STATE HOUSE NEWS SERVICE
As disruptive federal tax hikes and spending cuts loom on the calendar, managers of the state pension fund say they are continuing with the strategy of moving into lower risk investments without sacrificing investment returns.
The Pensions Reserves Investment Trust was pounded by the 2008 market crash, losing 29.5 percent of its value. Fund managers say they remain focused on long-term investment strategies and that focus has not changed amid a growing drumbeat of concern about tax increases and sequestration cuts that could go into effect Jan. 1 if Congress does not act first.
“The easiest way to fail is to try to predict the action of the market,” said Michael Trotsky, the Pension Reserves Investment Management CEO and chief investment officer. Trotsky’s only prediction to the PRIM Board Tuesday morning was, “We’re going to have good news. We’re going to have bad news. I have a feeling it’s going to feel manic for a while.”
The pension fund changed its strategy a year ago to position itself for the more volatile market. The fund moved out of international equities and large cap equities, while adding to its investments in high-yield bank loans and reconfiguring and increasing its hedge fund investments, Trotsky explained in a short interview after the PRIM meeting on Tuesday.
While Trotsky is staying the course, others on the PRIM board, which oversees the state’s roughly $50 billion pension fund, saw cause for alarm in the potential confluence of taxes, budget cuts and politics, which Congress is expected to take up after the Nov. 6 election.
The fund, which ended August with a $49.8 billion value, is used to pay benefits to government retirees.
“Do you have any idea of the havoc that’s going to take place? Have you given that thought?” Dennis Naughton, a retired teacher and board member, asked asset allocation consultant Michael Manning.
Manning said that fear of the fiscal cliff, the European sovereign debt crisis, and uncertainty around the election motivated PRIM to diversify, but he said he expected Congress to come up with a solution.
“I think our bias is they’ll figure their way through the problem,” Manning said, though later he said, “Congress has certainly not made that signal that ‘We’re going to do what it takes.’ ”
Investment strategist Connie Everson, who is on the PRIM Investment Committee, said if the country goes over the fiscal cliff, it could have an impact on the economy.
“To those of us who talk about the risks, indeed, let’s say it is a 1 percent impact, let’s say at worst. But in a 1.3 percent economy that’s impact,” Everson said. However, Everson also hypothesized that the economy might actually be strengthening right now, citing movement in the lead commodities market.
“There’s been some unusual behavior with commodities associated with better industrial activity,” Everson said.
Even if Congress takes action to avoid the fiscal cliff, PRIM risk manager David Gurtz said the politicking ahead of a deal could move the markets.
“The real issue is are we going to have some brinksmanship play coming in here that’s going to cause this to be a real issue, and they’re only going to act once the market’s had a significant selloff? Too many questions,” Gurtz said.
Preparations for the potential fiscal cliff depend on the investment.
Gurtz said, “For our long money equity managers, it’s too short term. They’re not really focused on this stuff. It’s not how most of our managers think. Our hedge fund guys, they are thinking about it. They do have some protection if there is some dramatic dropoff in the markets later this year or next year, and quite honestly our core fixed income will do fine in this environment if there is a flight to quality.”
When PRIM readjusted its investments a year ago, the fund pared down its hedge fund management and “over-diversified” investments and hopes to soon be invested in a core of 20 to 30 hedge funds, Trotsky said.
“When I got in we had 237 underlying hedge funds,” Trotsky told the News Service. “What I very quickly realized when I got here was we were in every single hedge fund that’s making the news for all sorts of different reasons . . . We were in Bernie Madoff before I was here.”
While Trotsky said he has not attuned the fund’s investments toward a prediction on what will happen in Washington D.C., he said he hopes Congress finds a way to an agreement.
“I’m very hopeful that our lawmakers understand the severity of going over the fiscal cliff and will do everything they can to prevent us from going over the fiscal cliff,” Trotsky told the News Service.
The Investment Committee is planning to meet in November, after the elections, to discuss the market impact of the looming deadline.