He also cites data showing there is no evidence any individual managers have any particular, persistent skill worth paying for. In a nutshell, Riddiough cites detailed industry data showing that these private funds have underperformed publicly traded real-estate investment trusts, the kind anybody can buy on the stock market or through a money manager like Vanguard, by a country mile. Such diversification is prudent and part of a sound investment and risk management strategy.” Moreover, the author’s attempts to link growing pension underfunding to increased allocations to real estate are purely speculative: public pension funds have been diversifying their portfolios for many years after investing predominantly in just two asset classes: public equities and bonds. It added: “Although the report author accuses public pension fund managers of a ‘herd mentality,’ in fact, many public pension funds do not invest in real estate at all, and among those that do, there is a wide range in the percentage of their portfolio that is invested in real estate. As part of their required due diligence, public pension funds continually review their asset allocations and risk profiles to ensure they are optimizing risk and investment return.” “As a group, public pension funds invest around 7% of their assets in real estate. “Public pension funds are long-term investors and invest in diversified portfolios that are intended to maximize investment returns within an acceptable level of risk,” the organization said in a statement.
The National Association of State Retirement Administrators, the organization that represents the managers, disagreed. And his comments matter not only for his expertise but because they come in an extraordinary and detailed takedown of public pension funds, especially their fondness for “private equity real estate” funds. He holds the department chair in urban land and real estate economics.
Riddiough is a finance professor at the University of Wisconsin and an expert in real-estate investment trusts. Oh, and they are pouring somewhere nearing 10% of their members’ money into private real estate ventures that have a dismal track record and which they won’t be able to exit easily if they need to. They engage in “delusional benchmarking, giving themselves A’s and B’s for C and D work.” They take foolish bets to try to get out of their funding crisis, like gamblers hoping to win back their losses. These pension fund managers invest in the same assets, then hope to beat the market, he says. (At least, he says, from the perspective of classical financial economics perspective.)
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