Everyone is aware of the serious situation facing many of the nation’s large public pension funds. Some of the problems are of their own making – bad decisions based on bad assumptions exacerbated by bad management and enabled by bad politics. But according to a new report issued just recently by the American Council for Capital Formation (ACCF), at least some of the blame needs to be assigned to fund managers’ investment decision-making.
Plainly put: some managers appear to be investing in assets they know have no real growth potential.
The ACCF report details the economically adverse effects of politically-correct investment decisions affecting the financial stability of the nation’s largest and most severely underfunded pension fund, the California Public Employees Retirement System (CalPERS).
The major problem with CalPERS is that its unfunded future liabilities exceed its present-day assets by $138 billion. All those liabilities have accrued in the past 10 years. In 2007, CalPERS had a surplus of $2 billion. Now, CalPERS is being run more like a political action committee than as an actual retirement fund.
Of course, politically correct investment decisions affect more than just public pensions. Financial and political pressure through the proxy voting process can negatively affect the earnings of publicly traded companies and the passive investors that own their stock.
The Securities and Exchange Commission requires most publicly-held companies to hold annual shareholder meetings. During these shareholder meetings any shareholder holding at least $2,000 worth of stock is entitled to put proposals on the company ballot. In the past, these proposals--at least the successful ones--have dealt mainly with corporate governance issues, namely changes that could potentially increase the long-term profitability of the company and, therefore, potentially increase shareholder earnings.
However, in recent years, shareholders have been increasingly offering proposals that have little to do with corporate governance and more to do with advancing some sort of political agenda. Often these politically-motivated proxy proposals attempt to advance environmental agendas, and they would potentially reduce the profitability of the publicly held company and thus the investment returns to future retirees or others invested in such funds.
In the past, the large institutional investors such as pension and index funds have batted away politically motivated proposals. However, some such proposals are getting support from big institutional investors. For index funds, a reduced rate of return means little to them--their benchmark is the performance of other index funds, so a reduced return from a proxy proposal affects all their competitors equally--and their investors can’t easily discern what has occurred.
But when investment managers put politics before my economic investment, they are violating their fiduciary duty to their investors.
SEC Chairman Jay Clayton referenced this conundrum in a recent address:
“A majority of Main Street America’s dollars are invested in vehicles where the investor – the person with their money at risk – is not the voting shareholder. Often voting power rests in the hands of investment advisers who owe a duty to vote proxies in a manner consistent with the best interests of the fund and its shareholders. A question I have is: are voting decisions maximizing the funds’ value for those shareholders?”
The data show that his concern is warranted. The National Association of Corporate Directors estimated that public companies faced over 200 resolutions on climate change in 2017, a 15 percent increase in such proxies over 2016.
According to Proxy Monitor, the Manhattan Institute website that monitors shareholder resolutions, in 2016 the 250 largest companies faced 58 environmental proposals—or nearly one out of every four large companies.
Liberal activists who find that they cannot achieve their political goals through the ballot box have decided that they will use political pressure through the proxy voting process to achieve their goals behind the scenes – often to the detriment of the average investor.
Investors have the right to take offense when their returns are reduced in order to advance political goals with which they might disagree.
Companies owned by the public should base their business decisions on what they believe is best for those whose money allows them to operate in the first place. The same should hold true for pension funds. Decisions on how to invest, and in what, should be made on the basis of what has the best chance to optimize performance and maximize returns for fund beneficiaries.
An investment manager’s job is to invest the fund’s assets in a manner that will economically benefit its investors to the greatest effect – not abuse their trust by allowing short-term political exigencies to interfere with that goal.
Eric V. Schlecht is President of OnPoint Strategies. He has worked on budget and economic issues in Washington, D.C., for more than 20 years. He has served in leadership offices in both the U.S. Senate and House of Representatives.
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