This is a transcript of my remarks to the Oregon Investment Council at their August, 2018 meeting.

I am here today to speak to you about the investment returns of the Oregon Public Employees Retirement fund. I believe these returns can be better, and really need to be: it is the only practical path to mitigating the massive PERS cost increases being required from public employers, and perhaps eventually the taxpayers, since courts would likely block any meaningful effort to reduce benefits.

Frankly, the last decade has not been a good one for OPERF. Returns are not what they used to be. They lag broad market indexes, your own benchmarks, and your assumed rate of return, both in your public and private investments.

According to data on your website, public equity lagged the S&P 500 substantially, posting an annualized rate of return of less that 6% while the S&P gained more than 9.5%.

Private equity underperformed the S&P by 0.5 percent annualized over the 10 years.

I am here respectfully to suggest that you make changes to your investment principles to get this portfolio back on track. I have two suggestions. First, you should embrace passive investing in a big way, and second, take a hard look at your allocation to private equity.

I believe you should dedicate a substantial part of this portfolio, if not most of this portfolio, to the passive investing model, using ultra low-cost products that track major market indexes. This seems like a clear path to increased returns: you are lagging market indexes, so why not buy market indexes?

Look at Nevada’s PERS fund. Fully 90% of its assets are deployed in passive investments, consisting of just three index funds. Its annualized investment return over the last 10 years is 6.8% compared to Oregon’s 6.02%. A difference like this makes a very compelling argument for changes to OPERF.

Over the last decade, returns in private equity have also disappointed, struggling to match market indexes, much less exceed them.

Your own 2017 Private Equity Performance review notes this under-performance and cautions that private equity may not generate sufficient excess returns over public equity in the future.

Yet despite mediocre returns and your own report containing a clear cautionary note, you continue to maintain an out-sized private equity allocation in comparison to other public pension funds. You are clearly still betting that private equity is the path for better returns. I respectfully disagree, as does a growing body of reporting asserting that the best days of private equity are behind it.

Rolling 10-year returns in the U.S. Private Equity index have trended downward for many years.  At the same time, money flowing into the private equity space has exploded. And now interest rates are on the rise.

These are all classic signs that the party is almost over. But in private equity’s case, we have one more very telling red flag: they’re finally letting in the little guy. JP Morgan recently announced it would substantially reduce its minimum investment in alternatives. When the Wall Street types start courting the little guy, it time get very concerned.

Investment returns aside, I believe the social impact of private equity activities should also be a factor when deciding OPERF’s level of commitment to this space.  This is an industry that periodically engineers massive catastrophes, the recent Toys R Us debacle being one of the most egregious, where Bain and KKR destroyed 33,000 jobs. It used to be these companies would get little blowback for failures like this. But those days are coming to an end. Social media is taking notice, and just last week, senators met with a group of former Toys R Us employees. Private equity is becoming more and more controversial.

For OPERF to allocate 20% of all of its assets to this space, amounting to over $15 billion, strikes me as increasingly inappropriate from the social impacts alone. Add to that its continuing underperformance and questionable future performance, it’s time for a change.

I urge you to re-evaluate your commitment to private equity and substantially reduce your allocation to this space, using the funds to increase your allocation to passive investments.

I make these suggestions with all due respect, and I hope you will consider my ideas.

In closing, I understand that the Investment Council has no citizen’s advisory function. I respectfully suggest that you establish a mechanism for hearing from Oregon citizens on a regular basis. I believe it would provide a needed counterpoint to the steady input you get from the financial industry.