Edward “Ted” Siedle launched a blistering attack on Treasurer Gina Raimondo in a Forbes.com post Thursday that suggested her changes to Rhode Island’s $7 billion pension system are leading to a “Wall Street feeding frenzy.” Raimondo’s critics seized on Siedle’s broadside immediately, while others wanted to know more about his charges.
Raimondo responded to the Forbes piece Friday in an interview with WPRI.com, defending the State Investment Commission she chairs for moving aggressively to create and expand a portfolio of hedge funds. This transcript has been lightly edited for length and clarity.
Let’s jump right to it. Did you read the article, and what was your reaction?
I did read it. It’s not an article – it’s an opinion blog, and obviously there’s a number of inaccuracies, and I disagree with the overall tone of the blog.
Did the author ever reach out to you or your office, do you know?
So there was no effort to discuss it?
Looking for a thesis in the article, Siedle writes: “There’s no prudent, disciplined investment program at work here – just a blatant Wall Street gorging, while simultaneously pruning state workers’ pension benefits.” I know you’ll disagree with that, but what’s your response?
Ted, we’ve talked about this before. The State Investment Commission has a clear strategy. That strategy is to produce strong long-term returns while reducing risk, and to ensure retirement security. That is exactly what we’ve been doing, and the results speak for themselves.
You’ve reoriented the pension fund to invest much more money in alternative investments. Is this what other pension funds are doing, moving to alternatives? Is it a search for yield with interest rates low? How does this fit with what you’re seeing among your peers elsewhere in the country?
Yes. It is right in line with best practices throughout the industry. In fact, the average across state pension plans is 22% of total assets are in alternatives, and Rhode Island’s pension system is at 22%. So what we’re doing is in line with best practices.
[TN: Raimondo’s spokesman said the average cited uses data from Clearwater Investment Management and state CAFRs, or comprehensive annual financial reports.]
It’s our job to be innovative and to be constantly looking to do our best and be better and reduce risk and increase returns. That’s exactly what we’ve done and that’s exactly what we’re going to continue to do. You and I have talked about this before, and it was in State of the Treasury, which came out months ago – we have a strategy. We have an underfunded plan, so we need to reduce risk.
That was one of the things that was interesting here. Siedle said the shift in the investment portfolio will “inevitably dramatically increase both risk and fees.” Talk about risk first. I can see why people would think that if you’re going into alternative investments rather than equities, you’d be increasing risk – isn’t that the fact here?
No, in fact we’ve decreased risk by more than 10%.
How? I know this is complicated stuff, but how can you explain it for the layman?
Here’s the important point. A lot of people got hurt in the stock market of 2008 and 2009, and this pension system lost more than 25% of its value. We don’t want that to happen again. There was an awful lot of risk in this portfolio, and I think everyone can relate to that – a lot of people got hurt and lost a lot of money when the U.S. stock market crashed. What we are trying to do, and what our strategy’s been, is to make sure our whole portfolio isn’t 100% correlated with the U.S. stock market, so that if we do have another crash in the U.S. stock market, hopefully we won’t lose 25% of the value – because we can’t afford that, because people’s pensions are on the line.
On fees, Colorado’s pension fund says its expenses total less than 0.4% of assets per year. Do you know what the figure is for Rhode Island?
No – you’ve got to be very careful with apples to apples in this, so I don’t know what Colorado means when they say that. But here’s what I can tell you: everything we do is in line with best practices – and by the way, it’s very important to remember we rely on our investment consultants. Every one of these hedge fund investments was done by a unanimous vote of the State Investment Commission after months of due diligence, in line with our asset allocation, which we voted on. All the fees that we paid are industry-standard. So everything we’re doing is in line with we should be doing. And it is transparent.
What about fees, though? There’s been a lot of attention paid to the higher fees that sometimes come with alternative investments. Is that a concern? Have you put anything in place to make sure we’re not getting gouged under the radar by fees charged with these alternative investments?
