Wyoming’s investments results have lagged for years, but no one can accuse the state treasurer’s office of idleness.
In the past five years, Wyoming’s investment operation has been a whirlwind of activity — creating a new investment advisory board, adding staff members and approving the payment of bonuses if returns exceed benchmarks.
But would the state have been better off going in the opposite direction — slimming down, simplifying and accepting the return of broad indexes that have long outperformed Wyoming’s own portfolio?
Gov. Mark Gordon kicked off the operation’s revamp during his tenure as state treasurer from 2012 to 2018.
In 2015, Gordon hired Patrick Fleming as the state’s chief investment officer. Fleming was the first person with professional investing experience to fill the role. Fleming, a Cheyenne native who ran a hedge fund for a few years and once led the Barclay Investments, said he realized immediately the state needed more expert input.
In 2017, Gordon and Fleming created the Investment Funds Committee, an advisory board that meets at least quarterly to assess investments and recommend how the state should allocate Wyoming’s savings between various asset classes, such as U.S. stocks, international stocks, real estate, private equity and hedge funds.
Until Fleming’s arrival, RVK, the state’s investment consultant, had recommended investments to the state, and then prepared reports detailing how well those investments were doing. The State Loan and Investment Board — comprised of Gordon and Wyoming’s other four top elected officials — had the final say, but since none are investment professionals, they typically signed off on the recommendations.
Prior to the committee’s creation, Gordon worried that the arrangement gave Wyoming no edge over other large institutional investors counseled by RVK, he said in an interview with WyoFile.
“The model that we had until recently was the consultant would tell you what the allocation is, and the consultant would grade your homework,” Gordon said. “They’re not going to tell you anything they won’t tell other clients.”
Now, he said, the SLIB can take recommendations from the Investment Funds Committee and vet them through RVK before moving ahead. “We’re asking RVK to not grade their own homework, but somebody else’s,” Gordon said.
Appointees to the committee include high-powered finance professionals with connections to Wyoming, such as Don Opatrny, a former partner at Goldman Sachs; Kenneth G. Lay, a former treasurer of the World Bank; Richard Grannis, a former treasurer of Qualcomm; and Tom Chapman, a principal with Teewinot Partners in Jackson.
“It’s a great group of people with some amazing experiences and backgrounds,” Treasurer Curt Meier said. “We’re relying on them more and more to fine-tune the direction that we’re moving in.”
Around the same time that it created the committee, the treasurer’s office made changes to better align the asset allocation for certain state funds to the purposes of those funds. The $2.3 billion Workers Compensation Fund is one example. The fund had been heavily invested in short-term bonds even though its payouts were medium-term in nature; Fleming moved much of the fund into longer-term bonds. Those changes were no-brainers, Fleming said.
“This is like first-grade stuff,” Fleming said. “You want to make sure a fund’s assets match a fund’s liabilities. It’s taken the better part of my entire time here to be able to fix that.”
Next, the Legislature signed off on a deal proposed by the treasurer’s office which allowed the office to build a professional investing staff. For every dollar Wyoming saved by managing investments internally, half the savings, up to $3 million, could be used to hire new staff. Wyoming now has seven investment professionals. Fleming was by himself when he started, he said. The average employed by university endowments managing more than $1 billion is 10 investment professionals, according to a 2017 study by the National Association of College and University Business Officers.
“What we have been doing over the last five years is trying to get the fund up to a level where we’re able to compete,” Fleming said. “Everyone knows that this system was screwed up. Now we’re all focused on changing things. This is a night-and-day difference to where we were in 2010.”
Hiring and retaining staff members remains a challenge. Partners at Goldman Sachs — Opatrny’s former employer — start at salaries of $1 million and make multiples of that each year with bonuses. Endowment managers at Ivy League universities — most of which have fewer assets than Wyoming — routinely receive salaries of $1 million or more. Fleming’s salary was $250,000 in 2019, and the next highest paid staff member in his investment division made $157,000.
“It’s hard to get somebody from the outside who doesn’t like the bright lights and the big city,” Meier said. “We’re trying to build a team with in-state people — math and computer majors from UW. Wyoming kids. Bright kids. They don’t have the investment skills, but that’s what Patrick is doing — teaching them the investment skills.”
In 2019, the Legislature signed off on yet another proposal from the treasurer’s office — bonuses for staff members if the return on Wyoming’s investments beat various benchmarks. Fleming could potentially double his salary under the arrangement, and others in the investment operation could earn bonuses worth 50% of their salary.
Michael Madden, an economist who served 12 years in the Wyoming House, including seven years as chairman of the House Revenue Committee, supported the legislation.
“Without having professional investment people with reasons to perform well through some kind of incentive program, you shouldn’t be surprised to find your investment performance fall short,” Madden said.
Measuring the results
The first measurement period ended this June. Performance reports through June aren’t yet available, so it’s too early to tell if bonuses will be payable.
Overall, during Fleming’s entire time in office, Wyoming’s returns haven’t improved. For the five years ending in March — the latest period available — the Permanent Mineral Trust Fund earned an average annual return of 2.48%. Two similar sovereign-wealth funds in other states did much better. New Mexico earned 4.35%. Alaska earned 4.96% — twice Wyoming’s return. Fleming was around for all but the first seven months of that period.
