‘We got as wet as everyone else’: Pa. teachers’ pension fund to dump billions in underperforming Wall Street investments

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The state teacher’s pension fund is pulling almost $2 billion from Wall Street firms that promised, and failed, to bring in steady financial returns even during uncertain times.

The Pennsylvania Public School Employees Retirement System unanimously agreed to the move in a board meeting Wednesday as part of a reallocation of about $5 billion out of hedge funds and pipelines and into stocks, bonds, commodities and infrastructure, among others. 

The biggest move is cutting the pension’s investments in so-called “risk parity” funds that have only lost value since PSERS first invested in them in 2012.

Risk parity funds use diverse investments to try to perform well even during a stock market tumble, and have gained popularity since the 2008 crash, according to Reuters.

But the funds may increase volatility in the market, according to critics. Such was the case in March when the coronavirus began to spread across the United States.

PSERS was investing 8 percent of its roughly $50 billion plus in assets into risk parity as part of a push to build a wide portfolio that could weather a recession or depression.

Oversight and management of the $4 billion investment was split roughly evenly between PSERS and private firms, including Wall Street giants Bridgewater and BlackRock.

But as the market hit a tough spot due to the coronavirus, the risk parity bet has not paid off. In fact, those investments lost 9 percent of their value since the start of 2020.

Those losses are due to private money managers, according to a PSERS report. Since January 2020, the pensions’ own managed risk parity fund has lost just half a percent of value. But the private firms that PSERS invested in lost almost 17 percent of their value.

Bridgewater, in which PSERS has $1 billion invested alone, lost billions of dollars for investors during the pandemic’s first few months.

Those losses bothered state Treasurer Joe Torsella, who advocates for a traditional, stock and bond-focused investment plan.

“We got as wet as everyone else,” Torsella said of pandemic-related financial hits. “And we missed a lot of years that would have had returns” from traditional investments. 

“This absolutely, categorically should make us mad,” he added. 

Instead, in recent years, PSERS has created a diverse portfolio that includes risk parity, private equity, and real estate among other alternative investments.

PSERS, which faces tens of billions of dollars in unfunded obligations, has used this aggressive strategy to make up for losses during the Great Recession, as well as historic underinvestment by the state to meet pension obligations.

All together, more than 200,000 teachers, janitors and other school employees are guaranteed, by law, pension payments that the commonwealth must meet.

PSERS staff agreed that the current investments had failed, but argued that their strategy was still sound.

Pension officials thought the firms “were up to the task we assigned them” and only learned this spring that they weren’t, PSERS portfolio manager Carl Lantz said.

“It was a test, [the firms] failed the test,” Lantz said during Wednesday’s  board meeting. But “it wasn’t a test they’ve had before.”

With Wednesday’s vote, the fund will also reduce a mandatory 3 percent investment in pipeline companies to 1 percent of all assets.

The board’s investment strategy includes an allocation for “master limited partnerships,” or MLPs, which are a special legal entity that can sell stock but is not subject to income tax. For legal reasons, these companies are concentrated in the energy industry.

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Even before the pandemic, MLPs were a “significant detractor” from the fund meeting its financial benchmarks, according to a 2019 pension report. Since, energy stock prices have sunk even lower.

Pension officials added that the direct MLP allocation will be eliminated next year, but the fund could still be invested in the companies regardless of the change.

Wednesday’s changes will take effect on Oct. 1. The move is expected to save the fund $12.5 million in fees annually, PSERS spokesperson Steve Esack said.