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The Bottom Two Percent

The bottom two percent is where the Public Employee Retiree Association (PERA) found itself when the dust settled at the end of the 2008. The investment strategy that was signed off on by the State Investment Council members (SIC) put it into the bottom two percent in the nation. Of course, it wasn’t just PERA funds that suffered under the State Investment Council guidance: [see update at the end of this post in red].

The PERA fund’s annual performance ranked in the 99th percentile of similar funds in the nation, meaning that 98 percent of funds performed better, according to the LFC. The land grant fund ranked in the 61st percentile, the severance tax fund in the 78th, and the ERB in the 85th.

A variety of problems affected each fund’s performance, since each fund’s asset mix and objectives are different. The State Investment Council manages the land grant and severance tax funds. ERB and PERA each have separate managements.

The LFC found PERA suffered from a “large exposure to international equity investments.” As of Dec. 31, 21 percent of PERA’s assets were in international equity. While that allocation proved “extremely advantageous throughout the middle part of the decade,” the sector has fallen more than 45 percent in the past year, LFC said.

ERB’s worst performing asset classes were fixed income and hedge funds, LFC found. The hedge fund assets under-performed benchmarks “by a staggering 1,920 basis points,” according to LFC. A basis point is one 100th of a percentage point.

Contributing to the severance tax fund’s decline were “economically targeted investments,” which the LFC said are “intended to stimulate the New Mexico economy despite having a lower than market rate return.”

That last point is really a sore point for me. This could have easily been prevented. Don’t get me wrong, we would have lost money like everyone else, but we didn’t have to be in the bottom two percent of the nation. Let’s roll back the clock two and half years to see how we landed on this worst in the nation list:

You read that correctly. An advisor to the state was terminated because, well, because they did their job. They advised the state against making an investment that would not yield the good financial returns New Mexicans should expect from an investment. If our advisors are supposed to be “on the same page” as the state, it kind of makes you wonder why we need advisors?

So, what was this unsound investment that “the state” wanted made? Well, you had to wait a few months to get the inside scoop:

Cincinnati-based Fort Washington Capital Partners resigned as the SIC’s investment advisor for the program last July, citing disagreements with the state over its role. The state had asked Fort Washington to render opinions on two large investments in space-related companies and Fort Washington refused, arguing that the proposals seemed more like economic development projects than private equity transactions.

Go back and read the entire original post and let me know if it doesn’t jut set your blood a boiling. And, if that doesn’t put you over the edge, maybe the SIC’s investment in Bahrain owned companies to supposedly “stimulate the local economy” will do the trick.

UPDATE: Looks like I may have misread that article Albuquerque Journal article this morning. PERA made it’s own investment decisions without any input or oversight from the SIC. Below is the email I received from the SIC’s Public Information Officer:

Mr. Burgos,

While I understand the your blog’s intention is primarily to offer opinion, it appears the core premise of your post today is based on a completely faulty assumption that Public Employees Retirement Association (PERA) investment strategy is signed off on by the State Investment Council (SIC).

For the record, SIC and PERA are two completely separate entities managing different Funds for the State of New Mexico. PERA has its own investments, managers and board of directors. SIC has ZERO input, influence and control over PERA Funds, and State Investment Council members have nothing to do with PERA performance.

The Education Retirement Board (ERB), likewise, is managed by different people, with a different board who oversee separate investments.

Unfortunately, there are similar factual problems with the rest of your post regarding a very old concern we had with Fort Washington, and a more current third-party criticism – which also has some significant factual problems. We would be glad to address these individually if presented in a meaningful way and I invite you to contact me on these issues if you like.

While SIC performance for the 4th quarter was definitely below par, this was primarily due to the historic market challenges and negative effects of a conservative hedging strategy that while well intentioned, hurt performance during December’s market rally. This same strategy in the first quarter of 2009 should easily put the SIC in the top 25% of peer funds around the country. Those performance numbers will be available in the coming weeks, and I will certainly make those available for your review.

While I am unable to post this response to your website, you may certainly do so if you believe it is appropriate. I do hope that you address the factual problems I address here as soon as practicable.


Charles Wollmann
Public Information Officer
New Mexico State Investment Council
(505) 476-9540 office
(505) 231-3334 cell

I did leave Mr. Wollmann a voicemail, and am eager to hear more about the factual problems with the rest of [my] post regarding a very old concern [they] had with Fort Washington, and a more current third-party criticism.” Mr. Wollmann is correct that I formulate opinions – nothing more, nothing less – based on the information I have at hand. Sometimes, I misinterpret that information. Hey, I’m only human. But, like you, I’m always eager to hear the other side of the story.