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Friday, March 17, 2017

Brian's Song: Why the PSPRS Board of Trustees Chairman toes the line for PSPRS' administration

Before we get into other issues, let's talk about PSPRS' returns.  The following table shows PSPRS' investment returns, gross of fees*, versus the Russell 3000 through November 2016, the fifth month of the current fiscal year (FY), with the FY end 2014, 2015, and 2016 returns included for comparison: 
Report PSPRS PSPRS Russell 3000 Russell 3000
Date Month End Fiscal YTD Month End Fiscal YTD
6/30/2014 0.78% 13.82% 2.51% 25.22%
6/30/2015 -0.73% 4.21% -1.67% 7.29%
6/30/2016 -0.32% 1.06% 0.21% 2.14%

7/31/2016 1.62% 1.62% 3.97% 3.97%
8/30/2016 1.76% 3.40% 0.26% 4.23%
9/30/2016 0.71% 4.14% 0.16% 4.40%
10/31/2016 -0.27% 3.86% -2.16% 2.14%
11/30/2016 1.17% 5.07% 4.48% 6.71%
12/31/2016 1.30% 6.43% 1.95% 8.79%

There is usually about a two-month lag in PSPRS reporting its investment returns.   Another good month for both PSPRS and the Russell 3000.  PSPRS lags the Russell 3000, but a 6.43% return for the first half of the fiscal year is terrific.  As of yesterday the Russell 3000 is, coincidentally, up exactly 6.43% for the first two and a half months of 2017, so there should, hopefully, be more gains for PSPRS in February and March 2017.  The only question is how closely PSPRS' gains will correlate to the Russell 3000's.

The handful of readers who have followed this blog for the past few years know that most of my criticism is directed at state-level union leaders and the PSPRS administration and Board of Trustees.  This is because they are the ones who are supposed to be looking out for PSPRS members.  While I do criticize state and local politicians, they have other constituents, namely taxpayers and citizens, whose interests they are supposed to take into account.  This is not so with union leaders and PSPRS' administration and Board of Trustees, who primarily have PSPRS members as their only constituents.

This is why it is so disappointing to see this editorial by PSPRS Board of Trustees Chairman Brian Tobin that appeared in the March 10, 2017 Prescott Daily Courier newspaper.  According to PSPRS' biographical blurb, Mr. Tobin joined the Phoenix Fire Department in 1983 and has been a Deputy Chief since 2007.  He is also a past president of the Professional Fire Fighters of Arizona (PFFA), the state-level firefighters' union, and the brother of former Arizona House Speaker and current Arizona Corporate Commissioner Andy Tobin.  Brian Tobin's position on the Board of Trustees is as one of the employee representatives for the state's firefighters.

In his editorial Mr. Tobin repeats the company line that we continually hear from PSPRS' administration: PSPRS is doing very well when we look at their own self-chosen metrics.  Mr. Tobin puts no hard numbers in his piece, but I do not doubt that, in any economic environment, he and PSPRS' administration can handpick the necessary data to show that PSPRS is doing great.  However, the rest of us would like to see a more objective measure of PSPRS' performance, rather than take on faith what PSPRS and the Board of Trustees has to say.

Let's start by referencing this excellent article, How the Bogle Model Beats the Yale Model, by Ben Carlson, CFA from his blog, A Wealth of Common Sense.  I recommend reading his short piece for yourself, but to summarize, Mr. Carlson used fiscal year-end data as of June 30, 2016 to compare the 3-year, 5-year, and 10-year annualized returns of more than 800 college and university endowments against the returns of a portfolio of three Vanguard index funds he calls the Bogle model after Vanguard founder John Bogle.  What he found is that the Bogle model not only beats the average endowment returns but even the top decile of endowments as well.  Mr. Carlson points out that many of these endowments are run by top-level investment professionals who utilize complicated, non-traditional, multi-asset strategies.  The following table shows Mr. Carlson's numbers as well as returns from other funds closer to home, the Arizona State Retirement System (ASRS) and PSPRS' own Cancer Insurance Plan (CIP), as of June 30, 2016:
Fund 3-year 5-year 10-year
PSPRS 5.71% 5.40% 4.45%
CIP 6.24% 5.49% 5.69%
ASRS 7.10% 7.10% 6.00%

Average 5.20% 5.40% 5.00%
Top quartile 6.30% 6.20% 5.30%
Top decile 6.60% 6.60% 5.40%
Bogle Model 6.40% 6.50% 6.00%

Looking at all these returns, we see that PSPRS' returns most closely match those of the average endowment.  However, what is most disturbing is how much PSPRS lags both ASRS and its own CIP.  The CIP is a very simple portfolio made up of approximately 25% US Equity, 25% non-US equity, 30% fixed income, 10% inflation-linked securities, 5% commodities, and 5% short-term investments.  No private equity, no real estate, no global tactical asset allocation, etc.and yet, this portfolio beat PSPRS in every time period.  ASRS, a more actively managed fund, bests PSPRS by even larger margins.  The three-index fund Bogle model also outperforms PSPRS in all three periods.

