Thanks to the steady climb in world stock markets, New Mexico pension fund and investment managers are now sitting on an asset trove larger than many developing countries.
As of Sept. 30, the public pension and endowments funds in New Mexico reached almost $50 billion, and that number is surely higher today as the stock market climbed another 6 percent in the last quarter of 2017.
Taken together, the assets are larger than many reserve funds in the countries of New Zealand, Chile, Ireland, Peru, Malaysia and Brunei, according to the Sovereign Wealth Fund Institute, which keeps track of such things.
With that growth comes more scrutiny and more demand for transparency than ever before. Perhaps for the first time, lawmakers and others are asking questions about where the money is going and how much is paid in fees.
In the last fiscal year, for instance, the funds paid out a combined $475 million in management and performance fees to investment firms and consultants, most of whom are outside New Mexico. Whether all of this money was well spent remains open to debate. Fund managers are being asked to justify these costs, which is a very good thing.
To say there is $50 billion sitting in one pot is not accurate. In reality, there are several pension and investment funds in the state each with independent boards, investment strategies and fiduciary obligations.
The two large state pension funds, for instance, do not necessarily have a mandate to build assets, but to ensure solvency so future generations of teachers, judges, law enforcement officers and state employees will receive the retirement distributions promised. Making money in stocks, bonds and mutual funds is one of the paths to achieve that goal.
The appointed State Investment Council is charged with managing the two so-called permanent funds, the Land Grant Permanent Fund and the Severance Tax Permanent Fund. The total assets of both funds now stands at $23 billion, up from $15 billion in 2008.
The value of the four largest funds in the state — the two permanent funds and the two pension funds — has grown by $12.6 billion, a 34 percent gain over the past five years, according to the Legislative Finance Committee.
In the last half of 2017, for instance, the SIC managers as well as board members and managers from the Education Retirement Board and the Public Employees Retirement Association went on informational visits around the state and have been answering more questions about their funds from the public and the media.
There also are fund reports and web dashboards. The Legislative Finance Committee also publishes a one-stop summary of all the state investments and how they fared, as well as what they spent on fees and how those fees compare to industry norms.
Here is a primer on the four largest state investment funds:
• The Land Grant Permanent Fund, with assets over $17 billion, was created as a way to preserve the gift of land granted to New Mexico when it became a state. The money generated from these lands and associated minerals were designated to benefit specific schools and universities as well as the general state government operations.
• The Severance Tax Permanent Fund, with assets over $5 billion, was originally used to repay bonds for capital projects from taxes on natural resources, largely oil and gas. But when there was excess money above and beyond the repayments starting in 1973, the Legislature created the fund to invest the balance of the dollars.
Distributions from both pots of money have certain restrictions and are set by law with a portion going to pay for day-to-day government operations, but the bulk reserved for future generations when there are no more natural resources to tax. In the most recent year, some 14.7 percent of the $6 billion general fund came from these endowments.
• The Public Employee Retirement Association of New Mexico is actually an umbrella association that manages 31 retirement plans for state city and county employees, including police, firefighters, judges, legislators and as well as special districts and housing authorities. The fund now has assets of over $15 billion, and has grown more than 9 percent over the year as well as paying out a $1 billion a year in benefits to 39,000 retirees.
• The Educational Retire-ment Board has assets of almost $13 billion and is paying benefits to 46,000 retirees, teachers, administrators, college faculty and staff.
By objective measures, the funds have done relatively well in the short term, but have lagged similar public funds from other states over a 10-year period.
According to the LFC report, only the ERB is near the average of its peers over the past 10 years while PERA and the Severance Tax Fund are at the bottom 10 percent in terms of performance.
PERA managers say they have a lower return because they are less invested in equities, a policy its board has adopted to sooth volatility and it doesn’t anticipate changes.
As far as fees go, there is also a wide range of formulas for reimbursements and the numbers are now more accessible to the public.
In fiscal year 2017, for instance, the LFC reports:
• The SIC paid $135 million in management fees for both funds (56 basis points) and $76.7 million in performance fees.
• ERB paid $99 million in management fees (65 basis points) and $63 million in performance fees.
• PERA paid $68 million in management fees (41 basis points) and $34 million in performance fees.
The ERB has paid special attention to the fees it pays and has switched to a more passive investment style, even taking the management of some domestic bond and equity portfolios in house to manage with its own employees instead of paying Wall Street firms.
PERA has also moved to more passive equity funds in some cases and worked to reduce what it pays for management as well as holding its advisers more accountable for returns.
Many argue there is still more to be done, and that some of the funds are being just too smart, holding specialty investments like land , timber, currencies that are expensive to manage and not easy to trade. The SIC also places money in startup businesses in exchange for equity in those firms, which is paid back when a firm goes public or gets sold.
Can a fund that holds $10 billion or $20 billion just lock in passive index funds or set an allocation of 70 percent stocks and 30 percent bonds? Those are the questions raised and answered at recent legislative hearings
The real question it seems after 2017 is not how best to pile into the winners, but how to take money off the table and reduce exposure to volatile equities. Those who look at long-term returns say avoiding bad years with big losses is more important for performance than getting in on the gains.
The more you have invested, the more you lose — and it can be a long way back if the $50 billion now held by state pension and endowment funds were to drop 20 percent to 30 percent.
And faster than you can say, “Hey, can you tell me again how Bitcoin works,” that drop will come.
Contact Bruce Krasnow at email@example.com.