How diverse investing hurt the pension fund

By Scott Mooneyham | Sep 03, 2013

RALEIGH -- Back in January, as some of the state's top business honchos held an annual economic forecast, a financial guru of some sort stood before the crowd and said, "If you don't own stuff in 2013, you will be missing the boat."

By stuff, this fellow meant commodities: investments in gold, oil, coal, timber, crops and livestock.

Unfortunately, he was wrong.

If someone had taken his advice, and bought commodities futures contracts in January that were due in July, that person likely would have lost money.

The larger commodities markets have been down over the course of 2013.

That doesn't mean that fellow is a bad financial adviser.

That's the life of those Wall Street types: Get it right 51 percent of the time, and you are gainfully employed; get it wrong 51 percent of the time, and you won't be for long; get it right 70 percent of the time, and you own a small island in the Caribbean.

This fellow, like a lot of the Wall Street crowd, was counting on the Federal Reserve to tighten the U.S. money supply and raise interest rates. Higher interest rates mean higher commodity prices.

So far, it hasn't happened.

This lesson in the cold, hard realities of the wonderful world of high finance was lost on a lot of North Carolina legislators this summer as they debated giving State Treasurer Janet Cowell more leeway in how she can invest the state's $80 billion pension fund.

Lawmakers had already liberalized the investing rules twice in recent years, allowing a higher percentage of the state employees pension fund to be put into non-traditional investments like commodities and hedge funds.

The two previous times, legislators agreed to Cowell's wishes with hardly a peep of opposition.

For whatever reasons, it didn't happen that way this year. Enough legislators engaged in enough hand-wringing to cause the legislation to be scaled back, making only marginal changes to the rules.

Still, quite a number of legislators hemmed and hawed about putting any brakes to the plan, repeating a zombie-like chant: "Diversity is safe, diversity is safe."

Those lawmakers failed to look back to see what previous rounds of diversity have gotten the pension fund.

If they had, what they might have seen is that Cowell and her investment staff, like those Wall Streeters, have been waiting for that interest rate rise and commodity price increase for three years.

In the meantime, its commodities holdings have lost money in just about every quarter. The last quarterly report issued by her office showed losses of 10 percent over three years.

Fortunately, the investments total only 3 percent of the fund. But 3 percent of $80 billion is $2.4 billion.

The losses also add up to more than those shown on paper. That $2 billion could have been parked in publicly-traded stocks during a time when the stock market enjoyed a big run.

But I have heard that investing diversity is the safest thing to do.