Pension fund is being run better than it may seem

November 04, 2001

IT WAS only a year ago that state Treasurer Richard N. Dixon was getting hearty congratulations for his management of Maryland's pension fund - mostly from himself, it's true, but there were real results to boast about.

Thanks to big gains in stock market investments, the state's retirement system was deemed fully funded for the first time since it was overhauled in 1979.

But now Dixon is in dutch. Stocks have reversed some of the gains they made in the 1990s; billions have disappeared from the pension pool; the system is no longer fully funded; and the General Assembly wants answers.

The first and obvious conclusion from the pension spat is that Dixon really does need to follow the Assembly's advice and hire a consultant to help allocate investments among stocks and bonds.

To improve results? Sure, but also to have somebody to blame when legislators get queasy about stock market air pockets.

It's hard to be calm when $3 billion evaporates from the public till. But the facts are that stocks rise more than they fall over time, that they do go down sometimes, sometimes a lot, and that you have to suffer the downdrafts to hitch a ride on the ascending thermals.

Part of Dixon's problem is that he has done a terrible job of educating legislators and state employees about stocks' downside.

Hanging over the fireplace of every American brokerage parlor, hand-stitched in linen by 10-year-old girls, are the timeless words, "Past performance does not guarantee future results."

A former stockbroker, Dixon knows this by heart. But here he is, speaking with a reporter about the pension fund in June 2000: "People say the stock market goes up and down. That's not true. The market goes up - particularly when you invest in quality."

The stock market has not gone up recently.

The dot-com disaster, the economic slowdown and lately the terrorist attacks have caused the worst U.S. stock performance in a decade. No institutional investors have escaped the damage, but it looks as if Maryland's pension fund did more poorly than most.

For the year ended June 30, the fund produced an investment loss of 9.4 percent, cutting its value to $29.5 billion. According to Wilshire Associates, Maryland's result was the worst for the period among 38 big public pension funds.

Most of the loss stemmed from a 17 percent plunge in Maryland's stock investments, and Dixon is getting beat up for putting what the legislature's Office of Policy Analysis implies is an excessive portion of assets in stocks.

But things may not be as bad as they seem.

Yes, Maryland's fund did lose 9.4 percent in value, but that's not hugely worse than the pain of its pension peers. The Virginia Retirement System booked a 7.4 percent loss for the year ended in June, and California's pension system lost 7.2 percent in the same period.

The Wilshire study that slammed Maryland, part of something called the Trust Universe Comparison Service, is mysteriously vague. Wilshire refuses to identify the other 37 pension funds that supposedly did better than Maryland.

Also, Maryland is not as tied to stocks as the legislature suggests. The Office of Policy Analysis says Dixon had 72.3 percent of the system's assets in equities, the Wall Street term for stocks. Problem is, that includes real estate holdings.

Real estate and stocks aren't the same thing. Nobody else categorizes assets this way. If you take out the real estate, Maryland's stock exposure was 67 percent, still high but not out of bounds and less than what other systems hold.

In 1999, stock ownership was 64 percent in California's main pension system, 70 percent in California's teachers plan, 71 percent in the Florida Retirement System and 75 percent in New York's teachers plan, according to a federal study.

Like Maryland, each of those funds held another 2 percent to 5 percent of its investments in real estate.

Dixon is no Robert Citron, the Orange County, Calif., treasurer whose bad bet on bond derivatives drove the county into bankruptcy in 1994. But neither is he Louis Goldstein, the late Maryland comptroller whose brilliant advice allowed the pension fund to sidestep the 1987 stock crash. Nor is he Warren Buffett.

The best measure of any money manager is his or her long-term record. Dixon's is mediocre. He took over as treasurer in 1996, and over the past five years Maryland's pension fund has generated average annual returns of 8.67 percent, far less than the 12 percent gained by top pension performers.

One year of below-average returns is routine. Five years means there are issues.

But the solution is not to dump stocks, as some are suggesting. The problem is the kind of stocks Team Dixon is buying, not the amount.

That $400 million in Cisco shares the state held in 2000? Didn't turn out so well.

Maryland retirees were heavily exposed to other tech stocks, too. On June 30, 2000, the most recent point for which portfolio breakdowns are available, the state's top 10 holdings included not only Cisco but also Microsoft, Intel, Oracle, Vodafone, IBM and Nortel. All except IBM have fallen sharply.

If Dixon had put the money in low-risk Treasury bills and Fannie Mae bonds instead, the General Assembly might be happy now. But they wouldn't be happy three years from now.

Dixon is supposed to produce an average annual return of 8 percent. To hit that, there's no other place to be but stocks.

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