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Mossburg doesn't let facts get in the way of her conclusion

Marta Mossburg wrote in a recent Frederick News Post column that "people like easy answers" where "facts … often play a minor supporting role in our decision-making process." Ironically, she proves her point in a different column appearing the same day in The Sun ("General Assembly elevates the trivial, neglects pension reform," April 10) when she notes that Del. Andrew Serafini, a Washington County Republican, has a novel proposal in search of a problem: outsource the duties of the State Retirement System's Chief Investment Officer to a consultant — an idea the facts do not support.

For a fund the size of Maryland's — $37 billion — outsourcing the investment function does not make sense for at least two basic reasons: It would not reduce costs, and it wouldn't guarantee increased returns. Using the results of a study on outsourcing, the cost of outsourcing the CIO function for a fund the size of Maryland's would be multiples higher than the existing structure.

The higher costs associated with the outsourced CIO model would not come with a guarantee of higher returns. The asset allocation adopted by the Board of Trustees is a result of an annual study using current financial models and market assumptions, with input from an independent, third party investment consultant as well as the system's investment staff. Outsourcing this function can result in a less robust process and increase the risk profile of the fund.

Ms. Mossburg asserts that the state's performance is significantly lower than large mutual funds, and she provides examples of two mutual funds that outperformed the state pension system over the most recent decade. What she fails to do is conduct a performance attribution to determine why. The two mutual funds included in the article are predominantly invested in bonds. The last decade saw two periods of significant decline in the stock market, and a steady rise in bonds as yields fell to near historic lows. So naturally, a concentrated bond portfolio would outperform a more diversified portfolio. How easy it is to identify outperforming assets after the fact with the benefit of hindsight. In fact, Morningstar, a leading provider of independent investment research, comments that one of the funds included in the article "could struggle in relative terms when rates rise from their recent, near-historical lows."

The article also includes a reference recommending that the entire pension fund be indexed in an effort to reduce management fees (which Ms. Mossburg overstates by more than 50 percent) and guarantee an average investment return. While the retirement system uses indexing extensively in some asset classes, indexing the entire portfolio would require the elimination of five of the system's eight current classes, which are not fully investable on a passive basis. The elimination of these asset classes would reduce diversification, increase plan risk and lower expected returns.

As a financial planner as well as an elected official, it is completely understandable that Delegate Serafini would have a keen interest in the state pension system, but to characterize the pension system's investment staff as a "farm system for the big leagues" and lacking "the skill set to manage some of these complex and intricate [investment] strategies" just isn't borne out by the facts. The system's assets are externally managed with responsibility for overall investment strategy, due diligence and compliance oversight provided by a professional investment management team that has on average, more than 15 years of credentialed professional investment experience, with nearly a third of that in the private sector.

Thankfully, for our members, retirees and beneficiaries, the legislature let the facts play a major role in deciding that the proposal to outsource Maryland's investment oversight responsibility isn't one for the big leagues. I urge Ms. Mossburg to do the same: gather all of the facts before arriving at a conclusion, rather than the other way around.

R. Dean Kenderdine, Baltimore

The writer is executive director of the Maryland State Retirement and Pension System.

Copyright © 2015, The Baltimore Sun
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