TRENTON, N.J. - Orin S. Kramer has served notice: From now on, things will be different at the $56 billion New Jersey Division of Investment.
And that's got plenty of people wondering whether Mr. Kramer's presence on the state investment council, coupled with intense scrutiny of the fund by Democratic Gov. James E. McGreevey and his treasurer, John E. McCormac, portends a move toward indexing or external management, or even future investments in alternatives like venture capital.
Mr. Kramer has not said publicly how he might alter the investment approach in response to the division's 32% decline in its assets over the last 27 months. He prefers to wait, he said, until two separate reviews are completed in early 2003. But he is certain that the way New Jersey has managed the assets of its seven state pension funds will not be the way they are managed in the future.
Mr. Kramer was appointed to the council earlier this year by Mr. McGreevey and elected chairman of the division's investment committee in a surprise move on Sept. 19. He said he intends to prod the 11-member investment council, a traditionally passive group that meets five times a year and occasionally considers policy questions for up to 12 months.
"Things are moving fast," Mr. Kramer said in an interview.
From the start
At his first official investment council meeting as chairman on Oct. 21, Mr. Kramer proposed holding monthly investment council meetings. He asked for and got support for more stringent portfolio management risk controls. He proposed and passed a series of stands on corporate governance - the first such positions ever taken by the council. He proposed adopting higher standards for monitoring the division's traders. And he proposed expanding the number of days that division of investment employees can make portfolio trades. Currently they can only trade on Tuesdays, Mr. Kramer said.
"All these things are going to be addressed immediately," he said.
Mr. Kramer also distributed a 15-page memo at the meeting that discussed his take on poor performance, laid out potential solutions and addressed criticism that his appointment to the council was politically motivated and designed to drive the division toward privatization of asset management.
It is this last issue that has prompted some Republican legislators in Trenton, such as state Sen. Peter Inverso, to start circling the political wagons. In response to Mr. Kramer's election as committee chairman, Mr. Inverso introduced a bill banning the Division of Investment from hiring outside money managers and, by extension, from investing in more risky alternative investments.
"I believe the decision to appoint Mr. Kramer is the first step toward pension privatization and hints of politicization," Mr. Inverso said in announcing his bill. In-house management has saved the Division of Investment $160 million per year over the last 10 years, an aide to Mr. Inverso said.
Mr. Kramer, general partner of Kramer Spellman LP, a New York-based private investment management firm, has a no-nonsense style. He wasted little time digging into the state's recent investment history. He did not like what he found.
The state ranked among the worst performers among public funds over the one- and three-year periods ended June 30. It was down 9% for the year, and earned a compound-annualized -3.1% for three years. The median large public fund in Wilshire Associates' Trust Universe Comparison Service lost 5.8% for the year and 0.3% over three years.
For five- and 10-year periods, New Jersey is closer to the TUCS median, posting annualized returns of 5.3% and 9.4%, respectively, compared with medians of 5.16% and 9.39%.
Even worse, Mr. Kramer said, New Jersey is taking more risk than other pension funds. He cites statistics showing New Jersey's risk, as measured by annualized volatility, was 12.43% over a three-year period, while according to Wilshire numbers quoted by Mr. Kramer, the median risk of all public funds with a 15-year performance history was 11.34%.
Over five years, New Jersey took more risk (13.16%) than the median for public funds (12.12%). And over 10 years, New Jersey took 63 basis points more risk than the median fund.
"The state has not created value for the excess risk it has assumed," he said.
Major changes near
The question is why. And it's the potential answer to that question that has New Jersey on the verge of major changes in the way it invests its pension funds.
"We have a fiduciary obligation to ask questions and evaluate the decisions and conditions that have contributed to poor investment performance," Mr. McCormac, the state treasurer, said in announcing that Washington-based Independent Fiduciary Services Inc. had been hired to perform a thorough audit of the Division of Investment and its practices.
(Another report is expected from an investment review committee appointed by the governor to evaluate performance and make recommendations. Committee members include two former governors, along with Alan Blinder, a Princeton University economist and scholar and former vice chairman of the Federal Reserve.)
What the reports will likely show, Mr. Kramer said, is that the Division of Investment's mandate to manage all of its assets in-house, its aversion to indexing and its reliance on large-cap equities have combined to torpedo investment performance in recent years.
Indeed, New Jersey is the largest public pension fund to manage all assets internally without any indexing, data from Pensions & Investments showed.