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Sunday, July 13, 2014

A final word about the soon-to-be-former PSPRS Administrator Jim Hacking

In case you missed it, the Arizona Republic had this July 11, 2014 article by Michelle Ye Hee Lee: Pension fund chief placed on leave in wake of illegal raises. The violation of state law has forced the Board of Trustees to terminate Jim Hacking's contract.  I expect Hacking's forced retirement to be the first of several departures, either voluntarily or involuntarily, from PSPRS' upper-level staff.

I have written minimally on the turmoil in the PSPRS office because I do not think it is important.  Worse yet, it is a huge distraction from the bigger, existential issues that plague PSPRS.  I do not know Mr. Hacking or what it is like to work for or around him, and I do not agree with everything he says or does.  However, before he leaves I would like to reiterate a point I have made in the past.

PSPRS' financial problems have been long in the making and preceded Mr. Hacking's tenure.  Responsibility in varying degrees can be laid on past and/or current PSPRS staff, Boards of Trustees, politicians, and unions.  If his personnel management style has annoyed and angered some people, Mr. Hacking has still done, I believe, an admirable job of righting the PSPRS ship and placing it on a sustainable future course.  Ideally, it would be nice to see PSPRS run without any controversy, but paychecks and retirement checks are the only real concern of PSPRS members.  Mr. Hacking deserves, at the very least, some begrudging gratitude, though it is unlikely he will ever receive credit for the good things he has done for PSPRS.

If Mr. Hacking never receives any thanks, we should not allow the most unfair thing to occur, which is to allow the creation of a public perception that there is some linkage between his management and PSPRS' dire financial situation.  One has nothing to do with the other, and whoever takes over for Mr. Hacking will have to deal with the same financial short-sightedness, political machinations, and naked self-interest engendered in the policies and actions of state and local government and public safety employee unions. The outrage shown toward Mr. Hacking and other PSPRS staff members would be better directed at the politicians and union officials (past and current) who are truly responsible for PSPRS' financial problems.  Implying some type of causal relationship between Mr. Hacking's management and PSPRS' finances is not only an injustice to Mr. Hacking but allows other responsible parties to escape blame and continue the same destructive behavior.  For an example of this kind of implication see "Think VA is arrogant?  Check out Ariz. pension system" by the Editorial Board of the Arizona Republic.

I wish Mr. Hacking a happy retirement.  And best of luck to whoever takes over his job.


  1. I'm not sure why you would be such a supporter of Mr Hacking. His investment record is atrocious. He recently had the PSPRS attorney Mr Lieberman write an article that distorts the actual record. Hacking has continually talked about the losses incurred by the system under the prior administator, but in reality, the fund outperformed the market during that period and resulted in additional COLAs for you and the other plan beneficiaries. Mr Hacking's "contribution" has been to reduce volatility and has limited the Fund's ability to fully participate in a 5 year bull market and has cost you and the taxpayers of Arizona real money. All the others you mention share blame in PSPRS problems, but don't allow Mr Hacking and his lawyer (paid with Fund resources) to give you a PR campaign to escape blame.

    1. Thank you for your comment. Everyone is entitled to his own judgment of Mr. Hacking's performance, but here is some perspective. PSPRS' 5-year annualized rate of return (gross of fees) for the period ending 4/30/2014 was 11.63%; the S&P 500 returned 15.90% over the same period. PSPRS' 10-year annualized rate of return (gross of fees) for the period 4/30/2014 was 5.91%; the S&P 500 returned 5.44%. The 10-year period coincides with Mr. Hacking's tenure at PSPRS. So what is a fairer representation of his performance, 5 or 10 years? That is for the reader to judge.

      I went back to the 2004 annual report to verify your assertion about the better returns under the former administrator and found that under the 5, 10, 15, and 20-year annualized rates dating back from 2004, the S&P 500 beat PSPRS by 2.27%, 1.93%, 1.08%, and 1.22%, respectively. (See page 44 of the 2004 annual report.) A passive investment in the S&P 500 would have beaten the active approach of the previous manager in every one of the time periods. So that assertion is plainly untrue.

