Four months loses $5 billion education fund in Texas

Report that The Texas fund that provides money for public school textbooks and backs school bonds lost $5 billion in the last four months of 2008, ranking it among the lowest performers of similar funds in the nation.

On Aug. 31, the Texas Permanent School Fund had more than $23 billion. At year's end, it had dropped to $18 billion, a loss of about 22 percent for those months.

That puts it in the bottom half of the nation, compared with hundreds of other endowments, foundations and institutional funds ranked by Mellon Analytical Solutions, said Tom Heiner, client relationship manager with Mellon.

State school board members received the bad news Friday as they met in Austin to review the fund's finances. The Star-Telegram listened to the meeting over the Internet.

Concerns have been raised that because of the losses, the fund's support for schools could diminish. For fiscal 2008, school district distributions totaled $716.5 million, according to Fitch Ratings.

The fund's losses were primarily attributed to domestic bond and hedge fund portfolios.

The bulk of the fund's stock and bond holdings are tied to market indices, state officials said.

"The fact of the matter is we have a tremendous percentage in the indices, which has come back to haunt us," said State Board of Education member Rene Nunez, D-El Paso.Some board members said they believed that the Permanent School Fund got into hedge funds too late. Top-performing endowments or institutional investors had gotten in earlier and had more assets in hedge funds, private equity and real estate, they said. The Texas fund didn't turn to alternative investments until last year, when it committed about $2 billion to hedge funds.

From Aug. 31 through Oct. 31, the hedge fund program lost hundreds of millions of dollars.

"We were probably three or four years late," Nunez said.

Nunez and State Board of Education member Rick Agosto, D-San Antonio, raised questions about one hedge fund manager, Blackstone, asking the staff and Heiner for details about a portfolio manager who recently left the firm.

"What I want to know is, again, I heard rumors that Blackstone had some problems and one of their portfolio managers," said Nunez, who didn't detail the concern.

He and Agosto wanted to know whether there were any issues involving the company and which investment sectors they were exposed to.Heiner said his company does not keep track of securities of individual portfolio managers.

"You don't have capabilities. of providing information about managers?" Agosto asked.

Holland Timmins, executive administrator and chief investment officer of the Permanent School Fund, said he would look into questions about managers.

"We're looking at as much information as we can," he told committee members.

Last fall, the Star-Telegram requested rates of return on the PSF's hedge funds, but the agency asked the attorney general's office for an opinion that the information did not have to be disclosed. The attorney general has not issued an opinion.

On Friday, some board members also asked whether investment managers would receive bonuses despite the losses. They were told that managers could qualify for what are called performance-based fees if the money they managed beat benchmarks. If a market index, for example, drops 35 percent but the manager's investments fall 30 percent, the manager will get a bonus, board members were told. It's a formula-driven structure, the board was told.

At their meeting, board members asked whether there were other investment opportunities they had not yet tapped. They were told that other types of investments are available but all involve some risk.

In December, the PSF suspended its guarantee program for school bonds. That program allowed even financially strapped districts to borrow money at low cost. Because of losses, the fund didn't have the capacity to back more bonds under Internal Revenue Service rules.
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Four months loses $5 billion education fund in Texas
Report that The Texas fund that provides money for public school textbooks and backs school bonds lost $5 billion in the last four months of 2008, ranking it among the lowest performers of similar funds in the nation....

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