PSERS pension chief makes big bets with his own money
James Grossman's personal investments are bold and are available to the public only because a state agency mistakenly posted it.
Jim Grossman likes the action.
As chief investment officer for Pennsylvania’s biggest pension fund, Grossman has built a $73 billion plan that has provoked controversy for its heavy bets on “alternative” investments — private-equity buyouts, hedge funds, and the like.
Off the job, Grossman is a daring investor, too.
The list of his private investments — made public online because of what a state official called a clerical error — shows that Grossman is a true believer. His wagers often mirror those of his longtime employer, PSERS, the Public School Employees’ Retirement System.
This is the pension plan for 250,000 former teachers and other retired school workers, much in the news because of an ongoing FBI probe into the botched calculation of its investment performance and boardroom quarrels over its lagging returns. No one has been accused of any wrongdoing.
Of more than 80 personal investments Grossman reported making since 2018, about three-quarters were in stocks or other assets also held by the pension system or managed by firms under contract with PSERS.
Experts call his portfolio surprisingly diverse and often high risk.
In one case, Grossman bet that a fund would fall in value — even as the pension plan owned a nearly identical investment.
His disclosure also shows he owns a string of funds whose developers say is designed for day traders, who practice a time-intensive tactic frowned on by investors focused on the long term. The company that sells the funds stressed they must be monitored daily and are meant only for short-term investors.
While PSERS discourages staff from “short-term trading,” it exempts the type of fund that Grossman chose. Other public pension funds, most prominently the world’s largest, the $440 billion California plan known as CalPERS, ban investment staff from any day trading. Officials worry that its relentless demands can distract investment staff from their jobs.
In a national debate that has grown more heated in recent weeks, critics worry that the private investments of public decision-makers can represent a conflict of interest -- that they may be personally profiting from their power and access to information.
Asked about Grossman’s holdings, his lawyer replied: “Jim follows all federal and state laws in his investments, as well as PSERS policy.” The lawyer, Matthew Haverstick, said Grossman engages in no day trading and that his bet that a fund would decline in value was part of his own sophisticated investment strategy and was completely unrelated to any of PSERS’s holdings.
PSERS replied: “It is clear as to what is a prohibited and permitted transaction under the [PSERS ethics] policy. We have no further comment on your questions that appear clearly based on conjecture.”
Grossman likely has money to invest. He’s the highest paid employee in state government, making $485,421 a year, more than twice the governor’s salary.
The Inquirer reviewed his investments after they were made public by the state ethics commission on its website. After The Inquirer asked Grossman about his investments, his lawyers recently requested that they be removed from public view. Robert Caruso, executive director of the Pennsylvania Ethics Commission, said he had agreed to pull them because they had been posted by mistake and should have circulated only internally.
However, Haverstick, Grossman’s lawyer, said he doubted the release was a simple error. He said he would ask PSERS and even law enforcement to look into the matter.
“I have serious concerns that there are people who have unfairly and potentially illegally leaked information about Jim Grossman to paint him in a false and negative light,” he said Friday.
Private and public roles
How key officials reconcile their public and private roles has been roiling the financial world.
This month the chairman of the Federal Reserve toughened rules about what Fed officials may invest in. Chair Jerome Powell said existing policies were “clearly seen as not adequate to the task of really sustaining the public’s trust in us.”
He imposed new policies that limit senior officials’ trading to broad investment vehicles such as mutual funds. Any trades must also be approved in advance.
Powell acted after Fed regional presidents in Dallas and Boston were harshly criticized for potential conflicts of interest when they disclosed they had traded in securities while helping to implement a market rescue from the coronavirus pandemic. Critics also cited their access to inside information about the market. The two bankers promptly promised to sell their stocks, but ended up resigning anyway.
Last year, in California, the CalPERS plan was stunned when its investment chief abruptly quit amid disclosures about his private trading. Bloomberg News reported that the executive was facing internal discipline for not recusing himself from a state fund investment of $750 million in Blackstone when he personally owned stock in the Wall Street investment house.
The mammoth California fund is still searching for a replacement. Its board has been debating the unusual step of requiring the new investment czar to sell all stock or put everything in a blind trust.
Professor Olivia Mitchell, executive director of the Pension Research Council at Penn’s Wharton School, said that executives -- from the Federal Reserve to local pension funds -- should not trade in individual stocks.
“In my view, everyone in government should be banned from individual security ownership and frequent trading,” said Mitchell. ”There’s just too much opportunity for conflicts of interest to emerge. And in this environment, government needs to restore citizens’ trust.”
