Luzerne County Councilman Rick Williams is pushing for a major change in how the county’s $215 million employee pension fund is invested, saying parking money in index funds could yield the same return and save $600,000 in annual fees to money managers.
He publicly pitched the proposal at a recent meeting of the county Retirement Board, which oversees the fund, driven partly by famed investor Warren Buffet’s suggestions in national media to buy low-cost index funds instead of paying active managers to try to beat the stock market.
Williams also pointed to Pennsylvania Treasurer Joe Torsella’s newly announced plans to transition the entire $2.4 billion in public equity investment holdings under the department’s control to a “passive investment strategy.”
Passive, or index-style, investments buy and hold all the stocks in a fund that mirrors a market index such as the Standard & Poor’s 500 or the Russell 3000, Torsella’s release said.
He described it as an increasingly popular approach expected to reduce investment risk and improve return to taxpayers by eliminating high management fees paid to outside firms that frequently underperform the market.
“We’re not at the racetrack,” Williams told the board.
Williams is not proposing eliminating the fund’s overall adviser, Morgan Stanley, which is paid an additional approximately $250,000, or 0.12 percent of the fund’s value. The adviser would be needed to ensure money is available to pay retirees and help the board select a diverse mix of index funds, he said.
Retirement Board member Brian Swetz said he understands the logic but worries the county would lose its ability to prepare for market drops if it gives up money managers who select customized investments.
“Yes, we don’t catch all of the upside, but we don’t have a year where we lose $20 million,” said Swetz, the county’s budget/finance division head. “It’s the downdrafts. Last year when we lost 2 percent, other places lost 10 percent.”
Board Solicitor Donald Karpowich said the board wanted Morgan Stanley to focus on investments that boost the fund but also attempt to insulate it from market volatility.
The fund had grown to $210 million in 2007 but dropped to $151.8 million before Morgan Stanley took over as pension adviser in September 2008, replacing Merrill Lynch.
“We lost $60 million overnight, and we never wanted to do that again,” Karpowich said. “We were in the market when we had Merrill Lynch, and we felt the highs and lows.”
The fund’s investment mix is currently 36 percent bonds, 32 percent stocks and 21 percent alternative investments, with the remaining 11 percent in cash set aside to cover ongoing expenses — mainly approximately $17 million in annual payouts to retirees, officials said.
Investment adviser Richard J. Hazzouri, of Morgan Stanley, told the board $39.5 million of the county pension already is invested in three index funds, and he’s preparing a recommendation to add a fourth in developed international equities.
“It’s not any sort of novelty for us,” Hazzouri said in reference to using index funds, but in conjunction with active managers.
Buffet built his fortune buying individual stocks, which is “counter to plowing money into an index fund,” Hazzouri said. Buffet also essentially has a private equity fund that invests in businesses with the ability to oversee and run them, as opposed to blindly putting money into an index, he noted.
Board members informally agreed to hold a work session to further discuss the matter in coming months and asked Hazzouri to broach the possibility of lowering money manager fees.
Williams said passive investing is worth considering because keeping $600,000 from fee savings in the fund could speed up efforts to end taxpayer subsidy to shore up the fund. More than $70 million in public funds have been pumped into the fund since 2002 to keep it stable, officials said. The county paid $8.7 million to the fund for 2016 and is projected to owe $9.6 million this year, Swetz said.