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Investments in big banks, pawn shops and rolling papers helped boost public safety workers’ underfunded pensions this past calendar years, according to newly released figures.
After recording middling returns in recent years, the Police & Fire Pension Fund (P&F) notched an 11.93 percent gain across its portfolio in 2017, with some profits from real estate and private equity still unrealized. The gains were largely powered by Wall Street’s big earnings as the Trump administration hacks away at taxes and regulations.
Outperforming their annual target of a 7.75 percent return, managers started to catch up on past underfunding and mismanagement that have left the public safety pension fund with barely half of the money it has promised to current cops and firemen. It’s still far behind: Since December 2014, the fund has returned 5.73 percent annually, according to the latest figures.
“We made $76 million” in 2017, David Moran, one of the fund’s advisors, reported this week. “We’re going back to 2012 – 13 returns.” Once the numbers are finalized, he estimates, the city’s returns might rise to 15.72 percent, including alternative investments.
The big returns that P&F posted come as alders decide whether to take a $250 million gamble on New Haven’s future fiscal health. Betting that money managers can make more on the stock market than banks will charge in interest, officials are seeking aldermanic approval to bond out $250 million to pay down unfunded liabilities in a second pension fund, City Employee Retirement Fund (CERF). (The state manages the pension for the Board of Education’s teachers.) Under the current proposal, which is still in the early stages, P&F wouldn’t see any additional funding.
Controller Daryl Jones said the city will reap a number of benefits from putting the borrowed money in just one pension. If CERF is fully funded, meeting about 85 percent of its obligations, then the city’s credit will look better to ratings agencies and the annual budget can free up cash that’s now going towards pensions, Jones explained.
To make the gamble pay off, the market would have to beat the bank’s interest charges, which Jones estimates will come in around 4.7 percent.
The police and fire unions have asked Jones if the city wouldn’t look better if both of its pensions were closer to fully funded, rather than keeping a gap between the two. Patrick Cannon, a representative on the pension board, also asked if the significant borrowing might trigger state oversight through the Municipal Accountability Review Board.
Jones said he’d checked with counsel and didn’t think it was likely. But because he doesn’t want to give up control to the state, he said he’d ask again.
The Elm City’s Portfolio
Trustees who oversee P&F gathered in the mayor’s conference room early on Thursday morning to hear about how the fund has fared, especially in the recent market correction that prompted skittish investors to pull their money out.
Currently the P&F fund has hired nine firms to pick its stocks, each of which focuses on just one segment of the market. One company, for instance, focuses just on small companies that are growing at a rapid pace; another focuses on big brands outside the United States. Last year the top-performing firm pulled in 33.91 percent on its sector, while the bottom one earned 7.49 percent.
To find out more about which individual companies were powering the stock market returns, the Independent matched public filings with financial records. By calculating how much the pension gives each firm and how much the firm then invests in each of its top stocks, we calculated a rough estimate for how much P&F invests in several companies.
Among the top holdings are:
- $2.82 million in JPMorgan Chase & Co.’s investment accounts and credit cards
- $2.67 million in Berkshire Hathaway’s many investments
- $2.64 million in Bank of America Corp.’s bank accounts and loans
- $1.93 million in Citigroup Inc.’s investment accounts
- $1.56 million in Goldman Sachs Group’s investment accounts
- $1.29 million in Fifth Third Bank’s accounts and loans
- $1.21 million in Schweitzer-Mauduit International’s tobacco rolling papers
- $1.20 million in Gildan’s tee-shirts and sweat-pants
- $1.19 million in FirstCash’s pawn shops and payday loans
- $1.08 million in Aetna’s health insurance
- $1.04 million in Syneos Health Inc.’s biopharmaceutical research
- $1.04 million in McKesson Corp.’s prescription pills
- $1.04 million in Biogen’s health treatments
- $1.04 million in Prudential Financial’s life insurance
- $1.04 million in TCF Financial Corp’s bank accounts
Other significant holdings, at firms that have been given smaller sums to invest, include:
- $600,000 in Tencent Holdings Ltd.’s mobile games and social media in China
- $550,000 in Keyence Corp.’s lasers and sensors
- $440,000 in PGT Innovation’s hurricane-proof windows
- $430,000 in Quanex’s metal windows and doors
- $340,000 in Banco Santander SA’s bank accounts in Spain
- $330,000 in Samsung Electronics Ltd.’s smartphones
- $330,000 in Honda Motor Co. Ltd.’s cars
- $310,000 in Trex Co. Inc.’s outdoor decks
- $280,000 in GrubHub’s food delivery
- $280,000 in Pfizer’s prescription pills
- $270,000 in Lennox International’s refrigerators and air conditioners
- $270,000 in Cintas Corporation’s uniforms and office supplies
- $250,000 in Mediadata Solutions’s clinical trials software
- $240,000 in Agricultural Bank of China’s bank accounts
- $240,000 in Taiwan Semiconductor’s electronic circuits
These figures represent the minimum holdings at the end of last year. Firms routinely disclose their top 10 holdings, which we used to calculate these estimates; there may be duplicates further down their balance sheets that we didn’t pick up on.
