Tucson Gambles with Pension Money

An article in Sunday's Star provided a surprising revelation about the City of Tucson Pension fund...too bad the reporter never made the connection. 

Tucson's dilemma: Is making a political statement by not investing its pension assets in Iran worth the potential $2.8 million hit taxpayers would take to finance it?  That's the question the City Council will face this fall as it considers divesting itself of any fund that has any connection to Iran's energy industry.

First, the premise of the story is essentially meaningless.  Tucson invests it's pension in a fund that has a tiny stake in a French company that has some investments in Iran.  That's garage fire journalism. 

Second, the story is fundamentally flawed because the reporter makes the obvious mistake of assuming that the funds will earn the same amount this year as they did last year.  His argument is essentially "the fund that invests in Iran made 19% last year and the other fund made 12% last year, so if we move $54 million from one fund to the other, it will cost $2.8 million."  Anyone with a basic understanding of investments will know that past performance is no guarantee of future returns.  After all, if the first fund is so good, why not put all the money in it. 

So the entire point of the article is based on a rather silly mistake.  But more importantly, the reporter missed the real story.

Why is the city of Tucson placing substantial portions of its pension investments into high risk international equity funds?  The article points out that the city has $108 million split between Julius Baer International Equity Fund and Causeway Capital Management fund. 

The Reporter is concerned that the city will lose $2.8 million if it switches out of the Julius Baer fund, but a little research would have shown that the city's investment in that fund lost over $6 million over the LAST MONTH!

Here's a chart for the Julius Baer international fund.  That's an 11.63% loss in in 30 days!  Applied to a $54 million base, that translates to a $6 million loss.

 

Morningstar classifies the fund as high risk and here's an example of its investment strategy.

It may invest in U.S. or foreign debt, including (up to 10%) high risk and high yield, non-investment grade instruments. The fund may use futures, swaps and warrants. The Fund will normally invest at least 65% of its total assets in no fewer than three different countries outside the U.S. The Fund may invest up to 25% of its total assets in the securities of issuers located in emerging markets.

High risk, high yield, non-investment foreign debt?  Give me a break.  Is that the type of fund in which you would invest substantial amounts of your pension?

The other interntational fund--the Causeway International fund--hasn't fared much better.  It's down over 10% in the last month, so Tucson has lost over $5 million in that fund as well.
 
Tucson has also invested in corporate bonds and has $47 million in real estate exposure.  How safe are those investments?

Which leads to the final question.  How long is it going to be before the Tucson pension plan experiences heavy loses and comes to the state for a bailout?

Comments

[ron]

Why is Tucson playing 'investment manager' when they could put all the funds into the state fund and let the state manage the funds?

[NICK]

Bless the libs.

[Common Sense]

How come government pensions get to invest their retirement money in the private sector, but us taxpayers are forced to put money into the government-run social security system?

Social security is a ponzi scheme. Nancy Pelosi admitted workers under 40 will lose 20% to 30% of their social security money.

[Peter C]

Would it be fair to say that while Julius Baer international equity fund is down over 9% in the last 30 days, this post coming 5 days after the original(and let's face it, anyone invested in the market took a hit last month), the Baer fund is up 9.05% year to date The Dow is up 7.35% ytd.
You take a bit more risk with the Baer fund, so the downs are more dramatic, but the bigger picture, and isn't that was pensions are, the big picture, paints a different story.
This is not to say that a poor story should not be revealed as such. But rather than give a simplistic response that warns of a doom 'n' gloom scenario, wouldn't it be better to implore people to do a bit of research to see if their money is being cared for properly.
I followed the link in the original post to get my numbers above. I also learned that the largest single investment in the fund was less than 7%. All this info in under 60 seconds. Now I'm less likely to get all high and mighty and question the city's handling of its fiduciary responsibilities
Finally, should I keep tabs on how public money is being cared for(at all levels), absolutely yes. Do I always have the time to do the research myself, absolutely not. So I'd like it if 'big picture' was more in the story when I read a post from this informative site.