Fleming said it’s taken him a few years to get the structure he needs — dedicated staff members focused on asset classes such as hedge funds, equities and real estate plus a robust Investment Funds Committee. Even now, he’s still trying to update the office’s system for trading bonds so he doesn’t have to write out a physical order ticket — something he last did on Wall Street back in the 1990s.
Meier, Gordon and state legislators saw the same shortcomings, and that’s why they were willing to spend resources to make changes, Fleming said.
“We haven’t even been able to play in the game,” Fleming said. “It’s like trying to do it with two hands and one leg tied behind your back, and somebody says, ‘Go run the 100-meter dash.’”
Not “playing” remains an option.
Like Wyoming, most sovereign wealth funds, endowments and pension plans embrace “active” management and a goal to outperform various benchmarks. But not all are trying to outrace the market.
At the Nevada Public Employees’ Retirement System, Steve Edmundson is the only employee in the investment operation. He manages $44 billion and yet made only $152,610 last year — nearly $100,000 less than Fleming. The system transitioned to an almost 100% indexed investing approach in 2015. The strategy: Keep costs low and accept market returns.
Index funds — which aim to track various stock or bond indexes, and have far lower fees than actively managed funds — have come into vogue in the past decade, but they were already widely available when Wyoming dipped its toe into equities in 1996. In Berkshire Hathaway’s 1993 annual report, billionaire investor Warren Buffett wrote: “By periodically investing in an index fund … the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.”
The indexing approach is working for Nevada’s pension plan. Over the five years ending June 2019, the plan earned 7.1% annually, compared with 4.4% over the same period for Wyoming’s Permanent Mineral Trust Fund.
Part of the edge came from keeping costs low. Nevada paid investment-management fees of $52.6 million in fiscal 2019 on assets of $44.3 billion. Although Wyoming indexes a small portion of its assets, the fee burden paid by Wyoming was nearly three times as high — $73.7 million in fees on assets worth $21.4 billion, according to the treasurer’s 2019 annual report.
Aside from fees, the philosophical approach taken by Wyoming and Nevada’s pension plan couldn’t be more divergent.
When asked how he formulates strategy in a 2017 interview with Trusted Insight, Fleming said: “I spend 90% of my time in trying to recognize the markets. I’d say that this is a little bit similar to ‘07-’08, or ’99-2000, maybe even ‘ 86-‘87 … I spend a tremendous amount of time trying to understand where the pressure points are and what is happening with the global markets.”
When asked by Fin News last fall about the most-challenging aspect of managing an investment portfolio, Nevada’s Edmundson replied: “Being patient. I think investors as a group have a tendency to always want to be doing something, when often the best course of action is to do nothing at all.”
Jeff Hooke, an investment banker in Washington, D.C. who advocates greater use of index funds by public funds, co-authored a 2018 academic study that concluded that “…states and municipalities have obtained neither lower risk, nor higher returns, with more active management and a turn toward alternatives.”
Hooke, who is also a lecturer at Johns Hopkins University’s business school, told WyoFile that he thinks advisory committees like the Investment Funds Committee can actually be counterproductive, since appointees tend to be people who grew wealthy through active investing.
“That’s their background,” Hooke said. “They’re not going to get up there and say, ‘you need to index.’”
WyoFile reached out to members of the Investment Funds Committee, including Opatrny and Lay, and didn’t hear back.
Confidence in the status quo
Fleming said he remains confident that Wyoming can outperform an index fund comprised of 60% U.S. stocks and 40% U.S. bonds, such as the Vanguard Balanced Index Fund that Wyoming’s two biggest permanent funds have badly trailed over the past decade.
“I believe that we will do much better than that index over time,” Fleming said. “We have created a vastly different structure over the last three years than what we were in 2010.”
Meier has confidence in Fleming and the state’s current approach, he said. “I think we’ll stay with the diversity we have,” he said. “What we’re trying to build here is a quality oil tanker — going from one port to the next.”
But index funds have plenty of advocates, too — and some are moving beyond merely encouraging their use. Clarence Herbst, a University of Colorado alumnus who has given the university’s foundation about $5 million, filed a lawsuit against the foundation last month, charging that it was driving up student costs with “…abysmal investment performance, which could have been significantly improved by simply investing in broad market U.S. equity index funds and not being over weighted in actively managed investment and ‘alternative investments.’”
The “abysmal” returns that drew Herbst’s ire? They amounted to 9.2% per year over the decade ending June 2019. Wyoming’s Permanent Mineral Trust Fund earned 7.1% per year over the same period.
Correction: This story has been corrected to clarify Patrick Fleming’s work history. The original version mistakenly stated that he had been the CEO of Barclays bank, not Barclay Investments.
This is part three of a four-part story package analyzing Wyoming’s investments and their impact on state spending. Read part one, Wyoming’s missed investment fund opportunities cost it billions, part two, Wyoming’s investments: Why returns have lagged and part four, Wyoming’s investments: Barriers to growth.