Md. pension system girds for market turmoil

Committee sets policy on `red flag' investments

July 13, 2002|By William Patalon III | William Patalon III,SUN STAFF

Wary of accounting scandals and smarting from losses during what was already the worst stock market in decades, the Maryland pension system is searching for ways to protect itself from future stock market disasters.

Members of the $27 billion pension system's investment committee spent much of yesterday's regularly scheduled meeting exploring ways to reduce the fallout from any future scandals.

"As an old Navy guy, I can tell you there are more torpedoes in the water out there," said Wayne H. Shaner, one of the investment committee's public advisers. "This is the worst financial environment we've been in since 1929."

The state pension system came under scrutiny last year after an independent rating group said Maryland's fund was lagging far behind its peers. In February, the pension system fired one of its outside money managers after it learned that the professional investor was under investigation by the federal Securities and Exchange Commission,

In part, yesterday's discussion came out a $52 million loss the state fund incurred from its WorldCom Inc. stock and bond holdings. Maryland's pension fund jettisoned the last of its WorldCom stock May 14, about a month and a half before that company's accounting scandal surfaced. Even so, WorldCom's stock had dropped from $15 a share at the first of the year to a May 14 close of $1.25.

State officials said the system still holds WorldCom bonds.

The WorldCom loss to date accounts for less than one-fifth of 1 percent of the pension fund's overall value, said spokesman Joseph M. Coale. But members of the investment committee referred to the loss several times during yesterday's meeting and spent considerable time debating what "red flags" might warn it of trouble ahead with other investments.

A bond that loses investment-grade rating - dropping to junk status - is a red flag, investment committee members decided. Any such bond can no longer be held by the state-managed bond fund, although some of the outside bond-fund managers can still hold them, the members decided.

Chief Investment Officer Carol Bokyin said retirees wouldn't be comfortable knowing junk bonds were included in the state's investment-grade bond fund.

Determining what constitutes a "red flag" for stocks was a tougher proposition. Many such stocks are - as WorldCom had been - members of indices tracked by index mutual fund managers. And just because a company appears to have problems, selling it before it is removed from an index violates the index-investing strategy, Boykin and several committee members pointed out.

One thing public pension funds such as Maryland's can do is to join with peers to pressure corporate executives to run public companies in the interest of shareholders, instead of for their own betterment, said Sarah Teslik, the executive director of the Council of Institutional Investors who made a presentation to the investment committee yesterday. Such pressure might prompt companies to stop their financial shenanigans, she said.

That won't be easy to achieve because the financial system gives companies lots of room to maneuver, often to the detriment of shareholders, including pension funds.

"Shareholders need to keep looking for ways to act like the owners they are," Teslik said.

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