Its easy to understand why Randi Weingarten, head of the American Federation of Teachers, would want to use her power to get pensions to boycott hedge funds that support charter schools or push for reforms of defined benefit plans. After all, hedge funds largest clients are pension funds and other institutional investors. Teachers have helped hedge fund managers get rich(er) so they can then turn around and contribute part of their wealth and bankroll alternatives to traditional public schools. In addition, among Weingartens duties as a union leader is to maximize teachers benefits and charter schools are an existential threat to those benefits. Boycotting hedge funds with opposing views is also in line with the way people increasingly look at their personal spending: as another way to influence a companys policies and the popularity of socially responsible investing.
A Wall Street Journal article last week, Teachers Union and Hedge Funds War Over Pension Billions, fanned the flames of the controversy. The AFT, which represents some two dozen unions, created a list in 2013 of asset management firms, mostly hedge funds, that donated to causes that unionized teachers hate: charters, tenure reform and replacing defined benefit plans with 401(k) plans. The list, which included Dan Loebs Third Point, is a powerful tool to curtail the flow of money to certain organizations. Public pension plans have long been a major target market for hedge funds. Unlike individuals, they measure their investment time frames in decades, dont need to tap their funds on a daily basis and desperately need the uncorrelated returns that hedge funds can offer.
Weingartens anger toward hedge funds is understandable. Many managers are thriving even as pension plans are dangerously underfunded in the U.S. The reasons are complicated: states failing to make contributions, increasing longevity, money manager ineptitude in some cases, unrealistic benefit promises, low interest rates. We need reforms to save them and more people from all sides involved in tough conversations about the complexity of finance and the trade-offs between different objectives.
But Weingarten is wrong to put politics into money. The healthiest pension plans are the ones that have sidestepped this muck. Take the Ontario Teachers Pension Plan (OTPP). When I was reporting on Ontario Teachers in 2012, I flew to its offices in Toronto to interview its then-CEO, Jim Leech. Waiting in the lobby to meet Leech, I watched a monitor displaying fun facts about the plan, including the huge number of teachers over the age of 100 who had been receiving a retirement paycheck from OTPP for more years than they had worked.
I was in Toronto to learn how the Canadians had created a well-funded pension system that is outside politics and often hires highly paid executives to directly invest in certain asset classes, such as private equity. To be fair, the model was born out of a crisis in the 1980s when the plan was going broke. A nonprofit, private corporation replaced the government agency that had managed the Ontario Teachers fund. The fund also established an independent board that delegated investment decisions to the CEO. No meddling. No use of the plans money for a high-profile public project in Toronto. No blanket boycotting of hedge funds because of their founders opinions or indigestion over high fees. Today investments are scrutinized to meet the plans objectives of providing a secure retirement to teachers. The plan doesnt create blacklists; it uses its power to negotiate the best deals, including on fees.
It did strike me while in Canada that teachers, most of whom made modest salaries during their professional lives, were often the financial beneficiaries of hard-edged investing tactics. Its palpable there because Ontario Teachers doesnt always hire outside money managers, which can put some space between beneficiaries and controversial strategies or unpopular investment decisions. At the time, Ontario Teachers was selling its stake in a company that owned Torontos beloved, albeit losing, Maple Leafs hockey team and the arena in which they play all for a C$1 billion profit. The plan was also ramping up its investments in activist hedge funds, sometimes partnering with them to pressure for short-term changes that would generate profits for shareholders.
Investing can be messy. Lots of people, including hedge fund managers, get rich and use their wealth to have their voices heard. Private equity firms restructure troubled companies, which most of the time means firing a lot of people. Index funds the moral darling of everybody these days invest in the entire market, including gun manufacturers and fossil fuel companies. But pension plans need good returns to honor their promises. If they want to lower their reliance on the markets, their plan participants are going to need to save more money or work longer.