How best to manage Wyoming’s funds, so that they provide income for many, many years through the ups and downs of ordinary tax revenues, is the focus of intense thought these days by the State Treasurer’s Office and the Legislature. It should be something every citizen considers. But oh, it’s important but dry, and complicated.
Jason Shogren, a leading economics professor at the University of Wyoming who is active in local affairs — he’s served on the board for Albany county schools and the Wyoming Environmental Quality Council, and he plays a mean guitar with local bands, has offered to help us out. Shogren is the Stroock professor of natural resource conservation and management, in the Department of Economics & Finance at UW. He’s also served as a financial advisor to the king of Sweden, among other engagements.
This column is the first of an occasionally appearing series Shogren will be writing for WyoFile to help us understand management of state funds and why they’re important — and, of course, his view of the best way forward.
This first column focuses on the general problem of how it can be a good idea to invest funds rather than put them in the kind of savings account (or mattress) people might be tempted to consider “safe.” His explanation of the issues involved applies to personal finances as well as state funds. It also applies specifically to a matter coming before voters on the Nov. 8 ballot: “Amendment A” that would change the Wyoming Constitution — Ed.
“Safe” ain’t safe for Wyo investments
With this first column, I’m going to start with this:
Why the Rule of 72 matters — for you, but really more for the future of your kids, your grandkids, and their grandkids who will be in Wyoming for the far distant future.
Recall, this is how the rule works with compound interest: Wealth (roughly) doubles every [72/x%] years, where x is your rate of return.
If your rate of return is 7.2 percent, your wealth doubles in 10 years. If your rate of return is 0.72 percent, your wealth doubles in 100 years.
Based on this rule, “safe” investing (e.g., cash under your mattress) will minimize risk, but it will also minimize return. If your own personal appetite for risk is low, then by all means play it safe. That might be how you want to treat your own retirement money, if you don’t want to see it grow much.
But Wyoming is not going anywhere—a state never retires.
You and I will come and go, but Wyoming never ends. For the State of Wyoming, “safe” investing is really not “safe” — we will have left behind so much money on the table that in the future we will always be behind in growing Wyoming’s wealth. We will always be set back on our heels.
As quoted in Sam Western’s recent Casper Star-Tribune article on investment of Wyoming’s Permanent Mineral Trust Fund and other state funds:
Patrick Fleming, chief investment officer for the treasurer’s office, quoted a National Association of College and University study that showed institutions with assets over $1 billion averaged a 7.7 percent return over the last 10 years. The state of Wyoming’s return, including investments in the permanent fund, averaged 5.93 percent return during the same period. If the state had not been hampered by certain investment restrictions, Fleming said, “this would have resulted in an increase of $2.1 billion over the last 10 years.”
That is $2.1 billion left on the table because Wyoming has followed a safety-first conservative investment strategy. Think about what we could have done with an extra $2,100,000,000.00 over the last 10 years. Invested in K-12, invested in infrastructure, invested in new carbon technology research centers, invested in higher education, invested in tourism, invested in the generation of more and better ideas on how to diversify and grow the Wyoming economy today and into the future (read that as jobs for Wyoming).
Today we have tools to hedge risk to manage the volatility in the stock market. So it is far safer to invest in the stock market, under the care of good managers, than to leave our money strictly in cash or bonds.
What can you do about it as a Wyoming citizen? Vote “yay” for Amendment A this November. Amendment A takes the handcuffs off two of our investment funds, allowing them to be invested in equities—in stocks—not just “safe” bonds and cash. These funds include the Wildlife Trust, Wyoming Public TV, Wyoming Children’s Trust Fund, the Military Assistance Trust Fund, State Hospital Emergency Medical Services Trust Fund, and the Cultural Trust Fund.
Fortunately, Wyoming already has most of its funds free to be invested in stocks. The State currently has roughly $19 billion in trust funds in total. Wyoming already invests $13 billion of that $19 billion in equities (stocks and index funds) up to a 45-55 percent cap. The cap is set by the House and Senate, and the investments are overseen by the five highest elected State officials on the investment board. The state’s prized Permanent Mineral Trust Fund is one of the key funds that can already be invested in equities.
