Aug. 14–The Massachusetts pension board today will consider investing up to 2 percent of its $28 billion in assets in housing and business-development projects that could produce economic and socialbenefits for the state and not just financial returns for its public employees.
The proposals could include restarting a low-cost mortgage program for state and local government employees; providing venture capital-like funding to small companies in overlooked industries, such as manufacturing and services; and investing in loans to Massachusetts small businesses that are guaranteed by the federal government.
The practice is called “economically targeted investments,” and is being pushed by state Treasurer Timothy Cahill, who is chairman of the Massachusetts Pension Reserves Investment Management Board.
Cahill said the board will consider a policy that requires each project to meet five criteria before the board will invest in it. Chief among them: They must have equal or better returns than similar investments; they should be run by seasoned investment managers with direct experience in the field; they should target companies, industries, or regions suffering a so-called capital gap, meaning they can’t get conventional sources of funding; and the entire portfolio must be diversified across investment classes.
Cahill said the initial investments, if approved by the board, will likely be in conservative, lower-risk projects that produce modest economic or social benefits. “We’re not trying to change the world, but if we can improve the Massachusetts economy even a little bit with this, then it shows why managing a large sum of money can be beneficial, not only to retirees, but to the general taxpayers.”
More than half of the public pension systems in the United States do some kind of economically targeted investing, with mixed results. California’s pension fund just started a $475 million program to provide seed capital and corporate financing to minority-owned businesses and companies in underserved rural and urban areas.
Massachusetts dabbled in some targeted investing in the 1990s, with limited success.
For example, the pension board gave $50 million in 1995 and a second $50 million in 1998 to Commonwealth Capital, a Wellesley venture capital firm that invested in Massachusetts-based companies and start-ups. So far, the current return on the 1995 investment is 1 percent, Cahill said; the median return of venture capital funds started that year was 26.3 percent as of March 31, according to the state pension board. The 1998 investment has so far produced an 8.9 percent loss, compared to a 1.1 percent median return of venture funds from that year.
Cahill and the pension board don’t have data to show the economic benefits, such as number of jobs created, that resulted from the Commonwealth Capital investments.
Chris Gabrieli, a former venture capitalist who helped lead a study of economically targeted investments for Cahill, said that returns aside, the Commonwealth Capital effort wouldn’t meet the new requirement for economically targeted investments because the firm typically invested in local start-ups that had fewer problems attracting capital.
“It’s not that Commonwealth Capital was, ‘Oh, my God, we lost our shirts.’ It hasn’t been a stellar investment, but more important it wasn’t clearly filling a major capital gap in Massachusetts,” said Gabrieli, now chairman of Massachusetts 2020, a nonprofit that focuses on creating educational and economic opportunities in the state.
Mike Fitzgerald, a founding partner of Commonwealth Capital, said his firm invested in a lot of high-tech start-ups, and “we got maybe a little more hammered by some of the turmoil of the year 2000,” when the stock market collapsed and blew up returns in the tech sector.
However, Fitzgerald said both funds “have a long ways to go” and are actively invested in companies that could still make money for Massachusetts. As for the social or economic benefits, Fitzgerald said, “we didn’t think of ourselves as an economically targeted fund. We were geographically limited, investing in Massachusetts companies. But we weren’t looking for companies that couldn’t get financing elsewhere.”
Meanwhile, a separate pension board program in the 1990s invested $231 million in mortgage-backed securities that provided low-cost mortgages for 2,200 Massachusetts employees and families, Cahill said. The program had a five-year average annual return of 6.94 percent, compared to 6.47 percent for the pension board’s core fixed-income portfolio.
That program eventually petered out, Cahill said, as the increasingly competitive mortgage industry made home mortgages more accessible and affordable to lower- and middle-income residents. However, with interest rates now on the rise, Cahill said there might be an increasing need for a new state-backed mortgage program, which the pension board may vote to explore today.
Results in other states have varied. Older investments that were more often guided by politics — the desire to save jobs at a high-profile company, for example — rather than economic logic, fared worse. In the 1990s, the Connecticut state employees fund lost more than $21 million investing in failing Colt Manufacturing Co., a large employer in the state that eventually filed for bankruptcy.
Meanwhile, the Wisconsin Investment Board has had a long-running program to loan money to established local companies to use for capital equipment and other corporate needs. Its five- and 10-year returns are running ahead of its benchmark for corporate debt, said spokeswoman Vicki Hearing.
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