      Herein lies the problem. There is a temptation through selective memory or nostalgia to believe that Mr. Hacking's predecessor was so much better when the numbers do not back it up, and advocating a return to that bad old time is very dangerous. Everyone can feel free to pile on Mr. Hacking about his management issues all they want, but his performance showed a better understanding of risk versus returns and speaks for itself.

  2. Okay, let's start with your numbers and see where it takes us. Starting with the underperformance of 1.93% for the 10 years ended 6/30/04. That's the performance of just the equity portion (9.90% vs, 11.83%) not the entire fund. (found on page 38 of the FY 04 report). However, let's take your premise that a passive approach would have been better and let's see who left what "on the table" If you take the equity fund balance at 6/30/94 of $1.08 billion and apply the total return of the S&P 500 (the total return index rose from 548.96 to 1678.83 on 6/30/2004) you get a fund balance of $3.3 billion. If instead, you take the published return and subtract 3 basis points for investment expenses (In 2004 they were less than $1 million), you get a balance instead of $2.77 billion, implying that about $530 million was "left on the table" by the prior administration over $10 years. Now if you take the implied $3.3 billion and apply the total return of the S&P 500 to 4/30/2014 you get $6.66 billion (the total return index rose to 3388.10 on 4/30/14). But, if you take the 10 year return of 5.91%, but this time subtract fees of 1.1% (that's because PSPRS no longer spends less than $1 million in investment expenses, by 2013 these expenses had exploded to $50 million). When you apply 10 years of 4.81%, you get a balance of $5.28 billion, meaning that Hacking and crew left $1.38 billion "on the table. So, the point is that if starting in '94 either administration had taken $2 billion and invested passively, there would have been $6.66 billion. Instead, over $1.9 billion was never realized. Of that, nearly three-quarters was not realized during Hacking's watch. A close look at Hacking's record indicates that in '07 he hired Mr Brown as Chief Investment officer and increased investment risk at the peak of the market. When Mr Brown left, he then decreased investment risk at the bottom of the market. Thus, the fund was exposed to substantial risk during the downturn, and then wrong way Corrigan dialed down the risk just in time to miss participating in a historic bull market. (while paying $50 million a year in added investment fees). You may still want to argue that over the last 5 years, PSPRS did a great job protecting you against risks that never materialized, but my view is not based on selective memory or nostalgia, just the hard numbers of where the fund would have been if Mr Hacking and his hundreds of millions spent on investment consultants over the past few years had never come along.

    1. As an edit, they only had to start with $1.08 billion to get to $6.66 billion for the 19 years and 10 months ended 4/30/2014 had they invested passively in the S&P 500 over that time. Basically, the active approach of the prior administration cost the fund some money over a passive approach, but the ill-timed risk reduction activity combined with the dramatic increase in investment consultant and manager fees, cost the fund substantially more.

  3. Thank you again for your comments. I appreciate the work you put into your calculations, but your initial point was that the investment strategy of the previous administrator, Jack Cross, outperformed the market. It did not. Second, it is a pointless exercise to try and compare Cross’ strategy versus Jim Hacking’s when we only have data for two distinct time periods. How one would have done in the other’s place can never be known.

    You also have to remember that not too long ago Cross was considered the primary PSPRS villain. He was criticized for a lack of diversification and investing too heavily in technology stocks that tanked during the dot.com crash. In just a couple of years, he went from being an investing genius to a pariah, despite the years he spent producing, perhaps accidentally, great returns for PSPRS. Hacking was brought in to clean up the mess. He was tasked to implement a less risky investment strategy, which is what he did. He was not brought into be a better stock picker or time the market.

    The claim that Hacking “left money on the table” when his strategy is compared against a passive strategy of investing in the S&P 500 should be addressed. The strategy Hacking implemented was meant to balance risk and return, and it uses multiple benchmarks for the different classes of investments and the total portfolio. It was not designed to track the S&P 500, so no one should be surprised or upset when PSPRS’ returns lag the S&P 500. I estimate that PSPRS will have a rate of return somewhere around 12%, net of fees for fiscal year 2014. That is a very good return but should (expectedly) lag the S&P 500.

    Hacking implemented a strategy that the Board of Trustees wanted to replace what they viewed as Cross’ failed strategy. The strategy has worked the way it was designed, yet people are now upset at him for not getting the same returns of the old, more risky strategy he was hired to correct. This maddening situation is an example of why PSPRS’ systemic problems will not get fixed.