So Amendment A is nothing really so new. All it does is give the other $6 billion of state funds — the funds I listed above — the same option for better investment. And, just as with the bulk of state funds, the share of those funds actually invested in stocks still have to be approved by the House and Senate, and overseen by the five highest elected State officials on the investment board.
To get an idea of what this means, if we had passed Amendment A ten years ago, Wyoming would have earned an extra $500 million for the corpus of these funds, if we had followed the same balanced risk strategy used for the other funds.
But isn’t this all just too risky?
No, the real risk is letting the State and our children’s children get left behind. Vote yay for Amendment A.
I’ve been in the investment business since 1972. There are a few flaws in your comments and replies.
For instance, leaving the timing of “When” to invest in equities is NOT what we want in the hands of our elected officials. The 5 person elected official supervisor panel is no comfort, either. Investing for the State needs to be left to professional investment managers since the only local elected official who knows enough to invest anything is Mike Enzi, and we need him in Washington.
There is some conventional wisdom that those of us from the investment world can share:
1. Timing matters: but no one (repeat: NO ONE) can effectively time the market.
2. Equities matter, but it is selective equities (See Lehman Brothers, Citi, etc…) IE: Stock pickers are the real artists.
3. Diversification is a myth that only works until you need it.
4. Passive investments or investors cannot, by definition beat whatever you define as the market. Ie: No index funds, ETFs.
5. Warren Buffett is the smartest investor in America. Period.
The Russell 3000: the largest 3000 market cap public companies in the US averaged an annualized 7.36% from January 1, 2006 to last Friday. 100% equities.
However, your statement that we need the money forever is a flawed assumption. The State is nominally forever, but the money is needed year by year, individually. It is not possible to accumulate a “safe” excess in a short period of time. It takes more than 10 years unless you take more than marginal risk. Trusts have a fiduciary duty to the beneficiaries. ie: State Trusts to us.
Fiduciaries have a duty to preserve the corpus, as well as grow it. Given the choice between “grow by taking risk” vs. “preserve by being carful,” our trustees have only one prudent option. Preserve.
Finally, that same Russell 300 from October 1, 2007 to February 25, 2009 lost an annualized -37.56% That would take a Billion down to less than $730 million.
Equities ? Sure, but in the hands of professional managers.
Dear John
Thank you very much for sharing your insight based on your many years of experience. This is the type of transparent public discussions we need to continue in Wyoming.
I think we are on the same page for most of your points. We both talking about the prudent growth of the stock of the corpus over the long run and the flow of annual income as managed by experienced experts. Of course risk is involved in managing every perpetual endowment—but Wyoming has a history for doing the right thing over long run. I have never talked about a short run view of reckless investment based on imprudent risk preferences—nothing of the sort.
So I see a vote for Amendment A as the first step in a longer term strategy to revisit the prudent management of Wyoming’s sovereign wealth. The next step is to talk with our legislators about expanding the Investment Board to include professional managers as advisors (as in New Mexico and New Zealand https://www.nzsuperfund.co.nz/nz-super-fund-explained-governance/board). Then there are few more steps that need to be discussed—such as a “double-arms-length” between the Board of guardians and the legislature who appoints the Board members. All these points need to be discussed out in the open.
All the best
J Shogren
The article & responses seem to assume a few things that remain unstated.
It seems the goals of each find need to be stated before we even consider what kind of investment policy will achieve them.
Key questions are: when we might need to actually use some of these funds, and in what amounts.
And what kind of asset allocation has the highest chance of achieving the account goals, and at what level of risk?
It’s likely that the need for liquidity will come at the least convenient time for converting stock holdings to cash.
I am not confident that merely allowing investment in equities without clearly addressing these issues is helpful. And I have no reason to believe that oversight by the house, senate & five elected officials is oversight by people with relevant education, training and experience.
Mike
thanks for the comments
yes, I agree–we need a plan and we need oversight by experts we trust and respect.
Financial markets work for us, not the other way around. We have to demand transparency and negotiate for reasonable fees to make sure that is the case.