Pension plans typically don’t ban staffers from personally holding investments, but do impose ethics rules.
PSERS’s policy mandates that investment staff must “act solely in the interest of the members of the system” and should avoid even the appearance of a conflict of interest.
PSERS and its smaller sister plan for state employees, called SERS, ban staffers from trading in a few selected stocks without advance permission. The logic is that in these cases, the two funds are awash with inside information that would give traders an unfair edge.
Grossman’s portfolio snapshots
Grossman, 54, has worked for the schools’ pension plan for nearly a quarter century. He oversees about 50 PSERS investment officers, who on average make $175,000 a year. His two deputies are paid $399,600 each.
His investment strategy for PSERS has become increasingly controversial. Saying that the plan’s profits were lackluster, six of the PSERS board’s 15 members tried and failed in a bid earlier this year to fire Grossman and the plan’s executive director, Glen Grell. The board has since rejected several investments proposed by Grossman’s team, and agreed to sell the system’s hedge fund investments and buy more U.S. stocks.
The board has also been grappling with an FBI investigation into PSERS’s mistaken adoption of an exaggerated figure for investment profits as well as a subpoena from federal regulators asking if staff had accepted gifts from outside vendors. When the board adopted a new and reduced figure for returns, it was forced under state law to hike pension paycheck deductions for 100,000 working school employees with less seniority.
In his ethics filing, Grossman disclosed his personal stock holdings for 2018, 2019, and 2020. The reports are bare bones. They list all investments held at any point during the year. They don’t put a dollar value on his investments, disclose specific trades and their timing, or say whether he made or lost money.
Still, his portfolio “is huge,” in the number and breadth of its investments, said Michael G. McMillan, an accounting professor who served as ethics-education director at Virginia-based CFA Institute from 2008 until September. The institute certifies investment experts such as Grossman.
Robert Costello, a veteran financial adviser based in suburban Philadelphia said: “With just this list of assets, I would say the owner is a high risk-taker.”
Grossman’s portfolio stands in contrast to that of James Nolan, Grossman’s counterpart at SERS, a $35 billion fund. Nolan, recently appointed investment chief, reported owning more than two dozen U.S. index funds from mainstream firms such as Vanguard and BlackRock, along with a longer list of tech stocks led by Amazon, Apple, and Google, and little else. (His disclosures, too, were made public, despite confidentiality provisions.)
By contrast, Grossman has put money into hedge funds, Asian small-cap stock funds, and leveraged funds focused on economically volatile industry sectors. He also invested in a string of so-called Master Limited Partnership deals, oil and gas investments. PSERS likewise invested heavily in such partnerships before dumping them last year, citing poor returns.
Grossman owns investments the fund doesn’t, including three bond-index funds from Vanguard, the low-fee investment giant. PSERS does not invest with Vanguard, though some board members say doing so would have improved the fund’s performance.
Finance professionals and scholars debate what is best practice for public pension funds when it comes to personal trading.
Some say the investment experts in such jobs already are paid less than their peers in private industry and must put up with public scrutiny as well. Stopping them from using their expertise to help themselves and their families, some analysts say, would be unfair, because it would amount to a pay cut and diminish the ranks of good job candidates.
Chester Spatt, a professor at Carnegie Mellon University and former economist with the U.S. Securities and Exchange Commission, said it made sense for pension fund leaders to invest personally in the same stocks as their funds, just as “we want executives to own their company’s stock.”
McMillan of the CFA Institute sees potential issues with that approach, however.
“Often it’s better that they don’t hold anything the fund holds, even though it’s perfectly legal, because of the perception they are benefitting from, or exploiting, the investment of the funds,” McMillan said.
Some money managers won’t buy into funds held by clients.
“Personally, I own no individual security that would be held or recommended for purchase by my clients,” said Howard A. Trauger, a Philadelphia pension fund manager since the 1970s. “I did not want to wake up in the middle of the night, decide to buy or sell, and have to figure out when I should notify which of my clients.”
Haverstick said that the investment chief followed the rules as they were set down for him and the rest of the investment staff.
Grossman’s ‘put’ option
In 2019, Grossman’s filing show, he made a bet that an investment similar to PSERS’s would fall in value.
That year, he acquired an option on a fund created by BlackRock, the largest U.S. investment firm. The “put” option would pay off if shares of an index fund were to lose value. The fund was named iShares MSCI Emerging Markets ETF.
With put options, investors buy the right to sell a security later at a set price. They are betting that the investment will then fall below that price, so they can obtain it cheap, sell it at the higher agreed price, and keep the difference as profit.
