Despite Exceeding Benchmark Goals State Fired Jackson Equities Manager
By Ben Gose
Wyoming’s extreme focus on income—as opposed to “total return,” the measure that most money managers focus on—can lead to some tortured decisions that may be hampering the long-term growth of the permanent funds.
The statute that created the Wyoming Permanent Minerals Trust Fund required any income from the fund to flow to the state’s general budget. (More-recent legislation caps the amount of income that can be paid out per year at 5 percent of the permanent fund’s market value.)
The focus on income originated at a time when the permanent fund was invested solely in fixed-income investments. Now, the treasurer’s office invests half its assets with equity managers, who are rightly intent on maximizing total return, rather than income.
Yet the permanent fund can still only pay out income—defined as interest, dividends or realized capital gains—to the general fund.
The policy recently led to a decision to fire Friess Associates, the state’s only significant equities manager that is based in Wyoming. And the decision had nothing to do with making money—which would always be the primary criterion if the state were focused on total return.
Jackson-based Friess Associates, a small-cap manager that handled $165-million for Wyoming, sold stocks over the past year, booking a $70-million loss, presumably because Friess saw better opportunities in other stocks.
The firm is headed by Foster Friess, who built a billion-dollar fortune while earning strong returns for investors at his flagship Brandywine mutual fund during the 1990s. Friess moved his offices to Jackson from Pennsylvania in the 1990s, and is one of Wyoming’s most-generous donors, supporting Jackson’s National Wildlife Art Museum and the University of Wyoming, among other causes.
Friess did not return phone calls or email messages.
In April, Joe Meyer, Wyoming’s treasurer, and the State Loan and Investment Board, decided to fire Friess Associates. That led to some tough questions for Meyer from Rep. Bryan Pedersen (R-Cheyenne) at a subsequent meeting of the Select Committee on Capital Financing & Investments.
Pedersen noted that despite the realized losses, the Friess fund had exceeded its benchmark over the five years that it had been in the Wyoming portfolio. R.V. Kuhns, the state’s investment consultant, had recommended keeping Friess and firing Fisher Investments, an international manager that had not kept up with its benchmark over nearly five years.
But Meyer and the investment board apparently couldn’t get past the fact that Friess had realized a loss, and the impact that would have on the permanent fund’s ability to distribute money to the general fund. Fisher had realized a small gain this year, while holding on to a whopping $155-million unrealized loss. By terminating the relationship with Friess—which had already realized its losses-and retaining Fisher, the state would book no additional realized losses. Thus, the state would have more “income” to kick over to the general fund.
In other words, a mere accounting difference—based on Friess’s decision to sell its losers, and Fisher’s decision to hold on to its losers—seemed to be trumping a far more important question: Which manager is actually adding value to Wyoming’s investments over the long term?
Meyer told Pedersen that the statute requires that income be considered, and that the Legislature could change the statute if it wished.
(As it turns out, Meyer decided to do a little tinkering of his own. As of March—in large part due to the realized losses at Friess-the pay-out rules would have allowed the mineral trust fund and the permanent land funds to distribute about $18-million to the general budget for the 2010 fiscal year, down from a distribution of $225-million in the 2009 fiscal year. The decline in investment income would have come at a time when Governor Freudenthal has already called for state budget cuts of 10 percent. In April, Meyer changed the pay-out policy to count the stock losses separately, enabling the two largest permanent funds to add more than $130-million to their distribution to the general fund in 2010.)
“You’ve got to understand that Wyoming is unique,” Meyer told Wyofile. “You have a dual consideration in this state—income generation and growing the corpus. If you look at the state’s investment policy, the number one thing is preserve capital. The number two thing is maintain liquidity so you can pay the state’s bills. And the number three thing is to produce reasonable income, given the first two.”
But Meyer may be overplaying the emphasis on income. The investment policy for the permanent mineral trust fund, which was updated in April, lists three primary goals: capital appreciation, total return, and protection against inflation.
All three of those goals would seem to call for sticking with managers who can exceed their benchmarks, rather than managers who can help satiate the state’s thirst for “income” by holding on to stocks with huge losses.
At the same select committee meeting at which Pedersen questioned the firing of Friess, two consultants from R.V. Kuhns were asked to weigh in on what yardstick would be best for measuring Wyoming’s portfolio.
Their answer? Ditching the consideration of income—and focusing solely on total return—would be “best for the funds in the long term.”