Five Questions With: Seth Magaziner

Seth Magaziner, Rhode Island’s general treasurer, oversees the state’s $7.5 billion public pension system.
Seth Magaziner, Rhode Island’s general treasurer, oversees the state’s $7.5 billion public pension system.

The British vote to exit – or Brexit – the European Union last month roiled public pension systems, as uncertainty in the international marketplace sent investors scurrying for less-volatile asset classes. Seth Magaziner, Rhode Island’s general treasurer, oversees the state’s $7.5 billion public pension system. He talks with Providence Business News about Brexit, pension performance through the fiscal year that ended June 30 and the effectiveness of its current asset allocation and assumed rate of return.
PBN: What market conditions most challenged the state’s pension fund during fiscal 2016?
MAGAZINER:
Fiscal year ’16 was a challenging year for all investors. There were three distinct market shocks, each of which originated with financial or political events overseas. The first was the Greek debt and Eurozone crisis; there was the Chinese economic slowdown and the concurrent drop in commodity prices; and most recently, Brexit. Each of these events resulted in significant market volatility. It was a challenging year for all, and in Rhode Island we grappled with those challenges. But on the positive side, we did well with our real estate and private equity allocations, which were two of our best-performing asset classes.
PBN: How do you expect the post-Brexit scramble for bonds to affect public pension returns?
MAGAZINER:
As you have in any time of uncertainty, there’s a flight to safety. Right now, U.S. treasuries and U.S. fixed income are considered the safest asset classes, so of course you’re seeing rate compression. That, combined with the equity volatility, makes it a challenging situation. With Brexit there’s going to be some uncertainty in months and years to come in terms of how the conditions of a British exit from the European Union is negotiated. When you have uncertainty in the market from political fallout you are going to have a flight to safety, lower rates on fixed income and a stressed equity market. So yes, it’s going to be a challenge going forward.
PBN: Looking at the fund’s current asset allocations, is there a better way to safeguard from international market forces?
MAGAZINER:
We’re currently conducting an asset and liability study to determine what our asset allocation and investment strategy should be for the next few years. This will be the first one since 2011, and this is one of the questions we’re asking. We don’t have a final determination yet, but I do expect we will continue to have a diverse portfolio. The best way to inoculate against any risk is to have a portfolio comprised of a set of diverse set of asset classes. When you’re building a portfolio and are concerned about risk, it’s best not to put all your eggs in one basket.
PBN: Given increased unpredictability of returns from public pension funds throughout the country, are you comfortable with the state’s current assumed rate of return of 7.5 percent?
MAGAZINER:
We have a process in place to evaluate what our assumed rate of return should be. It starts with the asset and liability study, and as of the fall we’ll know what our asset allocation will be going forward. That will inform the State Retirement Board as to what our assumed rate of return should be. I think [7.5 percent] is going to be challenging. We are in a lower return environment. But we have a process in place, and we need to go through that process in a thoughtful and deliberate [manner]. Another thing I always look at for the assumptions [that] our peers are using. To your point, the trend has clearly been toward lowering assumed rates return, but it’s worth noting that ours is still lower than the national average – of what other states are assuming. The momentum is moving toward reducing the assumed rates of return, and I think there are some good arguments in favor of that. We will go through the process thoughtfully and we’ll see where we come out.
PBN: Do you except the uncertainty in the European market to further extend the low-rate environment in the United States and, if so, how do you expect that to affect future returns for the state’s pension fund? If not, why not?
MAGAZINER:
No one can predict the future. My base-case assumption is that we’ll continue to have low interest rates for some period of time. … What’s important for us is to remain focused on the long term and to be well-diversified, so we can protect our capital no matter what the future brings. … We’ll continue to preserve our capital so members of the pension fund and the taxpayers can know it’s continuing on a healthier path.

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