Especially during bull markets, there is inevitably pressure on the Treasurer to "ride the wave" by pursuing high return investments. These instruments typically carry higher risk and, as we have seen in the last three recessions, returns that lead the nation in good times quickly can fall below national norms when the economy sours.
As a successful businessman who has led his company through good times and bad, Steve Grossman understands that prudent investment policy -- especially for pension funds -- must focus on strategies that provide long-term stability rather than short-term spurts. For pension investments, the state needs to hit singles and doubles consistently -- not swing for home runs on every pitch.
The value of the Commonwealth's state-managed pension funds, which are overseen by the Pension Reserves Investment Management Board (PRIM), plummeted 29.5% last year -- a loss of nearly $16 billion. This is not surprising given the brutal stock market crash last year that saw market indices lose more than 30% of their value.
What should most alarm the Commonwealth's citizens, however, is that PRIM's five-year rate of return dropped to 3.5% in 2008 compared with 16.3% a year earlier. Ten-year returns also fell precipitously. You do not need to be a Wall Street wizard to see that the aggressive strategies in past years could not hold up in the face of a downturn.
Steve believes in investment policies that focus on the long term and emphasize inherent value over market speculation. He is wary of exotic financial instruments that offer seductive short-term gains that cannot be sustained. These investment products played a major role in the collapse of our pension fund, and we must be careful not to make the same mistake again.
The Treasurer needs to stand up to Wall Street recklessness, not invest in it.