Dumping the hedge funds

Foolish is the gambler that bets on things he or she knows nothing about.

The problem with complicated financial stuff like collateralized debt obligations, hedge funds and risky market bets is that very few people understand anything about them. That includes the whiz-kids that brought us the 2008 crash where pension funds lost their respective shirts. The good news is people are finally waking up to the fact that when it comes to using money to make more money: safe and simple is better than risky and impossibly complicated. The pension funds that are being conservative and making smart bets with safe investments are doing great. The Arizona Public Safety Personnel Retirement System fund exceeded projections for the 2014 fiscal year by earning almost $1 billion for tens of thousands of retired first responders, corrections officers and elected officials.

The Public Safety Personnel Retirement System fund exceeded projections for the 2014 fiscal year by earning almost $1 billion for tens of thousands of retired first responders, corrections officers and elected officials.

In the wake of steep losses during the Great Recession in 2008, the state’s public safety investment portfolio was carefully adjusted to minimize risk through a broad diversification across asset classes. Despite such a conservative portfolio, the fund’s $989 million gross of fees return reflects an outstanding 13.8 percent gain.

The strong risk-adjusted performance places the PSPRS fund within the top 6 percent of 55 comparable large public funds over a three-year period ending June 30, 2014, and within the top 11 percent over a 5-year period.

Because of this strategic planning and resulting performance, the PSPRS investment staff has gained recognition for restructuring a portfolio that is becoming a model for public pension fund portfolio efficiency and responsible asset management, including by the Journal of Asset Management and Benefits magazine.

“We are absolutely pleased with our return rates for the 2014 fiscal year,” said PSPRS Chief Investment Officer Ryan Parham. “Our staff and board have worked together to build a portfolio that ensures both dependable gains and security for Arizona’s current and future public safety retirees across the state.”

“Over the past decade we have sought to diversify the portfolio, and today the trust has a proven track record confirming it is more secure than ever and even only half as risky as traditional conservative portfolios,” said PSPRS Deputy Chief Investment Officer of Risk Mark Lundin. “We are both surpassing our assumed investment returns and minimizing the potential for losses in bad years.”

Since the so-called “tech bubble” stock market crash of 2002, the public safety pension portfolio has been adjusted to be almost five times less risky. PSPRS calculations indicate the current portfolio would have endured only 5.5 percent losses during the 2002 crash compared to the actual losses of 21.1 percent.

PSPRS investment staff responded to market volatility by seeking a moderate return investment strategy that is highly resistant to market fluctuations and adverse economic conditions, factors and other variables outside of the fund’s control.

“The investment strategy adopted by PSPRS is gaining national attention and serious consideration – even from public pension funds with much higher risk tolerance,” said Allan Martin, an independent consultant who assists six pension funds, including PSPRS. “Consistent and moderate returns over time are pulling in higher returns than high-risk strategies characterized by hot and cold years.”

The PSPRS investment team projected a conservative 7.85 percent return for the 2014 fiscal year.

The PSPRS trust has delivered positive results for more than 80 percent of the months in each of the last six, 12, 18, 24 and 30-month periods. This unusually high, positive performance ratio provides additional evidence of the effectiveness of the asset allocation strategy of minimizing the duration and depth of periods of underperformance.