The Blade Editorial: Protecting private equity
THE BLADE EDITORIAL BOARD
JUN 18, 2023 9:00 PM
The truth that “personnel is policy,” was on vivid display at the State Teachers Retirement System of Ohio Board meeting Thursday.
Gov. Mike DeWine’s newly appointed board member, G. Brent Bishop, is a polar opposite of the DeWine appointee he replaced, Wade Steen. (“Steen vs. DeWine,” June 11)
The result is an STRS investment plan which remains heavily reliant upon alternative investments with private equity and real estate fund managers.
Mr. Steen was leading the charge to curtail investments in high fee alternatives in favor of low cost index funds. Mr. Bishop, a private equity and real estate investment management executive, was vig-orous in defense of these investments, and he provided the vote needed to keep STRS heavily invested in private equity.
The faction of the STRS Board attempting to shift the investment portfolio to low cost index funds failed to make their strongest possible arguments.
The assumed annual rate of return STRS needs to meet its obligations is 7 percent.
The 30-year annualized rate of return for the Standard & Poor’s 500 index is 9.89 percent. Since the creation of the index in 1957, the annualized return is 10.1 percent.
Since 2010, the annualized return is 12.54 percent, and the Special Audit of STRS by the state shows the teachers retirement fund would have $90 billion more than it does with an S&P 500 index beginning in 2009.
It would also know what it owns and what the assets are worth. Mr. Steen and the STRS Board members elected on a reform platform don’t trust the valuations provided by the private equity partners.
“As a limited partner, STRS does not value its PE funds. It must rely on subjective values each fund’s general partners develop, which could be subject to overvaluation bias.
“Concerns about this bias have been a longstanding issue not just for STRS, but for all those investing in PE funds,” is how Auditor of State Keith Faber put it in his report.
Mr. Faber is correct; the concern is for all those investing in PE funds, which is why the U.S. Securities and Exchange Commission has expressed concerns about asset valuations and conflicts of interest and is set to vote on new oversight rules this year to address the issue.
The superior returns from index funds make it clear STRS beneficiaries would be much better served by avoiding private equity investments. But, index investments would not allow for STRS investment staff bonuses.
In fact, indexing the portfolio would make investment staff unnecessary. The STRS board voted to increase performance bonuses for their investment staff by 30 percent, setting aside more than 11million for the extra pay. The board also began to strategize how to get Ohio lawmakers to force school districts to put more money in the pension, claiming “we can’t invest our way out of this problem.”
This is why STRS investment failure is a problem for every taxpayer in Ohio.
Those of you who followed us on our old website know that there was a lot of information there. We are in the process of moving older posts, that we want to preserve and share with new Watchdogs, from our old website to our new website. This is one of those posts.