Imagine this scenario: You worked hard, saved and scrabbled together $400,000 by age 55. You turned it over to your broker hoping he’d keep the money safe but also grow it so you’d be in a position to retire in another 10 years. The broker consulted experts, bought and sold … and bought and sold some more. At the end of 10 years, you had $800,000 — twice as much as you started with.
Pretty good, right?
You’re plenty happy until your neighbor Sally comes over to spoil the party. Sally threw her $400,000 into the Vanguard Balanced Index Fund — which puts 60% of its assets into a broad index that tracks the U.S. stock market, and the other 40% into an index that tracks the U.S. bond market. It’s a simple and fairly conservative investment, even for someone nearing retirement.
By buying and holding this low-cost index fund, Sally ended up with $1,086,000 after 10 years. A million bucks! And $286,000 more than you. The new car? The vacation in Cabo? Spoiling the grandkids? Retirement will come much easier for Sally.
That’s the story of Wyoming’s investments, in a nutshell.
As many state residents know, Wyoming has a lot of money — now more than $22 billion — socked away in permanent funds. What most aren’t aware of is that Wyoming could have a whole lot more.
Wyoming’s return on its permanent investments has been weak for a long time. And the consequences for the state as it tries to navigate the current budget crisis are far more severe than missing a trip to Cabo.
Sitting out an opportunity
The popular narrative is that Wyoming’s investments are a rare bright spot amid a windstorm of bad news.
Most media coverage describes Wyoming’s investing as a success. RVK, the state’s investment consultant, reports in its latest annual report that Wyoming beat its customized “benchmark” by four-tenths of 1% over the 10 years to June 2019. State Treasurer Curt Meier praised the state’s Chief Investment Officer Patrick Fleming in an April column for beating that benchmark again, amid the falling markets that marked the onset of COVID-19.
This is not the entire story, however.
The decade ending in June 2019 — a tremendous bull market, as U.S. stocks rose from the ashes of the financial crisis — was considered a generational opportunity for a long-term-oriented investor to build wealth.
Wyoming largely sat it out.
The state’s two biggest funds — the $8 billion Permanent Mineral Trust Fund and the $4 billion Common School Permanent Lands Fund — had just 12.5% of their assets directly invested in the U.S. stock market at the end of that period, according to an investment performance report RVK prepared for the state. U.S. stocks make up more than half of the world’s market.
Over that decade, Wyoming’s permanent funds lagged behind more than 85% of similar funds nationwide, including sovereign-wealth funds in other states, endowments and foundations, according to data from RVK.
Meier, who spent 24 years in the Legislature and operates a 4,300-acre farm and ranch near La Grange, ran for treasurer on the premise that investment returns could improve. He said he’s added more equity-like investments to the portfolio, and that taking more risk should boost returns over time. The state has favored international equities because they pay higher dividends, he said, but he acknowledged that they have badly lagged U.S. markets.
“If you had a magic ball, you would have gone into the S&P 500 and left it there for 20 years,” he said.
No experts would expect Wyoming, or any prudently managed fund, to match the heroic performance of the S&P 500, which rose 14.7% a year over the decade ending June 2019. But take the humble Vanguard Balanced Index Fund — far more conservatively invested than the typical sovereign wealth fund, and used here as a stand-in example of the innumerable low-cost index funds that are readily available. It earned 10.51% per year over the same period. That is a notable increase over Wyoming’s Permanent Mineral Trust Fund, which earned just 7.1%, as well as the Common School Permanent Lands Fund which returned 7.3%.
The two funds are crucial sources of revenue for Wyoming government. PMTF spending now makes up more than a quarter of general-fund revenues, on average, and the PLF is an important contributor to spending on K-12 education.
The roughly 3.3-percentage-point gap in annual performance between those funds and the Vanguard Balanced Index Fund may seem modest, but it has huge implications when compounding billions of dollars over 10 years.
The two Wyoming funds held assets of $5.5 billion in June 2009, according to data on the Treasurer’s website. If those assets had simply earned the return generated by the conservative Vanguard fund over the following decade, Wyoming would have an additional $4 billion today.
Or more. Wyoming has another nearly $1 billion in smaller equity-oriented permanent funds with similarly weak returns, and another $1 billion-plus in other funds, including the Legislative Stabilization Reserve Account, which only recently began investing in equities.
