Investment management and politics

Someone sent me a story about the Pennsylvania senate race, and a Republican candidate whose firm handled — not very successfully — some of the investments for the state teachers’ pension fund. An opponent, the famous Dr. Oz, is raising it as an issue.

Apparently the fees were high, the results mediocre, and the firm got fired. My friend thought it an example of the rich getting richer and the not-so-rich poorer.

I looked at it because the story seemed odd. Pension funds usually invest conservatively, which doesn’t require high management fees.

A NYT article linked in the very short piece provided details. The firm had charged a total of $500M in fees, which did seem a lot. But that would be an annual fee of 1% on asset value for investing $5B over a 10-year period. That seems high but not insane if special value is provided.

Apparently, lots of big investors all over the world think it is. The firm goes in for complex strategies that worked great in 2008, when the pension fund got hammered, but underperformed in boom times like 2009 – 2020. Unfortunately the pension fund used them during the latter period. There are proverbs about that kind of situation.

The example casts light on the view that smart financial guys always win. Investment management is competitive, and if clients don’t think you provide value you’re easily replaced. They’re in the same position as lawyers (my friend and I are both lawyers). We’re overcompensated overall compared with contribution to the economy, but there are competitive limits on how greedy we can be barring bad conduct. In the case of investment management, that would include cronyism, kickbacks, trading on inside info, etc. None of that seems present here.

There’s an imbalance in motivations — a high fee makes a pension fund official subject to criticism if it’s out of line with services provided and somebody wants to dig into boring financial statements and make an issue of a point that’s going to be arguable anyway, but it goes right into the management company’s pocket. Dunno what you can do about that without a radical change in the whole system, which would have its own problems, other than try to hire smart, energetic, public spirited pension fund officials.

Also, there’s the problem that if billions are splashing this way and some of it is going to stick to the people involved even without specific bad conduct. That’s why NYC is so rich, and it’s why offshore places like the Bahamas want to be financial centers. It’s also why the valet parking guys at fancy casinos get lots of $100 tips.

There doesn’t seem to have been bad conduct, but people in Pennsylvania have no reason to feel grateful to the firm or its former head, now a senate candidate. So it makes sense for Oz to raise the issue. It will be interesting to see what voters make of it, and what actual benefits to the state other candidates can point to.

The situation shows the necessity of noblesse oblige. It’s inevitable that some people have an advantageous position in the social order. It’s wrong to hate them for it, but right to expect them to be conscious of their advantages and do something for those without them.

Leave a Comment