Look, you’re always concerned to make sure that we don’t pay excessive fees. But what we’re trying to do here is we’re trying to buy a little bit of insurance, and so, like in anything, you have to pay for that insurance. But, again, everything we’re investing in are brand-name firms with a proven track record – and we always get the best fees. In consultation with our investment advisers, we negotiate wherever possible to make sure that the state of Rhode Island receives among the best fees of other investors.
One of the things Siedle asks about the alternative investments is, “how high will the allocation to alternatives go over time – 40%-50%?” I presume that’s not the plan.
No. Like I said, we’re right in line – if you do a survey for state pension systems, the average allocation to alternatives is 22%, and Rhode Island’s allocation is 22%. We have an asset allocation policy, and we operate in compliance with that policy.
When was the current allocation plan adopted?
Another criticism from Siedle is that the estimate of the value of the alternative investments is coming from the managers of the funds, whose pay is based on the investment performance. He questions the reliability of those appraisals. What do you say to that?
Again, it’s our job to be constantly monitoring these, and certainly if we were to ever have reason to have concern about that, we would act on it. We take a rigorous approach in everything we do – a rigorous approach to selection as well as a rigorous approach to monitoring. And when warranted we evaluate the benchmarks to make sure that they’re hitting the returns that we need. So it’s something we have our eye on and that we’re constantly monitoring, and we have a rigorous approach. I think that’s an area where we have a good process in place.
Do you know if any placement fees have been paid in connection with these alternative investments?
They have not. We have a policy here not allowing placement agents, and one of the things that I’ve instituted is an investor pledge – all of the investors that want to do business with us have to sign a pledge saying that, number one, they don’t use placement agents, and number two, that they don’t make contributions to my campaign. So those are facts.
And I will say, as you know because we’ve covered this before, we’ve taken a number of steps, which I’m proud of, to increase transparency, to increase accountability and to go above and beyond what’s required. This investor pledge is one example of that. Our investor relations portal, which I launched a year or so ago, put everything online – including our investments and the fees. So there really is no basis for this.
Really? Where are the fees?
If you go onto our investor relations portal, all the minutes and all the SIC [State Investment Commission] materials are there. And by the way, as you know, every SIC meeting is public, all the stuff is published in SIC reporting materials.
Is Cliffwater the state’s hedge fund consultant?
Does the state have multiple hedge fund consultants or just one?
Nope, just Cliffwater.
On those hedge funds, how is the performance so far broadly speaking? I know this was put in place less than two years ago, but is it working? And how do you decide that? What are the metrics? It is a significant shift, even if it is in line with what others are doing as you said.
As you say, it’s a young program, so it’s early going – but we’re pleased. So far the performance has exceeded the index by over 2% annually.
Let me back up. Alternative investments is both hedge funds and private equity. By the way, the state’s been investing in private equity for 10-plus years. This is not new. Certainly it was happening long before I got here, and they’ve had a good track record in it. So that’s not news. Over the last 10 years the state’s private-equity investments have earned an annualized return that exceeds the S&P 500 index by 5%, and the hedge funds – again, early returns – but have exceeded the index by over 2%.
Exceeded the S&P 500 Index or the hedge fund fund-of-funds?
The hedge fund fund-of-funds.
Also, the overall return of the pension system, the one-year return is 9.2% and the three-year return is 9.7% [as of Feb. 28, 2013]. So we are doing exactly what we should be doing and exactly what we said we would do, which is delivering strong returns at a lower level of risk and therefore providing greater retirement security to public employees – and all the while doing that in a highly professional, transparent process, consistent with best practices all around the country.
What about the “revolving door” issue? I hear it raised a lot about your office – you came out of finance, former Chief Investment Officer Ken Goodreau left to work for an alternative investment manager, the new CIO comes from hedge fund research at JP Morgan – isn’t it understandable that people would be skeptical of all that after what’s happened in the financial sector in recent years?
I think people should be a lot more worried if we were hiring people to manage these assets that didn’t have finance experience. What you want is people managing money that know how to do it and that come out of the industry. And by the way, again, this is not unusual. There are senior investment professionals – Massachusetts, for instance, which has a strong track record in their pension, they have a number of professionals on staff managing their pension fund that have come out of the finance industry – Connecticut, New York, New Jersey.
