Mass. pension fund posts big loss

By Todd Wallack, Globe Staff

Hurt by the steep decline in the stock market last summer, the Massachusetts state pension fund reported its worst year in its modern history.

The fund lost 23.6 percent, or $12.8 billion, in the fiscal year that ended June 30, according to Michael Travaglini, executive director of the Massachusetts Public Reserves Investment Management Board, which runs the state pension fund. Assets are now down to $37.8 billion.

Historically one of the top public pension funds in the country, Massachusetts is now likely to rank among the worst performers for the past year among all major funds tracked by Wilshire Associates. It is also the first time since 2002 the fund performed worse than average.

The fund's performance could spell trouble for its chairman, state Treasurer Timothy P. Cahill, as he contemplates a run for governor. Cahill dropped out of the Democratic Party earlier this month and is expected to run as an Independent in next year's election. He has increasingly criticized Governor Deval Patrick's fiscal management of the state.

But as pension board chairman, Cahill has taken an active role in the management of the fund. In 2004 Cahill pushed to invest in so-called absolute return hedge funds, which strive to make money regardless of the overall market's performance. Such investments, he argued, would limit losses during periods when the US stock market posts steep declines.

That has worked--to a degree. The state fund has considerably less of its money invested in US stocks than five years ago, and the hedge fund component of its portfolio declined much less last year than did its stock holdings. But the Massachusetts fund still had a large exposure to stocks of foreign companies--25 percent--greater than what most other public pension funds maintain. Foreign stocks performed just as poorly as US stocks last year, down 31 percent.

Meanwhile Massachusetts has lower levels of bond holdings than other public funds. That investment made money--up 4.3 percent--in the fiscal year.

"Given those weightings," Travaglini said, the state fund "will outperform during bull markets and underperform during difficult equity markets."

Travaglini said the board will re-evaluate its investment strategy at its next meeting on Aug. 5.

Some of the poor performance was attributed to failings of fund managers hired by the state agency. Four fund managers were fired within the last year including one--Austin Capital Management--that lost $12 million to convicted swindler Bernard L. Madoff. And in April, the pension fund replaced its long-time alternative funds consultant, Cliffwater of Marina del Rey, Calif., with Ennis Knupp & Associates of Chicago.

Travaglini said the fund would have lost only 20 percent if it had simply invested its money in index funds -- rather than hand-picking stocks and other investments.