Secrecy at pension funds is a haunting conundrum. The public wants disclosure so it can evaluate decisions. But trustees do not want to disclose.
The important reason for promoting disclosure of both investment committee actions and results of investment policies is to permit observers to study committee performance. With full disclosure, serious observers could develop hypotheses regarding why one committee produces better results than another.
Also, members of a committee supervising a poorly performing investment account could compare their decisions to actions of committees supervising the best-performing accounts.
However, full disclosure is not in the modern investment play book.
Quasi-public entities such as endowments and foundations also do not disclose policies, names of investment committee members and investment managers, or results. Private retirement plans maintain even more stringent confidentiality.
William M. O'Barr and John M. Conley discussed secrecy in their 1992 book "Fortune & Folly: The Wealth & Power of Institutional Investing." They said: "Private (pension) funds . . . view the details of their investment strategies and performance as trade secrets. . . . There is little communication with other funds. . . . (They) typically subscribe to services that report the performance of all large funds, but with the names deleted. They can identify themselves and can therefore see where they rank, but they do not know how specific competitors are doing, or, more significantly, how well particular strategies are working in the pension world as a whole. . . ."
"One issue that seemed particularly sensitive at one of the public funds was whether we would be permitted to observe the portion of a trustees' meeting at which investment strategy would be discussed. After consultation between investment professionals and lawyers, we were excluded."
Bad intention is not the reason for secrecy. Instead, the reason is human nature. Individuals, whether elected or appointed, public or private, want confidentiality. They want confidentiality in their personal affairs, and they want confidentiality in their roles as trustees. Individuals always have guarded personal financial affairs. They believe governments, competitors, or even neighbors potentially could damage either their financial conditions or their reputations by misuse of personal data. The strongest threat has been the tax collector, from whom millions around the world withhold important information.
Investment committees are made up of individuals inclined toward privacy. A reason might be found in the portion of human nature that is embarrassed by decisions that cannot be rationally explained.
Individuals accustomed to managing tangibles seem self-conscious when asked to manipulate intangibles. Most people can explain personal or business decisions in practical terms, such as "I built the new deck because we need a place to relax," or, "We need a new science center to attract top students." In these examples, needs are reasonable and results measurable. The decision-making process is orderly and comprehensible to an observer. Contractors are hired based on objective criteria such as skill and price.
Investing is not the same. Our language does not have enough words to explain exactly why a board places 20% in bonds, 40% in growth stocks, 20% in small-capitalization stocks, 10% in venture capital and 10% in managed futures. Committees cannot precisely explain these decisions. Explanations do not sound compelling, even to the spokesperson.
Why does the board hire Modern Portfolio Management Inc. instead of Old-Fashioned Growth Stocks Inc.? Both work in the same market, charge the same fees, and have access to similar information. Recent performance figures are different, but 10-year average results are about the same. Frequently, trustees say in private that the choice "felt right."
Since a journalist, author or beneficiary might not have the same feeling, committees do not want them in the room. Imagine the