How? One idea is to expand the State Loan and Investment Board to include both elected officials and private citizens. Currently, the 5-member Board includes the Governor, Secretary of State, Auditor, State Treasurer, and Superintendent of Public Instructions. Yes, they are our highest elected officials, but they are not necessarily all experts on modern finance. If we expanded the board to allow for Governor/Senate/House-appointed private citizens to serve on it, we could include people with vast expertise in finance and investment. This public members-on-the board idea has precedent in Wyoming—the Environmental Quality Council is a Governor-appointed citizens board that sets environmental policy in the state. Transparency would be increased because we would have more people asking more refined and precise questions on how we manage our trust funds.
Our friend and neighbor New Mexico does just this. The State Investment Council of New Mexico has eleven members: the Governor, the State Treasurer, the Commissioner of Public Lands, the Secretary of the Department of Finance and Administration, four public members appointed by the Legislative Council, and three public members appointed by the Governor (one must be the Chief Financial Officer of a state institution of higher learning). All public members are appointed and confirmed with the advice and consent of the Senate. To read more on the background of the public members, go to their website:
http://www.sic.state.nm.us/council-members.aspx
thanks again
J Shogren
I think it is important to pass Amendment A to provide the opportunity to better invest the funds that are not constrained. Of course, it needs to be done carefully. I also agree we should review the administrative costs of our current investments.
I have always wondered about low risk investments for an entity that has no investment timeline. Shouldn’t we be investing 100% in equities? Who cares if we lose money one year or ten years, seems like we should be playing and planning for the long haul.
Also, is anyone paying attention to how much we are paying in fees? Some serious research needs to be done as to whether we would be better off to invest in simple index funds rather then pay people to pick stocks.
P.S. My favorite class at the University of Wyoming was Global Econ, taught by Dr Shogren. Other then we were “taxed” one letter grade for not reading the book. I learned more about how the world operates in that one class then in the rest of my college career combined. Even if he is a lefty when it comes to healthcare…
Expecting a long-run return over 7% and attempting to attain it would be a HUGE mistake and extremely dangerous even considering the fact that the State of Wyoming does not need to pay federal income tax. I think Warren Buffett and other competent and very respected people in the field, such as Robert Shiller and David Swensen of Yale University, would STRONGLY disagree with this article. (See, for example, http://www.forbes.com/sites/gurufocus/2015/01/09/both-buffett-indicator-and-shiller-pe-continue-to-imply-long-term-negative-market-returns-2015-market-valuation/#2536a6ca2624 ).
The article did discredit to WyoFile.
I would encourage, at least, the author to address Buffet and Shiller’s projections and the current view of many that the S&P is substantially overvalued.
i am not saying that EVENTUALLY Wyoming’s reserves should not be invested more in equities but this should be accomplished slowly over time to hedge against the possibility/probability an inflated market and more skepticism should be exercised as far the significance of recent past market gains.
Finally, on a separate note, I hope the author analyzes the amount of administrative costs incurred by Wyoming in the management of its investments. Minimizing them is extremely important.
Chuck,
Thanks for the comments
I am not advocating a bullrush into the equities market starting tomorrow. nothing of the sort. if the market is overvalued now based on sound indicators, this has to be account for in any investment strategy.
Rather what I am asking is that we consider giving the State Treasurer’s office more flexibility–more options–to invest the remaining trust funds. How and when they chose to invest in equities or alternative investments (as discussed in Ben Gose’s comment below and his 2009 Wyofile attached article) will be up to the State Lands and Investment Board and State Treasurer’s office.
Why now? Unlike you and me, Wyoming never ends–and you seem to agree that “eventually” the resources could be invested in equities.
The Treasurer’s office needs the ability to do so first–Amendment A gives them that ability for the remaining trust resources that do not presently have that ability. They do not have to use this option, but it is available when the time is right. How they chose to cross that bridge is up to those we elect and send to Cheyenne.
thanks again
J Shogren
Better late than never, but why does Wyoming always get excited about stocks after long bull markets and cautious when stocks are cheaper? 2009 might have been a good time to think about this change, but the then-state treasurer told us that was a “bad time” to consider risky assets. Now that the stock market has tripled from 2009, the time is right?
https://www.wyofile.com/specialreport/should-wyoming-rethink-investments-despite-recession-time-may-be-right/
Thanks for this overview and analysis. I think we can all “get” this! Hope so!