Reversing its old policy of paying stock-pickers millions of dollars a year to try to beat the market, the Pennsylvania Treasury plans to fire private investment firms that handle $1 billion in parents' college savings investments, driver's license and lottery funds, and other state accounts.
State Treasurer Joe Torsella plans to announce the cuts Monday. In January his predecessor, Timothy Reese, similarly fired managers handling $1.3 billion in Treasury-run insurance accounts. Like Reese, Torsella plans to tell Treasury employees to put the money in exchange-traded funds that track the S&P 500 and other popular stock indexes.
Torsella figures the switch will shave $5 million a year from Treasury fees. The highest paid of several firms that are to be fired, Philadelphia-based Swarthmore Group, collected $1.26 million in fiscal 2016 for investing around $160 million in public money in stocks -- even though it posted returns 5 percentage points below its benchmark target, the S&P 500.
Swarthmore's founder and chairman, James Nevels, also chairs the Federal Reserve Bank of Philadelphia (he formerly headed the boards of Hershey Co. and the Hershey Trust.) Swarthmore president Glenn Becker is a trustee and past chairman of the Pennsylvania State Employees' Retirement System (SERS). Swarthmore officials did not return calls seeking comment.
But fees are only part of the equation, I reminded Torsella. What good are low fees if you also collect only low returns? Did he review how much better or worse the funds would have performed if they'd been in indexes all along?
The treasurer didn't have the kind of detailed graphs beloved of investment sales folks and advisory firms. It's "tricky" to compare a shifting portfolio of funds with benchmarks over time, he insisted.
Such estimates are, for Torsella, beside the point. The treasurer is a believer in the John C. Bogle-Burton Malkiel school of stock-picking. That means he is pessimistic about the value of human buy and sell orders, and believes the most mortals can hope for over time is to mimic the performance of the familiar stock indexes, minus the lowest fees you can find.
Torsella noted it's tough to find private managers who consistently beat the S&P 500 and other stock indexes.
And why take the risk, he said. "We're investing families' college savings, and the commonwealth's money. We don’t think people are expecting us to gamble and beat the markets."
Echoing Bogle, founder of Vanguard Group, Torsella added: "We expect to capture the underlying returns of the assets and minimize the cost we have to do it. The factor we can control is cost."
Torsella isn't ready to fire the state's bond and "alternative asset" managers. He says he's still reviewing whether index funds can match or beat those investments, with lower fees.
The Treasury controls billions; the state workers' (SERS) and public school (PSERS) pension systems control tens of billions. They continue to employ hundreds of outside managers but have moved more of their stock investments to indexed accounts.
Gov. Wolf has said he'd like to see the pension systems go further in dropping private managers. That would require support from legislators and worker and retiree groups who are also represented on the pension boards.
I asked if Torsella was also trying to distance state investment decisions from fund managers, to avoid the conflicts of interest that have come out in federal indictments against two of his predecessors.
Rob McCord pleaded guilty to extorting campaign contributions from state investment contractors; Barbara Hafer is scheduled for trial in June on charges of lying to the FBI about payments from an investment contractor.
"We obviously think this is part of changing a culture that is too pay-to-play-oriented," Torsella said. "There's a reason public corruption scandals happen with public moneys in state treasuries around the country."