On the wrong track
One question popped into my head right away: What was Joe Kennedy thinking?
Kennedy's latest idea, to open the doors of fancy private equity firms to any Massachusetts resident with the assistance of the state's pension fund, came bouncing out of a political speech last week. He defended it passionately during a phone conversation yesterday.
But that doesn't make it a good idea, and it's not. In a word, it's nuts.
Kennedy suggests the state could offer residents access to an investment portfolio that mirrored the $36 billion public employee pension fund and its impressive performance record. In addition to a variety of stock and bond holdings, the fund dedicates some money to alternative investments, such as venture-capital and private-equity funds.
Alternative investments have very strong performance records. But they are relatively illiquid investments and often require participation in pools of money for many years.
Kennedy has come up with more than his share of ideas to help those struggling to make ends meet. Everyone knows about his Citizens Energy Corp.'s work delivering low-cost heating oil to people in need. His efforts in the world of healthcare haven't worked so well to date.
Kennedy sees no difference between the state's practice of investing pension-fund assets and the offering of the same deal to residents for their personal profit. But there is a difference and any state that offers investment vehicles as a general service is asking for trouble.
State Treasurer Tim Cahill sounded downright enthusiastic about the idea last week. He wasn't available yesterday, but the tone coming out his office was firmly neutral.
The Kennedy concept comes with lots of thorny questions and practical details, such as what could happen to the pension fund's tax status if it started effectively managing money for individuals. Set them aside for now.
Think about those investment returns. They should certainly run circles around the interest on an insured bank deposits, but more realistic comparisons produce closer results.
The pension fund has earned an average of about 10.8 percent annually over the past decade and anyone who had a slice of that obviously would have made a lot of money. But an investment in the Standard & Poor's 500 index over the same period of time would have earned an average of just over 12 percent a year. A diversified portfolio of the S&P 500 (60 percent), a variety of bonds (30 percent) and cash (10 percent) would have earned something just north of 10 percent a year, by my back-of-the-envelope estimate.
The pension fund was competitive, but not a world-beater. Take into account the high administrative expenses that would come with a pension-fund portfolio available to all, and the comparison grows tougher still.
Kennedy believes access to private equity would be a huge advantage for a small investor's diversified portfolio. He thinks it would level the playing field in a system that reserves the best-performing investments for the rich.
Private-equity investments might make some difference to the small investor. But Kennedy and Cahill would be better off working on simpler ideas to deal with much larger investing issues.
Too many can't or won't save any money. Lots of people have no idea how to navigate their way though pages of mutual-fund listings. Practical work to make a dent in these problems would be a real service.
States can create tax incentives to save. Work to promote awareness of the many diversified life-cycle mutual funds already available to any investor would help.
What else can the treasurer do to promote savings and investment across Massachusetts? He could stop selling lottery tickets. That would have more impact than a short-money portfolio stuffed full of private equity funds.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 