Cronyism and "endemic" conflicts of interest make the Greater Boston transit employees' pension fund a cautionary tale for institutional investors,
"Fraud and poor investment choices are but symptoms of a disease that runs deep and poisons the well from the bottom up," senior fellow for finance Iliya Atanasov wrote of the $1.6 billion MBTA Retirement Fund, which he said operates under a poor governance structure, no independent oversight and an incoherent investment strategy.
In his report, titled "Hard lessons for Institutional Investors from the MBTA Retirement Fund," Atanasov said the fund dramatically underperforms the state retirement fund.
Though publicly financed, the $1.6 billion fund operates as a private trust to manage pensions for 12,000 current and former employees of the Massachusetts Bay Transportation Authority. The fund operates separately from the MBTA.
Backed by a state Supreme Judicial Court ruling 21 years ago, the fund has resisted efforts to release pension data in the face of a sunshine provision to a 2009 transportation law and repeated prodding from lawmakers and transparency advocates who taxpayers funneled $1.1 billion to the authority in fiscal 2013 and that the "T," as locals call the system, contributed $55 million in 2013 toward pension costs.
"The poor returns already are a stark reality," wrote Atanasov, who said $1,000 invested in 1985 with the Pension Reserves Management Board, which manages state and teacher retirement systems and several municipal plans, would have grown to $15,198 through 2013, whereas the same investment in the MBTA Retirement Fund would have yielded only $12,251. "This is just one of many benchmarks on which [the fund] underperforms dramatically," said Atanasov.
The fund came under white-hot glare last fall after revelations that it lost a $25 million investment in an apparent Ponzi scheme through a hedge fund run by bankrupt Fletcher Asset Management. Published reports also have connected the fund's dealings to associates of convicted mass murderer James "Whitey" Bulger.
According to Boston-based Pioneer's latest report, investment experience is no prerequisite for the fund's board of directors and senior managers. Three MBTA employees, two union designees and one member elected by nonunion employees serve on the board "without meaningful regulatory oversight," Atanasov wrote.
Messages seeking comment were left Monday with the fund's executive director, Michael Mulhern, and its attorney, Carl Valvo. A separate message seeking comment was also left with Gov. Deval Patrick's office.
Speaking in late February before the state legislature's joint committee on public service, Mulhern defended his organization's practices. "Folks will criticize us for not being forthcoming or willing to participate in the public discussion, the public discussion has never been fair," he said.
Mulhern, in a recent statement to his membership, reported a 16.2% investment return that exceeded the 15.2% that the bigger state pension funds received.
According to Atanasov, none of the fund's board members and senior managers had substantial practical investment experience before joining the fund.
The report said that since 1980, major investment decisions including the abandonment of a blind trust with Bank of Boston, "appear to have been made in reaction to internal crises, in pursuit of market fads and/or without true strategic assessment of how they fit with the fund's mission."
Pioneer said that under former chief Karl White, the fund in the mid-2000s pursued a more aggressive strategy of investing through hedge funds and private equity firms. White in 2007 recommended the $25 million investment in Fletcher. A few months later White took a job at Fletcher.
The U.S. Securities and Exchange Commission, the Federal Bureau of Investigation and Massachusetts Attorney General Martha Coakley are examining the Fletcher transaction.
"Manager turnover patterns raise red flags about [the fund's] hedge-fund program, aggressively expanded by White, and suggest that investment decisions may have been haphazard and personalized rather than based on robust selection processes," Atanasov wrote. He noticed a "long-term shift towards more volatile and less liquid investments - i.e., away from domestically traded stocks and towards private equity, hedge funds and international equities."
The MBTA, not the retirement fund, released some data last August that showed 17% of 6,359 listed people retired from the transit system while in their 40s.
Patrick in early July vetoed a line item in the $36.5 billion state fiscal 2015 budget that would have removed the retirement fund and its board from the public records law. "The governor sent a message that he wants more transparency, not less," Atanasov said in a recent interview.
In the report, though, Atanasov chided state leaders for remaining "mute" regarding the fund's governance, "seemingly opting to deal with the fallout on a case-by-case basis."
Secretary of the Commonwealth William Galvin in February denied a request by the Boston Herald to make the records public.