  4. Okay, one more time... Let's go back to my original post. I said "The Fund outperformed during that period." The fund, is the entire fund. It was you who decided to define it as just the equity portion. When you look at the entire fund for long periods of time, it outperformed. So despite the Dot Com meltdown that you referred to, the Fund for the 15 years ended 6/30/04 returned an annualized 9.21% vs 8.80% for its benchmark. For 20 years ended 6/30/04 there was again outperformance 11.27% vs. 10.52% For 10 years, the fund basically matched its benchmark (9.00% vs 9.04%).

    Your assertion that the overall fund has drastically reduced risk compared to the "dot com era" is also false. Take a look at the graph on page 50 of the 2013 annual report which depicts the volatility of the entire fund (not just the equities) versus the S&P 500. In 2002 when the stock market was still in a downturn, the overall fund had roughly half the volatility of the stock market (this was through the action of the significant bond portfolio at the time). During the 2005-2007 period, Mr Hacking left the investment policies of the '03-04 period basically unchanged and the volatility during that period continued to match the equity market (that's because Mr Hacking had about two-thirds of the entire fund in Large and Midcap domestic equities--substantially more than the Fund's benchmark). During the downturn of 2008, the volatility was still roughly 75% of the market, resulting in a significant loss (with relative volatility higher than it was in 2002) It was only in 2009 and beyond (already half way through Mr Hacking's 9 year tenure) that relative volatility was reduced. So again, I would challenge your assertion that Mr Hacking was brought in to "clean up a mess." There were no changes to investment strategies until 2007, and the initial changes in '07 were agreed to be a failure in '08 and abandoned. The current strategy does provide a lower level of investment risk. However, it only brings relative volatility back to 2002 levels and does so with a 50 fold increase in investment fees. Pulling a full percentage point out of returns and sucking an incremental $50 million a year of investment returns out of the system is unconscionable in a era of lower interest rates and lower capital market assumptions for most asset classes. In closing, I applaud your efforts in pointing out the multiple sources of policy errors that have led to an underfunding of PSPRS and how this will impact municipalities, younger members and Arizona taxpayers for years to come. I just wish you could acknowledge that Mr. Hacking's risk reduction activity did not occur until the Board in '07 recognized that overall funding levels were dropping below 67% and projected aggregate employer contributions were about to exceed 20% for the first time. (just look at the annual reports of '06 and '07 to confirm no change in asset allocation.) and furthermore, the level of volatility could have been accomplished at significantly lower cost.
    I have no illusion that we're going to completely agree on this issue, but I do hope we can agree that through thoughtful analysis of the data and healthy debate, PSPRS can begin what will probably be a two-decade process toward fiscal health.

  5. I think the criticism of both Hacking and Cross is unfair. Everyone loved Jack Cross as long as he was producing good returns. Once he lost money using the same strategy with which he had previous success, he was PSPRS enemy number one. As late as October 2010 Jim Hacking was publicly being hailed as the savior of PSPRS with new reforms and the use of outside investment advisors (ABC15 in Phoenix had a story at that time that states that he was “brought in to rescue the pension system when Cross departed.”), but now he is the bad guy because he has not fully participated in the recent bull market.

    So where were the defenders of Cross in 2004 or critics of Hacking in 2010? Where were the critics of Cross in 1999? People should have spoken up back then. Why didn’t they? Because they didn’t know what to do either. I do not remember a chorus of voices telling Hacking to sell everything in 2006-2007 or to buy and hold in 2009-2010. He had a strategy approved by the Board of Trustees, he implemented it, and it appears to be working the way it was designed to work. Was it perfectly executed and timed in its implementation? Of course not, but that would have been impossible.

    You and I are talking about two different things. I understand that you feel that Hacking is a failure on the investment side because he did not reap all the gains possible during the recovery from the Great Recession. That’s fine. I can not dispute that. However, I feel it is only fair to judge him on the plan he actually implemented. I want oversight, not hindsight. I want hard questions asked of administrators while they are making their decisions, not accusations after they leave. So you are right we will not agree on this issue. Thank you again for your comments.


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