Saturday, January 30, 2010

State of Wisconsin pension enhancement strategy

The State of Wisconsin Investment Board, with their $68 billion pension fund, is turning to Wall Street to leverage its returns.

112% allocation in 2011.

120% allocation in 2012.

The quants, devising this strategy for Wisconsin say this:

“'Downside protection' improves with increased leverage in absolute terms, i.e., lower worst-case costs minus higher expected costs.”

Here's what Wisconsin approved for their mix:

The new target allocation is 28% U.S. equities, 25% international equities, 26% fixed income, 7% TIPS, and 6%  private equity, 6% real estate and 6% multiasset.

Supposedly, they'll leverage less risky assets.

In other words, they get the free lunch, coupled with Wall Street fees to get it.

How do more fees increase the return?

Wisconsin currently pays over $220 million a year in fees to manage their portfolio. If they shift 6% of their portfolio, (which has diminished almost $20 billion) into private equity with a standard 2/20 fee structure, and that $4 billion returns 10%, then they would pay $80 million in management fees and an additional $80 million in performance fees.

Wall Street would garner another $160 million from the pensioners of Wisconsin.

Today we saw that one of the most successful private equity buyouts; that of HCA, is paying a dividend to its private equity holders of $1.75 billion. They are, of course borrowing it.

HCA made $673 million in 2008, and $1.05 billion in 2009.

Thus, this $33 billion in revenue hospital, paid out every penny they made the last two years, to the greedy, blood sucking owners of the firm, in a dividend borrowed from the banks.

Now The State of Wisconsin, has a flim flam argument to leverage their returns, just so Wall Street can take money out of their pensions and give it to people that strip companies of their assets, lay off people, and pay themselves all that the company makes.

California's foray into private equity was a disaster. So Wall Street hooked their next fish.


There isn't any Peacock Bass in Wisconsin, and they shouldn't have any private equity in their portfolio either.

You want enhancement for your portfolio?

Get it from Go Daddy, and tell Wall Street to take a hike!