Underperformance
It’s not just an index fund that Wyoming is lagging. Financial records show the state has dramatically underperformed compared to similar permanent funds in other mineral-rich states, as well as pension systems and endowments, which have a similar goal of preserving and growing wealth over long periods.
For a more apples-to-apples comparison, two other large sovereign-wealth funds in western states left Wyoming in the dust. The $18 billion New Mexico Land Grant Permanent Fund earned 9.4% per year over the decade ending last June. The $64-billion Alaska Permanent Fund earned 9.2%. College endowments worth $1 billion or more posted average returns of 9%. Large public-pension plans earned 9.7%.
Fleming, Wyoming’s chief investment officer since late 2015, said the S&P’s recent run is an anomaly that’s unlikely to repeat, and that Wyoming’s performance will exceed a 60-40 stock-bond index moving forward.
“Looking backward is the easiest thing in the world,” Fleming said. “Tell me where it’s going to be in the next 20 years.”
And yet, looking backward allows a glimpse into how investment decisions affect state finances.
All the financial talk can also obscure how the issue has real-world impacts on the typical Wyoming family.
The proportional share of Wyoming’s savings per family may be worth more than that family’s own personal savings, after all. Divided by the state’s population of 579,000, the savings yields $155,000 for each family of four — far more than the typical U.S. family has saved.
Residents don’t personally own that share — the permanent funds are designed to exist forever — but those funds work for all state residents. An extra $4 billion accrued by better returns — the kind the index fund would have generated — would amount to an extra $28,000 at work for each Wyoming family.
Everyone agrees that the downturn in the minerals industry is bad news for Wyoming. But Wyoming’s weak investment returns also represent a significant — and rarely discussed — reason the state is going to have to cut spending or raise taxes.
Under the state’s current policies, that foregone $4 billion would have enabled additional state spending of $200 million, year after year. That’s some expensive water under the bridge. Gov. Mark Gordon and legislators are currently weighing controversial rollbacks to the state’s sales-tax exemptions to try to save less than that — only $186 million.
This month, Gordon announced a 10% cut to the general fund budget, acknowledged that some state employees would lose jobs, and warned that additional cuts will be necessary.
The implications of the state’s long-term investing record, long under the radar, now threaten to impact everything from state government employees to teachers worried about salary cuts and those fearful of new state taxes.
It’s not a lost cause. Even now, modest improvement to investment returns would mean huge gains for the state. Every 1-percentage-point increase in the annual returns earned by the PMTF and Common School PLF would generate an extra $120 million in revenue.
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The issue has garnered little attention, even by state legislators. That may be because until very recently, Wyoming has been minerals-rich enough not to care. Legislators say scrutiny of investment performance is likely to get sharper now that the state faces its biggest economic crisis in decades.
“There’s no reason why we shouldn’t be competitive with others,” Senate Revenue Committee Chairman Cale Case (R-Lander), said. “It’s probably past time to ask the real tough questions.”
Wyofile will do just that in this series.
This is part 1 of a four-part story package analyzing Wyoming’s investments and their impact on state spending.
Any robust analysis of investment success must also discuss purpose, willingness to take risk, fund structure, gain/loss policy, and investment constraints. Ben and I spoke about many of these, and I look forward to his further reporting; however, simply comparing the returns of Wyoming’s permanent funds to the Alaska Permanent Funds — muchless the Vanguard Balanced Index Fund is specious without understanding the underlying investment thesis, attending investment constraints, and fund structure (in Wyoming’s case fundS structureS). Up until a few years after the Great Recession, Wyoming counted on mineral wealth for income and expected absolute safety for her investments. That was established in statute and in practice. Only in recent years, as statutory restrictions were revised, did return become more of a concern. Still, emphasizing return without understanding risk is a perilous practice. I am looking forward to a thorough examination of what Wyoming can do going forward and hoping Ben can add to that discussion. Driving by looking in the rearview mirror does not always yield success.
It is very probable that the author has failed to compare the Wyoming investment portfolio to other portfolios with the same risk. The article does not give the reader any risk data so a comparison, and a judgement on performance, cannot be made. The portfolio may be doing very well – when making a proper risk comparison. The author implies that a higher risk portfolio would be more appropriate. That may be true, but without knowing or presenting all the considerations affecting the decision, I would not make that call, or criticize those who do so.
