State's retirement portfolio takes a hit

$78 billion fund designed to ride out market turmoil, director says

By Adam Wilson | The Olympian • Published September 17, 2008

Havoc in the financial world is taking a toll on state workers' retirement funds, which took a $130 million hit this week.

But ups and downs are part of investing, and Washington's retirement fund is doing fine, state leaders say.

"The credit crisis is reaching a stage that I think no one expected. It's ugly. Is this the end? No," said Joe Dear, director of the Washington State Investment Board.

His agency manages $78 billion in investments for public employees, which pay for retirement benefits. Even a $130 million loss — what the fund wrote off when investment firm Lehman Brothers filed for bankruptcy over the weekend — amounts to a fraction of 1 percent of the total.

"A long-term investor like the WSIB needs to stick to its plan," Dear said. "And the plan is to have a globally designed portfolio of high-quality investments that is designed to withstand these ups and downs."

The returns on the portfolio were scorching in the previous four years, rising to 21 percent growth in 2007. Dear and other stewards of the fund said repeatedly that it couldn't keep up such huge returns.

When risky loans to homebuyers went sour, leading to a credit crunch and a darkened financial picture last year, the pension fund felt the effect. It has been losing value, down 1.24 percent in the past year.

Down times

All investors have to expect down times, said state Sen. Mark Schoesler, R-Ritzville, chairman of the Select Committee on Pension Policy.

"Our investment board has a long-term, rather visionary look. They are diversified for this very reason. They don't buy into just the stock market or just real estate," he said. "They avoid partisanship and political investing, and stick to good money management."

Still, the trouble on Wall Street, with its more than 500-point drop Monday, is affecting the fund. Dear said Tuesday that he was concerned about the fate of another financial giant, American International Group, which has seen its stock price collapse. If the company, the world's largest insurer, fails, it could mean the crisis is spreading, he said.

"We're all concerned, because it's hard for us to understand how this is going to impact our investment returns," said Rep. Steve Conway, D-Tacoma, another member of the pension committee.

The good returns of boom times cover the losses during a drop in the market, he said, adding, "If this persists for several years, then we will have to adjust."

The pension fund is supposed to deliver an average of 8 percent return on investments over the long term. While the three-year average still is high, at 12 percent, the 10-year average has just dropped below the target, at 7.87 percent.

However, there's money to be made even in a crisis. Dear noted that two years ago, the investment board began putting money into firms that specialize in buying distressed investments and selling them when they recover their value.

"I'm not claiming we predicted the magnitude of the credit crisis, but we knew the market would turn at some point," he said.