Monthly Archives: April 2016

Half the story and no punchline

Marketwatch recently published a piece on the sad history of the Central States Pension Fund of the Teamsters union. As a quick update for those that do not know why there are jokes about Jimmy Hoffa being buried at the fifty-yard line of Giants Stadium in New Jersey, the Teamsters were a very powerful union in 20th century America, covering the trucking industry and related trades. It fell under mob influence and union leader Hoffa is widely believed to have been murdered by the Mob to keep him from cooperating with the FBI investigation.

The Central States fund is a classic underfunded pension. Many truckers today are not union members, so the ratio of working to retired is 1 to 5.2, according to the article. Investment management of the fund was taken away from corrupt union officials in 1982 and put in the hands of Wall Street firms such as Morgan Stanley, Goldman Sachs (a former employer of the author), and Northern Trust.

The Marketwatch article opines that Wall Street did worse for Central States than the mob did. But is that true? It appears that part of the strategy to deal with the underfunded pension was to invest in higher risk/reward assets than the typical pension. When the financial crisis hit in 2008, this strategy means that the fund’s losses were also magnified.

That’s all the story tells us, but that is only half the story. Yes, the downside in stocks was worse than bonds in 2008, but the rebound was also better. The long-term outperformance of equities overĀ all other asset classes has persisted after the crisis of 2008. And if the mob was still in charge and heavily invested in Vegas casinos – that would have been better for Central States? Of course not.

The real problems here are two, in my opinion. Did the investment managers abandon their equity-heavy allocation at the bottom of the market? That would be a tragic misstep. Did the investment managers consider the average retirement age of the members in their asset allocation decisions? This should have driven concerns for generating cash vs growth. There is a tension between these two, but that is why GS and NT were getting paid the big bucks.

As a piece of financial journalism, this article doesn’t close out the issue it raises in the headline. A stock-heavy allocation does make sense (in my opinion). That in itself is not the problem. Changing strategy at the bottom – now that is a problem. But the article doesn’t document that that actually happened. We have only half the story and no punchline.

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