David McCormick faces scrutiny over teacher pension investment
Before entering Pennsylvania’s Senate race, David McCormick oversaw a huge hedge fund that invested billions of dollars in retirement plans for the state’s teachers.
But Mr. McCormick’s company, Bridgewater Associates, made such moderate profits and charged fees so high that the Pennsylvania Teachers’ Retirement Fund went on to sell Bridgewater Holdings, started two years earlier.
Overall, Bridgewater’s performance was a contributing factor to the retirement fund’s nearly decade of poor returns, the fund’s trustees said in interviews.
Its impact is now being felt indirectly by the thousands of teachers who have to pay more than their paychecks for their retirement, in some cases an additional $300 annually.
Since jumping into the Republican primary in January, McCormick has offered his professional career as a qualification for an open Senate seat in November, but has made little mention of his connection to the state’s Teachers Pension Fund, which Been stuck in it for a long time. dispute, nor the more than $500 million in fees that were paid by the fund to Bridgewater.
But on Tuesday, Mr. McCormick’s leading Republican rival, celebrity doctor Mehmet Oz, sought to use those high fees and Mr. McCormick’s decade to head Bridgewater, the world’s largest hedge fund.
“We’re stuck with a half-billion dollar bill, while he and his colleagues got half a billion in fees,” Dr. Oz said outside the Harrisburg headquarters of the pension fund, the public school employee retirement system, known as PSERS. . He addressed a small group of supporters with a large prop check for $500 million.
“The fact that no one knows this story,” he said, is “shameful.”
As of 2019, the retirement fund had approximately $5 billion in investments with Bridgewater, the most of any firm, and was one of the hedge fund’s top clients.
In response to Dr. Oz, the McCormick campaign stated that Bridgewater had raised a lot of money for the retirement fund and that Mr. McCormick, who served as chairman and later as chief executive of the hedge fund, directly oversees their relationship. were not included. Or invest with PSERS.
The dispute is the latest round in a slugfest between Mr McCormick and Dr Oz, whose primary contest will help shape one of the most important races for control of the Senate this year. Both candidates and their outside supporters have already spent a state record $30 million advertising the attack ahead of the May 17 primaries. A Fox News poll of potential Republican voters this month showed McCormick at the top of the five-person field, though many voters are undecided.
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McCormick, a West Point graduate and former Treasury Department official, was recruited as chairman by Bridgewater in 2009, became co-chief executive in 2017 and became the sole chief executive in 2020 before leaving for the Senate in January .
The Pennsylvania Teachers Pension Fund has been troubled for years. In addition to hedge funds, it put its money into highly risky “alternative” investments, including trailer park chains, pistachio farms and pay phone systems for prison inmates.
In mid-2020, the fund’s annual gains in nine years, a decade when the stock market boomed, amounted to only 6.34 percent, missing the target set by Pennsylvania law.
State Treasurer Stacey Garrity said the reduction resulted in $80 million in higher paycheck deductions for nearly 100,000 teachers and other school workers, as well as higher property taxes for homeowners as school districts’ makeup contributions to pension funds. prompted to pay.
Mr McCormick, who declined to be interviewed, said through a campaign spokesman that the poor performance of PSERS was not Bridgewater Holdings’ fault – as Dr. Oz argued — and those holdings did make money for the pension fund. “Pennsylvania retirees made $3.9 billion in net profit and didn’t lose a dime over the life of the relationship under Bridgewater management,” said spokesperson, Jess Szymanski.
Still, some Bridgewater investments missed the internal benchmarks that retirement funds had set, which contributed to the decision by the board of trustees to sell their Bridgewater investments, along with other hedge funds.
In the most recent quarterly reporting period, PSERS’s largest Bridgewater investment, the Pure Alpha II Fund, underperformed a benchmark for comparable funds over the past three-, five- and 10-year periods. It surpassed the benchmark in a span of one year.
According to board members, what was more important than individual Bridgewater investments was that Bridgewater’s investment philosophy became dominant over a broad portfolio of retirement funds, which are currently valued at more than $72 billion.