So after the bailouts of capitalism in 2008 and 2020 by using the power of the printing press, Ben is arguing the markets and decisions by Wall Street are actually transparent? It appears the goal of the Fed is to pump the stock market bubble to keep the old owners (voters) of these “investments” afloat, while not allowing actual price discovery by interceding in the markets. It was done in 2008 and never stopped and then with this administration it doubled down with a tax cut that drove businesses too buy back stocks, further hyping the market. Then a slow down was already occurring prior to COVID, but now that this great excuse has arrived the stock touters are back saying if we had invested here, in this rigged system, look how much money we would have for Wyoming. I hope that in one of these 4 parts the actions of of the Fed and analyzing the true state of America’s so called capitalist society.
We, and I mean the whole world, are borrowing from the future to boost stock prices now to further finance exploitation of labor and resources. Let me know how the glorious governments are going to pay back these debts, fund our pension liabilities and invest in our future? Eventually a weak currency economy will fail causing the whole Jenga pile to crash to the ground with no country around to pick the pieces back up.
Blowing bubbles with printed money and the picking of winners and losers is a suckers bet that we all are going to pay the price for, because seemingly everything is too big to fail. Energy is the key to a prosperous life, financial markets are not.
Never underestimate the power of overconfident men. In this case busy playing with our state’s wealth.
A sequel to this very good article will hopefully focus on another very significant reason for poor investment returns from Wyoming Sovereign Wealth Funds. This is the long-time practice of diverting permanent funds to Public Purpose Investments. This process is more accurately identified as political purpose investments. They are nearly always financed from the permanent fund corpus rather than the earnings generated from the corpus. Compounding this is that it causes investment managers to divert other funds into low-risk, low-return investments to balance the extreme risk of public purpose investments.
For more than a half century, the Legislature has invited lower investment returns by deliberately diverting funds for a so-called public purpose. Examples include low or no interest loans to build college dormitories resulting in subsidized rents for tenants, low interest loans to farmers, hydro power, low interest loans for economic development, low interest loans to local government programs – and the list goes on and on. Next will be the Occidental purchase.
The extreme cost of these politically inspired programs has been a main factor in the documented low returns discussed in this article. The only path out of this investment rut is to completely separate fiduciary financial decisions away from politics and make the state investment office independent like virtually all of the sovereign wealth funds that earn significantly better returns than have been experienced in Wyoming.
Michael Madden is right to question the Public Purpose Investments, but they are not a factor in the low investment returns earned by Wyoming’s permanent funds. Only a little over 1 percent of the PMTF and the Common School PLF were invested in Public Purpose Investments, according to the 2019 annual report, and they are excluded from investment-return calculations computed by RVK.
I would hope the future articles would have REAL numbers. A glaring error starts the article to position future articles against sub par performance. In fact, according to the RVK quarterly report the allocation to equities in the permanent mineral and common school land trusts approximates 50% of the total corpus. If you have the depth of knowledge and an understanding of investment objectives then you can compare apples to apples.
Bill McDowell
Wyofile will point out a in a future article that Wyoming held approximately 50 percent in equity-like investments in these two funds throughout this 10-year period. That is an asset allocation decision that puts the state on the “conservative fringe” of funds designed to exist in perpetuity. Even so, when compared to the Vanguard 60-40 index fund, Wyoming’s lower equity allocation in these two funds during the 10-year period accounted for only about a third of the underperformance.
So great to see Ben Gose and financial/economic acumen back in WyoFile. This is exactly the kind of public policy perspective the state needs in these challenging times.Also, keep up the good work for the Lander HS track team!!
I presume that in a future article there will be a discussion of the fees being paid to the state’s investment managers to buy and sell and buy and sell. Who is being paid what pursuant to what fee structure to invest in what?
Extend this analysis to the Social Security Trust Fund. for a heart-breaker! No assets at all, just IOU’s obligating future tax payers.
What some folks may be hesitant to voice is a general lack of confidence in the abilities of past state treasurers to invest in the stock market with any real degree of sophistication. Thus the hesitation among legislators back then to broaden the risk/return range of allowable investments.
And now we have been ask to trust the State in their proposal to buy the patch work property that has in my opinion will prove to be the same outcomes of the investments we appear to have lost according to the article by Ben Gose.
Stay Safe All
Peace Dave Racich