Several days ago we reported that as a result of ongoing “financial repression” and record low rates, public pensions in the US are currently facing a $2 trillion funding shortfall ($4.5 trillion in assets on $6.5 trillion liabilities), however the shortfall soars to as much $8.4 trillion if one discounts the future at “safe” rates of return around the current 2% level.
While that may be an exaggeration, the pension shortfall even under current actuarial assumptions is a major issue for future pension payments, and one which is forcing public asset managers to take drastic steps to cut the shortfall. Case in point, is the Michigan Department of Treasury which according to Detroit News, bought $48 million shares in Tesla Motors for state retirement funds in the second quarter, increasing its shares 224 percent in the electric-car builder.
The Treasury department’s Bureau of Investments oversees investment of more than $60 billion in the State of Michigan Retirement Systems. That includes four systems: the Michigan Public School Employees’ Retirement System, Michigan State Employees’ Retirement System, Michigan State Police Retirement System and Michigan Judges Retirement System.
The retirement funds owned 104,821 shares of Tesla as of March 30. By the end of June they had 339,623 shares worth $72 million, according to U.S. Securities and Exchange Commission filings. That means that as of June 30, Michigan retirees owned more Tesla stock than even the Swiss National Bank, which according to its latest 13-F owned “only” $59 million in shares of the car maker.
What makes the boost in the ownership stake particularly odd is that Michigan legislators have prohibited Tesla from selling its electric cars in the state. Governor Rick Snyder in 2014 signed a so-called “anti-Tesla bill” into law prohibiting vehicle sales by any company other than franchised dealers.
A Treasury spokesperson said in an email that all investment decisions are made by a team of portfolio managers that are independent of state regulatory agencies. “Our original $25 million position in Tesla was relatively minor, and we added approximately $50 million during the past quarter,” the department said in a statement. “The additional shares did not materially add to the risk of the overall $60 billion investment portfolio.”
Yet somehow they materially added to the potential return of the overall portfolio? In other words, Michigan has found the golden grail of investing: future return without risk.
So what else do Mihcgan retirees own indirectly?
The Tesla stock represents 0.12 percent of the state’s $60 billion portfolio. The state owns holdings in hundreds of companies and funds. Some other notable companies it invests in include Verizon Communications Inc., Apple Inc., Wells Fargo & Co., AFLAC Inc., Microsoft Corp., Home Depot Inc., Facebook Inc. and Amazon.com.
Treasury owns 1,355,538 shares of Ford Motor Co. worth about $17 million. It owns 486,800 shares of stock in General Motors Co. worth about $13.7 million. It also holds about 94,000 shares of Delphi Automotive stock worth more than $84 million. It does not own stock in Fiat Chrysler Automobiles.
Andy Dillon, former state Treasurer and now executive director of financial and management consulting firm Conway MacKenzie, said the Treasury has a large portfolio, and any one stock investment likely is just a coincidence.
“They have an obligation to chase returns and be diversified,” Dillon said. “It doesn’t jump out to me as anything out of the ordinary… It’s very difficult to read much into that.”
When Tesla stock is rising, Dillon is of course correct. However, when it – and everything tumbles – the state’s furious retirees, most of whom would see their pensions slashed, will demand answers. And this will be one of the #timestamped articles that leads to an exuberance of anger at what in retrospect will be seen as a reckless decision. For proof look no further than Japan’s pension fund, which in the first quarter alone lost about $100 billion as it shifted away from bonds (which are, ironically, soaring) and into Japanese and foreign equities. Then again, one can’t say that Japanese pension managers learned their lesson either: as we reproted a month ago, instead of reassessing, they are simply doubling down…
As for the culprit behind this sad state of affairs, look no further than the world’s central banks, who have made the job of pension fund managers virtually impossible courtesy of the coordinated global effort to get everyone invested “all in” in the riskiest assets if any return (or yield) is desired. Incidentally, every time this has happened in history, it ended in tears. This time may not be different.
via http://ift.tt/2aRLINq Tyler Durden