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A Suggestion to the Pension Fund

Member to Member

Volume 117, No. 3March, 2017

Scott Ballantyne

This is with respect to the current crisis of the AFM pension fund. I believe the fund’s situation is much worse than the recent memo indicated, but before we get to that, I have a solution to the fund’s continuing investment underperformance.

First of all, I want to express my appreciation for the letter from Mr. Donelian in the February issue, and I am in complete agreement with him that the fund’s investment returns of 5.2 percent (2015) and a negative 0.1 percent (2016) are completely unacceptable. I would add that they were also completely avoidable.

While in total sympathy with every point Mr. Donelian made. I must respectfully disagree with his recommendation for “Skillful, innovative and focused investment strategies…”

In fact, the search for skillful, innovative and focused investment strategies is one of the main factors that has brought the fund to its current miserable state. I have no doubt that the trustees have been in search of just such investment skill. Given the state of the fund, there should be no doubt among any of us that this search has not succeeded. In fairness to the trustees, there are very few people in the world who have achieved market beating returns. The chances of them being found and then also agreeing to work for the pension fund are vanishingly small. In the spirit of the baseball coach who advised a player who consistently fouled balls to the left to “try aiming in another direction,” I think there is a very simple solution to this dilemma.

Rather than pursuing the fruitless picking of stock-pickers, the fund should should follow the investment advice of actual market-beating investors such as Warren Buffett and instead manage our investments as an index fund.

Index fund management is a purely mechanical strategy, and guarantees a return that is very close to that of the stock market as a whole. Historically, it has beaten a vast majority of stock picking professional investors. As one example, the Vanguard 500 (VFINX) fund, which simply purchases every stock in the S&P 500 by market weight, returned 19.89 percent over the past year. Over the past three years, it returned 10.69 percent. Over the past five years, VFINX returned 13.92 percent and over the past 10, which includes the market meltdown of 2008, it returned 6.87 percent. If our fund had done this well, we might very well not have received the recent memo. With an index fund strategy, there is no risk that bad stock picking will dent returns, or as in the case of the pension fund stock pickers, destroy them.

Another, and very significant advantage of the index fund approach is that the management cost is very low. No stock picking professionals need apply. That leaves us most of the $11 million the fund paid them last year to invest for the future. Perhaps less oversight would be required and we could reduce the $14 million in administrative costs as well.

In summary: with musicians’ futures at stake, it is absurd to pay $11 million to investment professionals who do less well than a simple mechanical strategy can and has done.

Now, a few comments on the status of the fund. I believe the situation is much more critical than was reflected in the pension fund memo. According to the rehabilitation plan published on the pension fund web site, the pension fund’s actuary “does not project that the plan will emerge from critical status. Accordingly, the objective of the rehabilitation plan is to take reasonable measures to forestall possible insolvency.”

In other words, it is not about rehabilitation any longer. Our trustees are now concerned about sheer survival. This information was not shared in the memo. You must go to www.afm-epf.org to actually see this comment.

I would also like to point out that all these gloom and doom projections are based on what are called “actuarial values of assets.” These values are higher than current actual market values. If the actual market value of assets were used instead of the actuarial values, the situation would look much worse.

Actuarial values are a bit of an accounting fiction. Over time, actuarial values and market values will grow closer. If the market values of our investments remain low, the funded ratio will decline. As it declines, this brings our pension fund closer to being taken over by the government. You don’t want this.

If the federal government takes over our pension plan, the most you will receive is $35.75 per month times the number of years of service. If you worked for 30 years, and are expecting to receive (or are currently receiving) $3,000 a month, you won’t get it. The maximum you can receive would be $1,072.50 a month. And of course, this is the government. They can change it at their whim. As I said: You don’t want this.

The fund must increase its asset values and it can do this by improving investment returns. As the industry recovers, employer contributions will improve, and that will help a lot also

I am personally optimistic about the future for music and our industry, and I believe down the road, at some point, employer contributions will increase as the availability of work for musicians increases. However, it is my humble opinion that the fund is less than optimally managed at present. That can be fixed today, by a simple, reasonable and time tested index style investment strategy.

Local 802 President Tino Gagliardi replies: Mr. Ballantyne raises concerns that I know are on a lot of members’ minds. As your president and a trustee on the Pension Fund, I am eager to address those concerns and to discuss the state of the Pension Fund with you. As this issue goes to press, I am looking forward to the Local 802 membership meeting on Feb. 22. We hope as many people as possible will attend.

I will respond briefly to some of Mr. Ballantyne’s points. First, there is a misconception about the Fund’s 2016 returns. The Fund earned around -0.1% (gross of fees) from April 2015 to March 2016. That’s the Fund’s fiscal year. That one-year period was a poor one for stocks generally. For instance, the broad U.S. stock market was down 0.3%, so the Fund performed similarly to U.S. equities during that period. Since then, the Fund’s investments have performed much better, and the Fund has outperformed its peers, earning 10.6% for the 2016 calendar year.

Mr. Ballantyne makes an argument that I’ve heard from a lot of people in favor of investing in index funds. In fact, the Pension Fund does invest in index funds, where it makes sense to do so. But the trustees are required to diversify assets, for many reasons. While the past eight or so years have mostly been good for U.S. stocks, that has not always been the case, and over the long term, it is becoming less and less viable to invest in U.S. stocks and bonds alone, if you want to meet the Fund’s actuarial investment return assumption. There are no index funds for some asset classes that have done very well recently, like private real estate. One of the Fund’s best asset classes has been private equity, which also has no index funds. For these investments, and even for many stock investments, active managers can in many situations achieve higher returns than passive stock or bond investments. Different types of assets do well at different times, and a pension fund that is doing everything it can to provide benefits over the long term has to take that into account. We can’t simply put over a billion dollars in any one type of investment, even in an index fund.

I am also extremely optimistic about the future for musicians and our union. These are very tough times for the Pension Fund, but know that I and the other trustees of the Fund are committed to doing everything we can to preserve the Fund for the long term, and forestalling insolvency, so the Fund can keep paying benefits, instead of relying on the limited government guarantees provided by the Pension Benefit Guaranty Corporation. We are also trying to keep our members as informed as possible about the Fund.

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