Concern has been raised from participants of the Florida Retirement System (FRS) and organizations that utilize the State Board of Administration's (SBA) services by recent articles expressing criticism of my ethical standards and judgment and questioning the decision to invest in hedge funds. It is time to set the record straight.
FRS among best
The FRS Pension Fund continues to be one of the best run public pension funds in the United States. Independent research determined that the FRS is not only one of the best-funded pension plans in the nation, it was recently recognized by the Pew Center on the States as one of four model pension funds entering 2008 fully funded. Additionally, the FRS has recently been highlighted as obtaining the best investment performance and deemed one of the most cost-effective pension providers among its peers.
No conflict
We take our fiduciary responsibility seriously at the SBA. Favors that benefit business acquaintances or employees are not part of the mix and our processes make it impossible for any individual to do so.
I have had the privilege to work with many of the world's most talented and respected investors. These relationships are an asset to me and by extension, to Florida. Building a network of peers, staying in touch with them, comparing market perspectives, ideas about risk and opportunities are essential in making any successful and profitable investment decision. This does not signify favoritism, conspiracy or misdeeds of any kind.
My actions at the SBA have been and will continue to be taken on behalf of our beneficiaries — FRS participants, local governments and members of other SBA managed funds — in their sole economic interest.
The article focused on investments with Bayview Financial and Ramius. The consideration of Bayview Financial started before I returned to Florida in 2008 and Ramius was sourced from an external consultant. Neither was brought to the table by me, and both are wise investments, that have other well known shareholders and equity owners.
In each case, the SBA's normal processes and policies were followed. This means each endured multiple checks and balances at various levels of consideration within our organization and independent external financial and legal review as well.
Reduced risk
FRS beneficiaries can rest assured that their retirement assets are being prudently managed. The decision to increase alternative investments and add modest hedge fund exposure of only six cents of each dollar has been under consideration for nearly three years, made in the sunshine, with careful oversight and input from the SBA's Investment Advisory Council, the Board of Trustees, and multiple independent internationally recognized investment advisers. Changes will be implemented thoughtfully, with prudence, discipline and patience.
The result, contrary to assertions, will be a reduction of risk by decreasing our current positions in equities and actively managed investments and increasing the proportion of passive versus active management.
The SBA's focus is on institutional quality fundamental funds willing to provide an appropriate level of transparency. Overall, we are targeting returns for hedge funds that will be slightly below equity returns with less volatility and less correlation to other assets.
Our investment plan continues to be in line with peers and more conservative than many respected institutions. To the extent we choose to take active management risk, we want to do so in less efficient corners of the market, where the probability of being paid for risk is greatest. This is where alternative strategies contribute, by offering greater diversification, protecting capital in down markets and participating in up markets.
The SBA has a history of making periodic adjustments to ensure our strategy is appropriate for the long-term health of the pension system. This has resulted in nearly 65 cents of every dollar paid to retirees coming from investment earnings, not Florida taxpayers.
Strengthened policies
The SBA has strong ethics and disclosure policies, which have been followed, broadened and strengthened on my watch. The Florida Legislature, at the SBA's recommendation, recently codified a number of SBA policies into statute and required that financial statements for Florida retirement funds be subject to annual external commercial audits.
Additionally, prior to the most recent articles, I asked SBA staff to contact our external fiduciary counsel to review our ethics and disclosure policies in comparison to industry best practice and recommend any changes needed to comply. We are always looking for ways to improve and serve our participants in the most appropriate, beneficial and financially sound manner possible.
Ash Williams is the executive director and chief investment officer of the Florida State Board of Administration.
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