Look, there is no place for problematic conflicts of interest or bad behavior. But it is a good thing that people who have a strong investment track record want to work for the state to help us do the best we can to manage money for our public employees.
Siedle writes that you recently hired “18 more hedge fund managers.” Is that number correct?
Yes, that is correct. Well, it’s not more –
Oh, right – they’re the only hedge fund jobs, because Rhode Island didn’t invest in hedge funds before.
He says this is a way of “greatly increasing operational and investment risk, and dramatically increasing investment management fees.” That’s wrong, in your view?
Yes. It’s reduced the risk. Like I said, if you look at the risk, the volatility in our portfolio, it’s less now than it was before we had this hedge-fund portfolio.
And by the way, Ted, I have been on record saying this for a long time – it was in State of the Treasury, I have talked about it at every public Investment Commission meeting for over a year – this is an active strategy to reduce the risk in the portfolio so that we don’t again feel the pain of 2008 and 2009. And so far, it’s working – we have strong returns with less risk. We’re monitoring it, but so far it’s working and it’s doing what we said it would do.
[At this point Raimondo’s spokesman said we were almost out of time.]
I want to go then to Point Judith Capital. [This was Raimondo’s former venture capital firm, which received a $5 million commitment from the pension fund in 2007, under former Treasurer Frank Caprio.] What were the returns like at Point Judith, and are the pitchbooks, portfolio holdings and investment returns available publicly from Point Judith?
I’m not sure. Again, I wasn’t here when that investment was made –
Well you were, but you were on the other side of it.
Right. Exactly. The returns, all that stuff is public, so whatever they submit, just like any other private equity firm, whatever they submit on a quarterly basis would be public. They submit quarterly reports on their investment performance, and we have that and that would be public. I have to say I don’t know it off the top of my head.
How did the initial opportunity for Point Judith to go before the State Investment Commission and get that $5 million commitment come about? You don’t just show up that day to the meeting, obviously.
Basically, through the process. The investment advisor – Pacific Corporate Group, I believe it was called – was looking for venture capital allocation, and we applied, we went through the due diligence process and we were selected.
How was the performance of Point Judith?
It was top quartile at the time [in 2007].
Do you have any sense of how Point Judith’s performance has been sense then and how the state’s investment has fared?
It’s a strong performer. They’ve produced strong returns. It’s still a little bit early. Those kinds of firms have a 10-year investment life cycle, so they’re maybe halfway through the cycle.
Is that why Rhode Island had only funded $4.4 million of the $5 million commitment as of March?
Exactly. That is totally standard – that’s the way it works. They do what’s called a capital call.
[An aide provided Raimondo with documents about Point Judith II, the fund Rhode Island invested in.]
As I suspected they have solid performance, a realized return of 22% – so a 22% realized return, but again, they’re halfway through the fund. Early returns are strong, but like any of these private equity holdings, you have to wait until the fund is done to see how they’ve performed.
[Update: Raimondo’s spokeswoman provided a correction on April 9, saying the Point Judith II fund has a 12% return; 22% is the amount that has been cashed in.]
One thing that appears to be incorrect in the Forbes piece is that the Point Judith II investment stopped being reported on your website in October 2012. It’s in the March 2013 SIC document. It looks like nothing has changed with those disclosures recently?
Finally, the Engage Rhode Island question.
You’re being portrayed in this piece and by a lot of your critics as the handmaiden of Wall Street – doing all this, acting like you’re looking out for public employees but instead just creating a windfall for financiers. Clearly if you run for governor or even run for treasurer again, that’s going to be the critique of you. Are you concerned Engage Rhode Island is going to be an anchor around your neck?
Look, this is politics. Here’s what I know. I know that we’ve increased the retirement security for public employees in Rhode Island. I know that we had to make some tough choices to do that. I’m proud of the work we’ve done. And I have a much higher degree of confidence that teachers’ and public employees’ pensions are actually going to be there because of the work we’ve done. So those are the facts, and we’re going to continue to do that kind of work – politics aside. •
• Related: Chart: How Raimondo has changed RI’s pension investments (April 4)
This post has been updated.