Poli-ticks

Treasurer Magaziner is getting it done

By Arlene Violet
Posted 12/8/16

He may not be tooting his horn too publicly, but surely and certainly R.I. General Treasurer Seth Magaziner is making some bold moves. He fired First Southwest as a consultant. That company was …

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Poli-ticks

Treasurer Magaziner is getting it done

Posted

He may not be tooting his horn too publicly, but surely and certainly R.I. General Treasurer Seth Magaziner is making some bold moves. He fired First Southwest as a consultant. That company was involved in the 38 Studios debacle and was rehired by the state until Magaziner sent the advisor packing. The College Bound Fund was consistently posting low returns and now the college program is back on track with important changes involving yield and fees. The most gutsy recent move is the Treasurer’s decision to jettison Point Judith Private Equity Fund as soon as he can.

In a recent conversation, Treasurer Magaziner emphasized the difference between the private equity company Point Judith and other equity companies, and hedge funds. In the case of private equity funds, those companies control the contract. It is the norm for them to get 10 years of exclusivity and the right to extend one or 2 years beyond the contract at their call. Point Judith was engaged in 2007, two state treasurers ago, and it recently signaled its intention to extend the contract. The rate of return was a dismal -2.2 percent vs. the other private equity funds in the pension portfolio that returned 9 percent over the past 5 years. In order to replace Point Judith now, the state would have to find another suitor to substitute for the $5 million investment, and given the lackluster performance the pension fund would take a haircut of anywhere from 20 to 50 percent on that money. Mr. Magaziner is wisely choosing to take a loss of perhaps 5 percent over the next 2 years (although there could be a positive return) since it is far cheaper than a fire sale replacement for the state on that $5 million.

Relative to hedge funds the typical time to phase out of them is 6 to 12 months in order to prevent a steep loss by a sudden sell-off. The treasurer anticipates reducing the pension portfolio from the present 15 percent to 6 percent of the pension total by this summer. Hedge funds that are doing well will be retained and evaluated on an ongoing basis.

Perhaps the greatest judgement call Seth Magaziner has made is to initiate the “back to basics” program. After engaging consultants who studied the best case scenario for the state’s pension, Rhode Island will now look more like California, where “fancy” investments are not used. California, for example, has had great returns with index funds at a low cost. Mr. Magaziner is implementing exactly the same approach. Under the “back to basics plan” the largest investment in the state’s portfolio will be index funds. The collective fee on the index funds is approximately .02 percent, which is a dramatic change from what was being paid to hedge funds in years past.

Kudos should go to him for his leadership. Not only is he preserving the hard-earned contributions to the pension made by state workers and most teachers, but he is mitigating the risks to taxpayers who also have to contribute to the pension fund. It took some guts for him to balk at maintaining investment companies who were long on favors but short on returns. There’s a line in Shakespeare’s A Midsummer Night's Dream where the female protagonist is described as “little but she is fierce”. Mr. Magaziner may be soft-spoken but his actions speak louder than his words.

Arlene Violet is an attorney and former Rhode Island Attorney General.

Arlene Violet

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A lifelong Portsmouth resident, Jim graduated from Portsmouth High School in 1982 and earned a journalism degree from the University of Rhode Island in 1986. He's worked two different stints at East Bay Newspapers, for a total of 18 years with the company so far. When not running all over town bringing you the news from Portsmouth, Jim listens to lots and lots and lots of music, watches obscure silent films from the '20s and usually has three books going at once. He also loves to cook crazy New Orleans dishes for his wife of 25 years, Michelle, and their two sons, Jake and Max.