By Michael Norton/State House News Service
Boston, Mass. - The state’s pension fund incurred losses worse than 48 of the 55 local funds last year, as some of the smallest public pension funds in Massachusetts, including five without investment consultants, were among the best-performing.
While long-term returns at the Pension Reserves Investment Trust place it among the top-performing in the state, the big Boston-based fund, which relies heavily on investment consultants and fund managers, posted a loss of 29.5 percent last year, compared to a negative 26.3 percent median return for 55 systems that invested on their own.
The PRIT Fund, overseen by professional staff and a board chaired by Treasurer Tim Cahill, invests all pension assets of 49 local retirement systems, in part due to a 2007 law aimed at bringing about property tax relief by placing underperforming local funds within the state fund. That law forced Lynn, Methuen and Southbridge into the PRIT Fund last year, while Arlington, Gloucester, Milford, Pittsfield and Waltham joined PRIT voluntarily.
But a June report of the Public Employee Retirement Administration Commission concludes the latest data means no retirement boards will be ordered to transfer assets to PRIT this year, with many local funds outperforming PRIT last year and a handful posting better long-term gains than PRIT. Placement in the state fund is based on the funding levels of local systems and the average rates of return, as compared to PRIT, over the last 10 years.
The 2008 return data, compiled in the PERAC report, shows smaller systems, those with assets ranging from $7.5 million to $130 million, performed best during 2008, when the financial markets were battered.
The best-performing systems last year had “well-above-average cash positions,” above-average investments in bonds and made strategic moves to reduce exposure to riskier investments, according to the PERAC report.
“We’ve beaten them handily the last couple of years,” Malden Retirement Board Director Kevin Morrison said, referring to PRIT. “Not going into the PRIT Fund really saved us, not that we had an inkling to do that.”
Malden’s 4.9 percent 10-year return on its $150 million fund is slightly better than PRIT’s 4.65 percent and its 9.58 return rate since inception also edges PRIT’s 9.41 percent, according to PERAC’s report.
According to the report, “For several years, the PRIT Fund’s size had enabled it to invest meaningfully and efficiently in a wider range of asset classes than many of the local systems, and its clout enabled it to gain access to the top tier of managers in these nontraditional asset classes, particularly in alternative investments.” Calling 2008 “a trend-changing year,” the report noted “smaller and mid-sized funds generally held up better than their larger counterparts” and said PRIT investments in international equity, emerging markets and hedge funds hurt in 2008.
“In the bull market that helped them,” PERAC Executive Director Joseph Connarton said, referring to PRIM’s investment strategy. “In the bear market, not so much.”
The PRIT Fund shed about $15 billion in assets during 2008, its balance falling to about $38 billion by year's end.
"PRIM is focused on a long term investment strategy and has been among the top performing pension funds nationally, over the past decade," Michael Travaglini, executive director of the Pension Reserves Investment Management Board, which oversees PRIT, said in a statement. "Because of the historic and unprecedented economic climate in 2008, some public pension funds with allocations in cash and bonds outperformed more diversified funds like PRIT. With 2008, behind us, we are confident that PRIM's allocation strategy is the most appropriate going forward."
The best-performing fund in 2008 was the $60 million Northampton Retirement Board fund, which covers the benefits of 683 active public employees and 338 retirees. Its 19.3 percent loss in 2008 was the smallest in the state.
“We’ve done consistently well and that’s without doing some of the more risky investment types,” said Christopher Pile, city finance director and chair of the board. “We didn’t get into hedge fund or any of that kind of stuff.”
Pile said the board has about $2 million invested with PRIT, but wants to remain independent from the state fund. “We don’t feel any pressure to put any more in there obviously since the state pension fund did far worse than we did,” he said. “I think we’ll just stick with what we’re doing.”
Investments in cash and bonds helped insulate Northampton from losses that other funds took in riskier categories, such as emerging markets and international equities, but the local fund is moving back towards stocks again. Pile credited the advice of the DeBurlo Group, a fund consultant that also advised Malden retirement officials.
Forty-one local retirement systems invested all their assets with PRIT at the start of 2008 and eight more joined the PRIT fund during the year, some of which were forced into the state fund under the 2007 law aimed at reducing local expenses and lowering property tax burdens by forcing “underperforming” funds into PRIT.
After Northampton, the best-performing Massachusetts public funds during 2008 were Greater Lawrence (-20.13), Malden (-20.47), Marlborough (-20.53), Norwood (-20.57), North Adams (-21.2), Braintree (-21.35), Adams (-21.71), West Springfield (-21.9), Massachusetts Water Resources Authority (-22.29), and Medford (-22.47).
A conservative approach, with an above-average allocation to bonds, helped protect Marlborough from deeper losses last year, said Margaret Shea, Marlborough Retirement Board director. “We’re a little more conservative. At least for this year it helped us,” she said, adding, “It’s hard to brag about when we still lost 20 percent.”
The two-year-old pension law means there’s always a possibility that the Marlborough system will be “swallowed up” by the state board, but local officials are comfortable with their approach to investing and have so far resisted the opportunity to allow the state fund to invest local fund assets, Shea said.
“Our board has always had a more conservative outlook,” Shea said. “It’s what they’re comfortable with. For that reason they haven’t initiated the process to transfer the money to PRIT.”
Since 1985, the PRIT Fund has returned an average of 9.41 percent per year, outpacing the vast majority of local funds, which registered average annual returns of between 7 and 9 percent.
Local funds with higher return rates since inception include Wellesley (9.93), Weymouth (9.64), Needham (9.6), Malden (9.58), and Wakefield (9.53), according to the PERAC report.
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