In a July 2020 meeting with senior retirement fund staff members, then-state treasurer Joseph Torcella criticized Bridgewater’s poor performance and its massive impact on the pension fund.
“I understood that we were important at the highest level of Bridgewater, and I understood at PSERS that Bridgewater was a true church,” Democrat Mr. Torcella said in an interview.
Bridgewater, which handles roughly $140 billion for large-scale institutional clients, is known for a culture in which employees express their differences as clearly as it is known for its investment record. It claims to have earned customers billions of dollars over four decades.
Its founder, Ray Dalio, is a multi-billionaire who popularized an investment strategy called “risk parity”. It promises to make money in both good and bad economic times by betting on a variety of assets such as gold, treasury bonds and sovereign wealth funds.
During the 2008 financial crisis, when the stock went into free-fall, Bridgewater’s Pure Alpha Fund gained 9.5 percent. According to board members and their colleagues, this was the beginning of an infatuation with Bridgewater by the professional staff of the Pennsylvania Teachers Fund.
Surrounded by their dwindling stock holdings, retirement funds adopted a risk parity model. Not only did it load up on Bridgewater’s own fund, it molded itself into a hedge fund like Bridgewater.
A 2018 report for the Pennsylvania legislature found that PSERS’ portfolio allocation “reflects a risk parity model.”
It was a highly unusual and risky approach to public funding that sends monthly checks to 250,000 former teachers, mentors and other school staff.
“Bridgewater’s real impact on PSERS was not only that Bridgewater was one of a hundred managers – they were mentors,” said Torcella, who was part of a bipartisan group of board members who began to challenge the way pensions worked. did. Fund was run. “Many of the investment teams at PSERS became Bridgewater’s maintainers. There was a great deal of respect for his way of thinking. ,
Certainly, no one at Bridgewater was twirling the arms of PSERS employees to copy the hedge fund’s strategy.
Still, teams of retirement fund staff members flock to Bridgewater’s wooded campus in Westport, Conn., or host Bridgewater Advisors in Harrisburg for day-long seminars. In 2019, top pension fund executives flew to China for two Bridgewater events, including a one-week “investor summit,” at a cost of $4,467 in travel.
In the decade following the financial crisis, as the stock market recovered and boomed, PSERS’ adoption of the risk parity model of investing had a disastrous effect on the pension fund’s bottom line. As of 2018, retirement fund returns in a decade rank 50 out of 52 public pension schemes across the country, according to a report by state lawmakers.
Although Bridgewater’s fund was hyped as a bear market season in stocks, the arrival of the pandemic in 2020 proved that complex financial struggles did not live up to the hype. Bridgewater’s Pure Alpha fund was underwater for the year, even as the S&P 500, the broader stock market index, gained more than 16 percent.
Dissatisfied with the PSERS board, which largely favored a plain-vanilla portfolio of public stocks and bonds, the pension fund was successful in selling its two Bridgewater funds, All Weather and Optimal, and eventually liquidating all of its hedge funds. Investment.
In July 2021, the pension fund was forced to increase paycheck deductions for the 94,400 school workers hired since 2011.
Samantha Creda, who taught special education to third- to fifth-grade students at the Richard R. Wright School in Philadelphia, was one of them.
“PSERS increased each paycheck by $30, but that’s a huge amount considering all the things teachers are expected to pay,” she said. She buys books, snacks, birthday gifts, and school supplies from her own pocket for students at her high-poverty school. She said that instead of cutting back on those extras, she’s reconsidering “splurges” like dinner with her boyfriend.
Ms Creda, 27, who has a master’s degree from the University of Pennsylvania, knows Ivy League peers who went into law or finance and now earn “fathomable” salaries. “I love my job; I don’t teach for a paycheck,” she said. Still, the $30 deduction from her biweekly salary gives her pause. “It definitely makes a difference,” she said.
Maureen Farrell Contributed to reporting.
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