P&F’s advisors did not respond to emails asking them to confirm that the Independent’s estimates aligned with their records.
At the pension directors’ meeting, the advisors did explain why big banks make up such a big portion of the fund.
“With the financial companies, we were thinking there’d be a trifecta: higher interest rates, which mean banks make more money; a less onerous regulatory system, which we got yesterday [with reversals to Dodd-Frank]; and tax reform, which they were paying some of the highest rates,” said Joseph Matthews, the fund’s other advisor. “Those three came together.”
Active Management
Some commenters on the Independent have recently questioned why P&F needed to hire money managers to choose all those stocks. The firms actively watch the fund’s equities, trying to ride to the top in good times and cover their losses in bad. But the managers also take a cut of the profits.
P&F’s advisors said the low-cost option looks good in a bull market, when almost anyone can pick winners, but their expertise is especially needed when the market nosedives.
Just in the past quarter, as uncertainty swelled around the Federal Reserve’s climbing interest rates, a nuclear standoff with North Korea, and the fallout from indictments of the Trump campaign, investors got skittish and started pulling money out of both stocks and bonds. Usually, people swap between the two, but the volatility caused a rare double whammy.
“During the month of January, there was a little bit of euphoria and then a precipitous drop. Anxiety kicked in, and emotion got in the way,” Matthews said. “We were due for a correction, and it happened. The good news is it happened very quickly, it was violent, and we made most of it back.”
In the last three months, bonds, in particular, suffered. At the lowest point of the correction, the index was down 8 – 10 percent, Moran said, a major drop for a stable investment that acts as a “ballast” to the whole fund. But the three firms were able to track back up. “They did a good job of playing defense,” he said. As bonds took a 2.09 percent hit across the board over the last quarter, the money managers for P&F roughly kept in line: Western Asset Management lost 2.54 percent, Cincinnati Asset Management lost 2.09 percent and Mutual of America Capital Management lost 2.00 percent, according to the fund’s numbers.
And even when the markets are flush with cash, a good money manager can far exceed competitors. One of New Haven’s contracted hedge funds, Alkeon Capital Management, based in New York, brought in 29.91 percent last year.
“With a passive index, you hope that, 30 years later, you have a lot of money, but in between, it’s a lot of bumpy roads,” Moran said. And that’s exactly where an active manager kicks in. “Volatility is one of the best ways to make money,” he added.
But the city’s other hedge fund shows how active managers can go astray. GrayCo was recently fined and suspended by the U.S. Securities & Exchange Commission. Its president, Larry Gray, who once advised New Haven’s where to invest, was accused of fraud after he directed Atlanta’s municipal pension to invest in a risky alternative fund against protections in state law.
New Haven’s P&F is still drawing down $11.37 million that’s tied up with the same risky fund, and it has another $2.22 million invested in the Houston-based Capital Point Partners, a company that gave Gray a loan.
How Others Fare
While P&F is now climbing out of the hole that Gray left, it’s still got a long way to go. While its final numbers aren’t in, if the city meets gets what the advisors expect, they’ll edge out some larger pensions that have much more money to put in risky alternatives to stocks and bonds.
CalPERS, the largest pension fund in the country, earned a 15.7 percent return on its $350 billion portfolio. Its stocks earned 24.0 percent, a couple points ahead of New Haven’s 19.6 percent.
One scale down, Connecticut earned 14.38 percent on its fund for teachers, 14.32 percent on its fund for other state employees, and 13.05 percent on its fund for municipal employees.
Vermont’s fund for municipal employees brought in 14.1 percent, and Maine, doing even better, brought in 15.8 percent on its portfolio.
To compare to another city, Greenwich scored 15.82 percent on its portfolio.