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Wisconsin Pension to use Leverage

February 9, 2010

After a 4 month break to catch up with work and enjoy the holidays, the SWIB action has brought me out of blogging “retirement.”

The State of Wisconsin Investment Board (SWIB) has recently decided to use leverage in their investment portfolio.

The State of Wisconsin Investment Board trustees voted Tuesday to borrow the equivalent of 4% of the pension fund’s biggest chunk of assets and use it to more than double its position in Treasury Inflation Protected Securities, or TIPS.

The action makes the investment board, known as SWIB, one of the first public pension plans in the country to use debt to buy more securities. It’s the board’s first move on a three-year plan recommended by a San Francisco consulting firm that would have SWIB borrow the equivalent of 20% of the $67.8 billion in assets held in its core fund and use it to boost the percentage of TIPS in its portfolio to 20%, from 3% now.

You can read some write ups here:

Journal/Sentinel Online

Mish

Seeking Alpha

The basic concept is this.  SWIB has a goal of an annualized return of 7.8% to to pay the benefits it has promised to pay.  The pension assets are invested in a variety of “pools”, each with its own volatility.  The pension board (from what I’ve read) is investing the capital from the debt into TIPS, which historically has lower volatility compared with equities.  Thus the SWIB claim that they are “lowering risk.”

What they aren’t forthcoming about is by using leverage, they now have a new risk. Because now they are levered.

There are 2 interesting aspects of this strategy.

  1. Investing in TIPS is a bet on inflation, which they claim it isn’t.  If it isn’t a bet on inflation, than why TIPS?
  2. They don’t say how long they will implement this strategy.  Forever?

I feel the bet on TIPS is misguided.  I’m not an investment professional, but I have a hard time seeing inflation in the near future.  The money supply continues to shrink and will for quite some time.

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