review of wyoming treasurer office presentation “historical … · 2020. 8. 28. · presentation...
TRANSCRIPT
Review of Wyoming Treasurer Office Presentation “Historical Investment Returns,” August 24, 2020.
Jeff Hooke, August 28. 2020
1
Summary
• TheWyomingpermanentfundsarethevictimsofModernPortfolioTheory(MPT),aportfoliomanagementstylethathasbeeninvogueforthelast25years.
• UnderMPT,institutionalmanagers,liketheTreasurer,replaceaportionoftheirlow-feetraditionalinvestments-- likepublicstocksandbonds-- withhigh- feealternativeinvestments-- likeprivateequityandhedgefunds.SeeFigure1.
• Theideaisthatthehigh-feeproductsenhanceprofitsoverthetraditionalmodel,althoughseveralindependentstudiesthelastcoupleyearshavetotallyrefutedthisidea.Infact,MPTreducesprofitsversusthetraditionalmodel.
Figure 1
Traditional Portfolio vs.
Modern Institutional Portfolio
STOCKS
BONDS
Infrastructure
Commodities
Real Estate
Private Equity
Hedge Funds
Bonds
Stocks
Core
Satellite
WhyDoInstitutionalMoneyManagersuse
MPTifitDoesn’tWork?
• ManydonotreadstudiesthatcontradictMPT,sincethestudiesmostlyappearinobscureacademicjournals,onlysometimesreachingthenewspapers.
• Somerefusetobelievethestudies,evenifastudyhasbeenreviewedbytwoNobleLaureates.
• Somethinktheycanbeattheaveragesoftheirpeersandsimplepassiveindexes,byusingthepriceyalternatives,evenwhenWarrenBuffettsaysmostshouldindex.
• Somethinkindexingwillhurttheircareers,sinceyouseemsmarterifyoubuymanycomplexinvestments.
Page1ofTreasurerPresentation
• Wyominggoalsandobjectivesarelikeotherinstitutional
investors,notparticularlyuniqueassuggestedbythe
Treasurer.
• Thestateguidelinesdonotmaketheportfoliostyleforthe
permanentfundsanydifferentthanmostotherendowments,
statepensionplans,sovereignwealthfundsorfoundations.
• TheWyofile storydoesn'tanyspecialcherrypicking.
Page2
• TheWyomingfundshaveaequitytototalassetratiothatislowerthanitspeers;thismeanslowerreturnscomparedtoitspeerswhenthestockmarketrises,andhigherrelativereturnswhenthestockmarketfalls.
• Abettercomparatorinthearticlewouldhavebeena50-50index,ratherthan60-40,butthisdoesnottrulychangeconclusions.
• Thepermanentmineraltrusthasanequityratioof65%todaybutthiswasaround50%in2012.
• NewMexicoandAlaskasovereignfundsdonothaveequityratiosof70%ormoreassuggestedbythepresentation.
Page3
• NotsurewhytheTreasurermentions2009,whichis11years
ago.
• TheSLIBpolicyislikemostinstitutions.SeeFigures2and3.
• TheWyofile storycovers10yearsbuttheunderperformance
wouldalsobeevidentfordifferenttimeperiods.
• Mostconsultantsuse1,3,5and10years.
Figure 2
Principal Institutional Investors
Pension Funds
Sovereign Wealth Funds
University Endowments
Foundations
Fund of Funds
Insurance Companies
Wealth Managers &
Family Offices
Figure 3
Institutional Investors’ Portfolio Objectives
Institutional
Investors
Preservation of Capital
Reasonable Rate of
Return
Moderate Risk
Page6
• IftheTreasurerbelievesthatthe60-40willdolousythenext
10years,heispredictingabadstockmarket.
• Heshouldthereforesellsomeofthefunds’stocks,MLPsreal
estate,PE,etc…
• Or,tosavefees,justusea40stocks/60bondsindex…..more
downsideprotectionthana60-40
Page7
• Mostconsultantsdonotfavorusingatwo-yearyardstick.1,3,5and10yearsarecommon.
• The60-40isstillthegoldstandard.
• Lately,institutionsthathavenot“beaten”the60-40indexwanttousetheMSCIACW60-40index.
• Thethepoorperformanceonint’lstocksmeanstheMSCIACWisweak.
• Thetacticislike“shiftingthegoalposts”tomakeiteasierforinstitutionstowin.
Page8
• Thechartisprobablybasedonsomeself-madeRVK
benchmarkthatneedsthirdpartycorroboration.
• RVKisgettingpaidbytheState,sothestateshouldcheckthe
RVKchart,giventheamountofdollarsinvolved.
• Abettercomparatorisanobjective,non-customindex,likea
50-50index.
Page9,Indexit?
• AlloftheFunds’assetclasseshaveindexfunds,suchasUSstocks,int’lstocks,bondsandrealestate(REITs).TheTreasurerdoesnotseemtoknowthisfact.
• Privateequityissimilartopublicstocksinmanyways.
• Hedgefundsareusuallyacombinationofpublicstocksandbonds.A60-40indexhasoutperformedhedgefundseasilythelastfewyears.
• Internalmanagementwillcutcosts,butindexingwillcutcostsevenmore,withoutsacrificingreturns.
Page10
• Thereisalonglistofindependentresearchthatshowsthat
activemanagerscannotbeatanindexaftermanagement
expenses.Thatbeingsaid,peoplekeeptrying.
• Thisgoesforbondsandstocks.
• Thecomparisondoesnotshowthesalariesandothercostsof
in-housemanagementintheyields.
Page11
• Page11isapopularpagewithinstitutions.
• Withitsconsultant,theinstitutioncreatesa“customindex,”
whichtheinstitutionthenalwaysbeats.
• Thisislikeachild“gradinghisownhomework.”
• Itcan’tstanduptoindependentscrutiny.
Page12
• Internationalstocksarecheaperforareason.
• ManyprofessionalsconsiderthemtoberiskierthanUSstocks.
Page13
• True,theUSstockmarketisverytechdependent.
• Thetopfivebiggeststocksnowaccountfor20%oftheS&P
500indexbytotalvalue.
Page15,conceptconfusion
• Today’s64%equitycommitmentbythePMTFisgreaterthan
thatofNewMexicoandAlaska.
• However,thisequityexposureisconsistentwithmanystate
retirementplansanduniversityendowments.
Page16,Fees
• Wyomingfeesareunderstated.
• IfyoulookattheStateofNewJerseypensionplan,whichdiscloses
bothfixedfeesandcarriedinterest,NewJersey'shedgefundand
PEfeesareabout2.5%ofsuchassets.
• ForWyoming,suchfeesshouldthustotal$50millionalone.Adding
50basispointsfortheotheractiveassetclasses,placesthefee
totalmuchhigherthan$47millionindicated.
• Likemostinstitutions,theWyomingfundsignorecarriedinterest
feesbecauseaccountingrulesprovidetheoptiontodoso.
• JeffHookeisaseniorfinancelectureratJohnsHopkinsCarey
BusinessSchool(Baltimore,MD).
• Heisaformerinvestmentbankerandprivateequityexecutive,
whohaswrittenseveralfinancebooks.
• Hehasco-writtenseveralstudiesoninvestmentreturnsat
statesandfoundations.