The 10-year period is most instructive since it includes both a horrendous downturn and an extended bull market, and any strategy utilized during that time will have been tested at both market extremes.  PSPRS has the worst 10-year annualized returns.  So we can see Mr. Tobin does not need to look far and wide for comparative data; he can just look in PSPRS' own offices or cross town at ASRS.  He does not need to selectively choose data to produce a measure of PSPRS' performance; Mr. Carlson has already given him a good baseline to use.  And for goodness sake, he and PSPRS should stop giving comparisons of how much better PSPRS' portfolio would have done than the actual portfolio during past market downturns.  This is idiotic. Anyone could design a better portfolio if he or she knows what is going to happen in the future.  The numbers do not lie, and objective criteria shows that PSPRS performance is mediocre at best.  Even against simple index funds, PSPRS lags behind.  So why would Mr. Tobin offer such a full-throated defense of PSPRS' investment strategy?

For those of you who are interested, you can the find a theoretical foundation of PSPRS' current investment strategy in a paper entitled Modern Pension Fund Diversification, which among its authors are current and former members of PSPRS' administration.  The abstract alone is very complicated, never mind the entire 16-page paper that you can download.  That uneasy feeling you may be getting right now is understandable when you realize that your future paychecks and future retirement security are based on an academic experiment conducted by individuals whose own paychecks and retirements are unaffected by the results of the experiment.  This might explain the bizarre, unshakable insistence by PSPRS' administration that everything is going well with their strategy.

I make no claim of understanding Modern Pension Fund Diversification, but should we take it for granted that Mr. Tobin or any of the other Trustees do either?  It would seem that one would need an extensive background in mathematics, statistics, finance theory, and/or economics to even begin to understand it.  The PSPRS employee representatives on the Board of Trustees know law enforcement and firefighting, not finance theory, so they are overly dependent on PSPRS' staff for information and guidance.  This traps the Board in an environment in which the people they are tasked to oversee have become the de facto decision-makers.  When comes to investment decision, PSPRS' administration is insulated from oversight behind an intellectual moat that the Board is unable to cross.

This could explain the defensive and arrogant tone of Mr. Tobin's editorial since he can only parrot what the PSPRS administration tells him and trust that it is accurate.  PSPRS' investment strategy is working because PSPRS' administration says it is working, and he has no other choice but to concur with that assessment.  The natural, common sense questions that the layperson might ask are dismissed as ignorant and naive.  If someone were to ask, "Why hasn't PSPRS performed as well as the CIP or ASRS over the years?," Mr. Tobin can only respond with bits of insight like this:
". . . our investment returns are elite among pensions that operate with a similar risk-averse strategy." 
"We outperform index funds (even after fees), in which we also invest."
"Our plan also stacks up well against private sector investment funds."
 "PSPRS, like any institutional investor, suffered heavily from Dot.Com crash of 2001-02 and the housing market crash of 2007-2008."
I will leave it to the reader to judge the accuracy, relevance, and/or usefulness of those statements.  Does Mr. Tobin speak for the entire Board of Trustees?  If he does, it appears the Board has relinquished its oversight role of PSPRS, at least when it pertains to investments.  I can only hope that the new members who have recently joined the Board will not allow themselves to be co-opted by the PSPRS administration like Mr. Tobin has.  PSPRS members need watchdogs to look our for their interests, not cheerleaders for the PSPRS administration.


  1. To PSPRS Pension Watch: Do you have a way for me to share some other PSPRS information with you reference other litigation that I think you will find to be very interesting...Maybe an email or method of attaching documents?

    1. Could you please message me through the Facebook page?

    2. I will work on that. I'll have to get set up on it....

    3. Facebook thing won't work. There are attachments. Suggestion that would make getting you information easier would be to set up an email account of some kind. Thanks!

    4. I added a contact form to the blog if you would like to send me contact info. I am constant fighting battles against spam just in the comments section, so I cannot give out an email address for the site. Thanks.

  2. I believe that one of the new employee reps on the board does have a Master's degree in finance. Hopefully he will be of use.

  3. Have you seen the latest supreme court decision regarding ASRS? My understanding is that city contributions to deferred compensation will now be treated as pensionable income. If so, I imagine it will be only a matter of time before someone from PSPRS sues to get the same.


  4. It already does count for psprs. At least I know Phoenix has always counted it.

  5. when are we getting paid? i just bought a $50k boat


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