Pension officials defend record

No plan to change retirement system's investment strategy

Md. returns rank last

October 31, 2001|By Michael Dresser and Eileen Ambrose | Michael Dresser and Eileen Ambrose,SUN STAFF

Top officials of the state employee pension system defended their investment performance yesterday despite statistics showing that last year their returns ranked last among comparable public retirement funds.

Carol Boykin, chief investment officer of the retirement system, told the General Assembly's Joint Committee on Pensions that fund officials do not plan to change their strategy significantly after $3.5 billion in stock market losses last year.

Boykin reaffirmed the fund's commitment to aggressive investments in stocks, saying officials talked after the Sept. 11 terrorist attacks and recommended "holding the course."

"We are long-term investors, and we are not market timers and we are not forecasters," she said.

Arthur N. Caple Jr., chairman of the pension board's investment committee, struck a note of cheery optimism. "If history repeats itself, markets always come back," he said.

Not present at the briefing was state Treasurer Richard N. Dixon, chairman of the pension fund board and chief advocate of a high level of investment in the stock market. His office said he was traveling and would not be available to comment.

Boykin and Caple did most of the speaking for the fund as Executive Director Peter Vaughn looked on. Judging by the tone of the questioning, the officials failed to allay the concerns of legislators.

"There was a sense of alarm on my part and there still is," Del. Martha S. Klima, a Baltimore County Republican, said afterward. "I didn't go away from there feeling this won't happen again. I didn't feel the problem had been solved."

She noted that legislators will have to find as much as $68 million next year in an already tight budget to cover the unanticipated losses.

Boykin gave little ground in her defense of the fund's record despite its minus 9.4 percent return on investments last year. Asked what she would do if the fund lost another $6 billion in the current fiscal year, she replied, "I would do the same thing I'm doing now."

Sen. Edward J. Kasemeyer, a Howard Democrat and the committee chairman, pressed repeatedly for assurances that there was some level at which fund officials would cut their stock market losses.

But Boykin insisted the fund should stick to its long-term strategy - even if it means the state finishes last again next year. Caple eventually allowed that "there might be" a point where the system pulls in the reins.

The pension system's rebuttal came after legislative analysts delivered a harsh critique of the fund's performance, noting that it ranked last for the year ended June 30 in a national rating of 38 public pension funds with assets of more than $1 billion.

Maryland's pension fund, which boasted assets of $33.1 billion in June 2000, had dropped to $29.5 million a year later. Legislative analysts said the fund lost an additional $3 billion by Sept. 30 but added that a rebound in October could have cut that figure in half.

The Department of Legislative Services recommended that the system consider reducing its higher-than-average 72.3 percent equity exposure, saying it exposes the state to swings of the stock market.

The value of Maryland's domestic and international stock market investments dropped 17.3 percent last year, canceling out gains in real estate and fixed-income securities.

The department also urged the system to drop its long-held reluctance to hire an outside investment consultant. Analysts said the use of independent consultants to develop asset allocation strategies is common for large funds.

Boykin contended that Maryland's stock market exposure was not significantly greater than that of many other public pension plans. She said the system's heavy losses were largely a result of its relatively high percentage of international investments, which by some benchmarks were down more than 20 percent last year.

She sidestepped questions about the recommendation that the state hire an independent asset allocation consultant - a move Dixon has opposed. Boykin said the state's investment decisions were not made "in a vacuum" and that the fund does receive "consultant-type input" in its decisions.

Pension experts interviewed yesterday said Maryland's increased investment in the stock market in recent years reflects a consistent trend among public pension plans nationwide.

Nicholas Greifer, manager of the Government Finance Officers Association Research and Consulting Center in Chicago, said asset allocations are "long-term strategies that you stick to."

But Joseph J. Masterson, vice president with Diversified Investment Advisors in Purchase, N.Y., said the typical asset allocation for pension funds is 60 percent of assets in stocks and 40 percent in bonds. "Seventy-plus percent is aggressive," he said.

Opinions were divided on the need for an outside adviser.

Michael Beczkowski, a financial analyst with Bolton Offutt Donovan Investment Consulting Group in Baltimore, said independent consultants can provide information about what other state programs are doing.

"Basically, you have an unbiased facilitator between the investment committee and the investment managers, and that helps eliminate a lot of conflict of interest," Beczkowski said.

But John Peterson, of Government FinanceGroup/ARD in Arlington, Va., said there is no guarantee that a pension plan's performance would be superior with an independent consultant. Peterson added that many pension plans investing in stocks took a hit in the past year.

The returns, he said, "will all be pretty dreadful for anyone in equities."

Sun staff writer Meredith Cohn contributed to this article.

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