City Light Lease Fund Update & Analysis
Posted by Jeff Pruitt - 2/24/09 @ 11:33 pm - Filed Under Featured, Local Politics
I attended the annual meeting of the City Light Lease board which meets to oversee the city’s investment of the original light lease money. The trust fund’s management company (Dimeo, Schneider & Assoc) presented a brief update of the fund’s current balance and took questions from the board.
First I want to say that my analysis assumes the one page of data that was presented is accurate since the full annual report was not made available to the media or even to the board (unbelievable). Specifically it assumes that the starting balance shown in the figure linked above was only increased through dividends and capital gains and not through additional contributions. Ok, enough on the caveats.
UPDATE: According to the News-Sentinel the city has been putting $270k/year into the fund. I’ve adjusted the numbers below to account for this.
To date I believe this group has managed the fund relatively well. Fund managers are typically compared to the S&P 500 as a benchmark and the sad reality is that most fund managers don’t outperform the S&P 500. In other words they are essentially wasting their clients’ time and money since the client could do better without using a professional money manager. So how is our management doing?
Well the current fund balance is $25.6 million which is down from it’s peak in 2007 of $35.1 million. At first glance this might sound bad but in reality it’s actually not that bad. Since 1996 the fund’s annual rate of return has been 7.1% 5.4% while the S&P 500 over the same time period has been only 4.5%. This comes out to about $7 $1.9 million that the fund managers have added over and above the S&P 500 benchmark - not bad.
Where I’m concerned is their strategy for moving forward. These guys struck me as eternal optimists with no plan to hedge against the market continuing to tank. Their philosophy is a buy-and-hold one using the old “the market never goes down in the long run” ideology. While this strategy may be a reasonable one for individual investors looking 20-30 years down the line it is completely inappropriate for the city of Fort Wayne.
The reason is quite simple. Government is already “invested” in the long term economic success of our economy. When times are good there is more investment, more taxes, more jobs, etc. The problem comes when times get tough - that is what government needs to be prepared for. The city may very well need this money in the near future and especially if the economy continues to deteriorate. The board needs to ensure that the trust fund is properly hedged on the negative side considering this money may be needed.
I have no doubt that these managers could properly hedge the city if given that direction. Their past performance shows they are capable of adding value but they are not going to make that decision on their own. As they said during the meeting they are still going to pursue an investment strategy based on growth unless they are told otherwise. We don’t have to give up the growth investments completely but we should certainly hedge against massive market deterioration.
The old adage applies here - hope for the best but prepare for the worst…
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7 Responses to “City Light Lease Fund Update & Analysis”
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Several things concern me. Instead of a one-page summary, The Board should be looking at details of this fund, including the type of holdings, risk characteristics, expense ratio, and diversification. Did anybody ask if the fund was holding any Madoff investments?
In addition, the fund manager should not be comparing the returns to the S&P 500. If the stated objective is a 60 / 40 mix of stocks and bonds, there are plenty of benchmarks that use this blended approach. According to my year-end 401K statement, my 2008 Vanguard 60/40 balanced fund lost 22.21% for the year, with the benchmark index losing 22.04%, both better than the lease fund loss of 27.6%.
Jeff-I’m glad to hear you went to this-I think it should have been held where the public would feel free to attend and should be publicized more. Does anyone know if the Board has established an investment policy and if the manager is following it? If either answer is a no then corrective action needs to be taken. I happen to believe that the fund should be invested with growth in mind and that only the earnings(or a fixed % like 5 or 6% a year-as in typical endowment funds) should be spent. Using this money to meet annual expenditure needs is a bit like eating your seed corn rather than living within your means. I look for the Admin. to attempt to squander these funds with political gain/maintenance in mind!!
Z, I’m the one that compared it to the S&P because I don’t know what the split was throughout the fund’s existence. You can download the linked document and see their other benchmarks.
Also, there were questions about the exposure to financials (I believe Harper asked this) but no definitive data given because they didn’t have it. I seriously doubt they were holding any Madoff investments.
Lockwood,
The public was free to attend but it was a board meeting not an open forum where media and the public could ask questions.
The board’s direction has always been long-term growth and unless they give new guidance to the management team then that will not change.
My other question would be why is the Fort Wayne Community Trust fund being managed by a firm from Chicago? Something this visible should be handled locally.
Not sure if this is the best place to ask the question, but would not a portion of the City Light Lease income be an appropriate use for the federally mandated program to prevent raw sewage from flowing into the city’s rivers?
The city light utility was created to reduce the cost to the taxpayers in powering the city. It leased the utility to the private sector in return it paid for the power it now used. Was there a net savings, I do not know.
My first thought is to say no to using the city light lease funds to pay for the mandated storm/sewer separation. It would be like raising money for one project and then using that money for something totally different or similar to the 1% sales tax on food and beverage for something other than the coliseum expansion.
City Council should have been collecting the funds since the mandate was first imposed over two decades ago. To bad we can not keel haul the city council members.