Monday, May 21, 2007

"Taxpayers are on the hook, and long-term liabilities quickly become current — no matter how ardently a legislative body might hope they won’t.”

A panic attack move into private equity?

May 21, 2007

By Robert Elder
Austin American-Statesman
Copyright 2007

Writing in the May 18 issue of Grant’s Interest Rate Observer, Dallas investor and state of Texas pension official Frederick “Shad” Rowe tees off on the leaders of the Teacher Retirement System of Texas pension fund.

Rowe examines the Texas teacher fund’s recently announced plans to move massive amounts of its holdings into private equity and out of publicly traded stocks. The strategy strikes him as the investment equivalent of a panic attack.

Rowe writes that the teacher fund is trying to juice returns by moving into so-called alternative investments (hedge funds, buyout firms, hard assets such as timber, toll roads) a little late in the game. Maybe even just in time for the private equity bubble to pop and the very stocks the teacher fund is selling to rise in value.

The $109 billion TRS is proposing to shift as much as 35 percent of its holdings into alternative investments, up from 3 percent now.

(Rowe notes that the Texas Pension Review board, which he chairs, has no authority over TRS investment strategy and that he’s writing as a private citizen.)

Of course, many pension funds are seeking higher returns in private equity; that’s partly what’s fueling that sector’s boom. But Rowe notes that the Texas teacher fund’s proposed asset mix is way out on the edge and may be an example of managing by looking into the rear view mirror at all those wonderful returns private equity provided in the past.

Increasing competition in private equity, and a growing backlog of deals looking to cash out, could severely depress future returns.

The teacher fund and its new investment chief, Britt Harris, may see themselves in the mold of David Swensen, the pioneering Yale University endowment manager.

“An experienced investor might suspect that TRS is coming late to the alternatives game,” that its investment shift “is really a desperate adjustment and that Britt Harris will not prove to the next David Swensen … but rather a wannabe who drags TRS into a deeper role,” Rowe writes.

“World-weary gamblers have an adage: Scared money never wins,” Rowe writes.

“While presenting the brightest public face possible, thoughtful pension fund professionals live with the gnawing reality that the assumptions of the pension world are consistently unrealistic… . Taxpayers are on the hook, and long-term liabilities quickly become current — no matter how ardently a legislative body might hope they won’t.”

© 2007 Austin American-Statesman: www.

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