on investments that can not be measured does that mean that Missouri should be just as stupid? Wouldn’t it be wonderful to get a job where you can bet others people money on unpredictable market behavior to earn a bonus on immeasurable outcomes and have no downside? Wouldn’t you be swinging for the fences all of the time? It’s no wonder they are being so protective about this murky pay scheme.

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 

Should Investment Advisors Be Political?

Recently some of readers of this newsletter and blog have commented that they don’t want our political commentary – only our investment advice. Unfortunately how can we or any investment adviser ignore the weight that government now has on capital market activity? Who is the largest owner of General Motors? Where are over 90% of the new jobs coming from? The free market is still trying to work – unfortunately as unpleasant as it might be it is our role to remind investors of all types the significance that government now has in open market activities. This is not a criticism of our Democratic administration or the past Republican administration – it is only questioning whether or not our government has grown out of control when it takes over a major corporation and the central bank has overwhelming authority on credit policies. Should we citizens always be suspicious of government action of all sorts from all parties? Do you want your investment adviser to point out the political realities and risk that will directly impact the value of your portfolio?

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 

Why Would Anyone Ever Buy a Corporate Bond Again?

Do you find it outrageous that the US Government can come into a Federal Bankruptcy proceeding and start re-organizing the priority claims of secured bond holders in order to save jobs? In the recent Chrysler Bankruptcy the Obama administration did just that! Claiming to save jobs and accusing secured debt holders of being "speculators" President Obama chose to ignore well established law that protects the property rights of the bond holders. But who were these so-called speculators? Would the State of Indiana Pension plan be a "speculator"? The State Treasurer of Indiana is filing a lawsuit calling for a trustee to be appointed in order to liquidate Chrysler so that the secured bond holders can be paid off. "We are simply seeking to enforce our bargained-for rights under well-settled law."- Richard Mourdock, Treasurer - State of Indiana.

Critics of Mourdock are quick to point out that he is a Republican doing this for "political purposes" only. If The State of Indiana is successful then over 4,000 Chrysler jobs will be lost in the liquidation. But isn't the primary purpose of a business to make money or should it be to create and maintain jobs? What is the purpose of your business or organization? If the property rights of these Chrysler bond holders are not secure in the United States then what other fundamental rights are we loosing? Is there anything more valuable than our property rights?

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 

Ouch!

Today was a painful one for investors as well as those in the financial industry.

Lehman Brothers filed for bankruptcy.

Merrill Lynch was bought by Bank of America for a bargain basement price.

The downfall of these supposed financial industry stalwarts sent the markets worldwide plummeting.

There are plenty of lessons to be learned from days like this. The one we'd like to share it this:

Just because a company has been around 100 years, doesn't mean it's going to be around tomorrow.

As an investor, the best thing you can do to protect yourself is diversify.

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 

WSJ Struggles to Find 401(k) Expenses

If a reporter from the Wall Street Journal has trouble figuring out what she's paying in 401(k) plan expenses, what chance do the rest of us have?

In an interesting article today, WSJ reporter Karen Blumenthal opened up the hood on her 401(k) account to take a look inside. She got some fee information from her plan provider's website, some from a "Summary Plan Description" from her company's HR department, and some from Morningstar. Even after going to three separate places, there was still one fund in her plan that she couldn't get information for.

Hopefully, the new DOL proposal requiring more fee and fund disclosure on 401(k) statements will help reduce, if not eliminate, all the legwork 401(k) plan participants have to do to get fee information.

A few other points of note from the article:

1. This paragraph toward the top of the article is about the relationship between fund expenses and performance.

"In almost every study we've run, expenses show up as a very significant predictor of future performance," says Christine Benz, director of personal finance at Morningstar Inc., the investment research firm. In other words, over time, funds with lower fees are likely to outperform those with higher fees in the same category. By contrast, says Ms. Benz, "our data indicates that past performance is a weak indicator" of future results.

2. The reporter's plan is better than most. Her employer covers many of the administrative expenses, there are index fund options, the expense ratio data (for most of the funds) was fairly easy to find, and the funds had no loads.

To read the entire article, click here.

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 

A Financial Headline You'll Never See

Did you catch this story that made big news last week? The Yahoo! headline read:

"Ex-hedge fund manager ordered to pay $300 million."

It's about former hedge fund manager Paul Eustace who, according to the Commodity Futures Trading Commission, "cheated clients by sending out fake account statements." Evidently Eustace told clients that their portfolios were valued at over $230 million while he "fraudulently operated the funds and lost millions of dollars."

So what's the financial headline I bet you'll never see?

"Ex-index fund manager ordered to pay $300 million"

I wonder how many more millions of dollars Eustace's clients would have in their portfolios right now if they had just put all their money in a low cost index fund or ETF instead of a risky (and evidently fraudulent) hedge fund.

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 

More 401(k) Problems?

Here's an article from IndexUniverse.com titled "Auditors Finding More 401(k) Problems".

The article talks about the IRS is finding a "substantial" increase in the number of compliance problems in 401(k) plans. Not surprisingly, the problem is especially troublesome for small businesses.

It's a short article, and worth a quick read. We especially agree with the sentiment in it's conclusion:

"So what does this all mean for index investors? It could be another sign that pressure is building to clamp down even more on the use of high-priced actively managed funds."

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
•