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Friday, March 25, 2011

Wheeler keeps shuckin' and jivin'

Oregon's state treasurer Ted Wheeler's optometrist is doing an excellent job: Wheeler can read handwriting on the wall. Now he's ordering his "Masters of the Universe" investment advisor staff to file public financial statements with the state ethics commission. If he hadn't done it, the Legislature was probably going to require them to do it, anyway.

Basic financial disclosure doesn't do much, though, to cure the ethical problems created when these employees enjoy lavish travel and entertainment from private parties in connection with their official duties. And besides, the ethics commission has few resources and precious little appetite for controversy.

The only way to cure the problems is to stop the unhealthy practices. There are business-like ways to evaluate and monitor state investments. Golf junkets, luaus, and five-star restaurant blowouts are not part of that picture. And while they continue, the investigation into some of Wheeler's Masters continues. As it should.

Comments (7)

The solution is not to try a different polish on the turd, it's to get rid of the turd. The whole job of investment manager for a state is fraudulent, as there is no evidence that any directed funds manager has any advantage over a balanced portfolio algorithm that adjusts holdings once a year.

As long as we have these guys, we are talking about nothing but conflict of interest because their whole job is a conflict of interest. The one who shows up every day, puts his feet on the desk and says, "nope, not trading today, or tomorrow, or any other day until January" would be fired, although he would be the only one actually honoring his duty to act in the best interests of the fund owners. You hire clowns to " manage investments," you're going to have your investments managed, and they are going to do everything possible to keep anyone from noticing that the real fraud is what they do every day at work, not the petty fraud of enjoying the lap dances at the luaus.

I don't want anyone to get the impression that I'm spending a lot of time responding to these issues, but I want to set the record straight. Although the Oregonian has not seen fit to mention it, I pledged support for this legislation last summer. We have been asked by the sponsor to inform the discussion, and I continue to support it and ask that the legislature pass it. That said, Jack, I would encourage you to actually look at the SEI. I think its weak compared to the comprehensive quarterly disclosures required by Treasury officials that include all assets, all investments, etc. for all officers and their families. Those quarterly disclosures go not only to the Treasury auditor (the O did mention this) but they also go to the Sec. of State Audit Division and the Dept. of Justice. (The O chose not to mention that...)

George - I've seen you comment before that Treasury is a fraud. Are you aware that every year an outside firm analyzes the value of active management vs. just dumping the funds into passive index funds? (We do use some index funds for domestic equities and fixed income investments). Our outperformance of the S&P comes from the active portion of our portfolio. That is why PERS is in the top 11% of pension funds over the last 5 years. The private equity portion of the portfolio has been the top performer in recent years.

Ted - I looked on the Treasury website and could not find a link to this report. Can you point me to it? Thanks,

Thanks, Bill Harbaugh, UO Econ Dept

To clarify - the active management report.

A few months ago WSJ had an well researched article on the performance differences between large portfolios (diversification) with different levels of activity. They then compared that with portfolios that had 3 or 4 funds of different types with little trading activity. They also considered the risk factors in the various scenarios. They also considered the holding length of time.

The conclusion was that the smaller portfolios with less risk was within 1% to 2% in performance. And that both the small/less risk and larger portfolios all outperformed the S&P. And that for many people the "risk factor" is extremely important, especially as the last three years has proven. Considering that Wheeler and Co. is playing with public employee's retirement funds the risk factor has to be strongly considered. But I guess you don't if you can just go to the taxpayers to make up the mandated difference.

I tend to agree with George's thinking. And I have many friends in trading, from sitting tight to day trading. Almost always the less trading wins out and excessive diversification isn't all that it is cracked up to be.

George and Lee are on the right track. A diversified re-balanced portfolio of index funds will beat the S&P500. But then how would we be able to go with KKR etc.

Treasurer Wheeler, thank you for addressing the comment that you've noticed before. And by how much will your actively managed portfolio outperform the indices by this year, and next year, and the year after?

Recall that every year, some funds or other always wind up on top, it's the law of chance. Unless you have broken a mystic code, the fact that your particular group of guessers have been fortunate of late means nothing.

If you wish to claim credit for exceeding the market indices of late, may we expect your "advisors" to make up any shortfalls in the future? After all, if they are, by dint of their extraordinary acumen, able to beat the market, then any year in which they do not is evidence of an intentional failure to perform is it not?

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