In 2019, PSERS owned similar BlackRock shares, called the iShares Core MSCI Emerging Markets ETF.
The components of the two funds are 99% identical, according to ETF Research Center, a firm that advises traders. Their prices have risen and fallen in near lockstep, market statistics show.
Grossman’s filings show only that he owned the option at some point during 2019. His option bet was set to pay off when the price fell below $36 a share. That never happened during 2019, market records show.
PSERS, which had owned its fund since 2013, sold a substantial portion in the first half of 2019 but purchased more in the latter half of that year.
Grossman appears to have bet on the investment falling in price at some point during a year when PSERS was variously selling its stake and then increasing it, the available public records show.
In interviews about the limited information in his disclosures, several analysts said it was impossible to know what happened without more information. Still, experts raised questions about managers’ investing in puts, including Daniel M. Hawke, a former SEC lawyer now with the Arnold and Porter law firm in Washington and Craig McCann, a former SEC economist who now heads a consulting firm that provides expert testimony in financial lawsuits.
They said investment officers’ decision to invest in puts of an investment similar to one owned by their employers could give the impression they were betting on a stock’s fall because of inside knowledge about their funds’ trading strategy.
There’s also the concern that fund leaders could buy in advance of their employers, betting on a drop in shares while their plans were preparing to pull out of the investment. Much would depend on the details, such as the timing of the various transactions, Hawke and McCann said.
There is no allegation that Grossman did anything wrong.
Haverstick said Grossman had disclosed his put to his employer. “It complies with all state and federal laws and PSERS internal policies,” he said. “It has nothing to do with with PSERS investment strategy and is not in reaction to PSERS strategy.”
Charles Elson, a business professor at the University of Delaware and expert in corporate ethics, recommends that investment officers stay entirely clear of such puts.
“You should avoid this trade completely. For a fund manager to engage in a transaction that refers to an investment in the funds he manages, it is wiser to avoid even the appearance of a conflict,” Elson said. “A fund manager is held to a seemingly higher standard. He needs to be pure as Caesar’s wife.”
Direxion focuses on high risk and high reward
Grossman and PSERS have invested in funds offered by the same Virginia firm, Direxion.
These Direxion funds are “leveraged ETFs,” exchange-traded funds, that enable traders to pick a particular industry or investment approach and boost their potential gain — or loss — by leveraging their bet with borrowed money.
The funds each had “Daily” and “2X” or “3X” in their names, the latter phrases to show whether investors were doubling or tripling their bets. Direxion sets a new price each day, which can make the funds unprofitable to hold for more than a day, since the previous day’s gains may be wiped out.
These funds are for “gamblers” with large appetites for risk and lots of time to follow the market, said Eric Balchunas, author of a book on the ETF business.
During the last year, he owned six Direxion leveraged funds, Grossman disclosed. His ETFs focused on gold mining, home building, financial, real estate, and biotech stocks, and U.S. Treasury bonds.
PSERS itself also owned Direxion’s gold mining fund.
In that case, Grossman bought into the Direxion fund first, ahead of PSERS. Records show that he reported owning this Direxion ETF in 2018 and 2019 and sold it by the end of 2019. PSERS bought it the following year in 2020. The investment was recently valued at $9 million, small for the pension plan.
“I’d be very surprised to ever see one of these in a pension fund,” Balchunas said, referring to a leveraged ETF, because it’s pitched to day traders.
Among his more than 80 holdings, this was the only such instance where Grossman led the way, in effect, buying a financial instrument later acquired by PSERS.
Direxion is explicit that its products should “be considered primarily for short-term trading purposes” — and must be watched closely, according to a statement provided by Direxion spokesperson James Doyle.
As the company itself says in promotional material, “Direxion Leveraged ETFs seek daily investment results. Investors who choose to hold a fund for periods longer than one day should recognize that their holding period is not in line with the fund’s objective.”
Intense attention is required, the company says.
“The funds are designed to achieve their investment objectives on a daily basis, not to track the underlying index over a long period of time, and not appropriate for investors who do not actively monitor their portfolios,” it says.
The company also says that Direxion provides a suite of funds to “customers who use them daily.”
Haverstick, Grossman’s lawyer, said “he is not trading in and out of anything, not on a daily basis.” Haverstick said he could not say how long Grossman would typically hold a Direxion fund before selling.
In general, because of the time demands, “most institutional plans would have a rule against” personal day trading by senior officers, said Rich Jakotowicz, a finance professor at the University of Delaware. For example, the giant California fund bans its staff from reselling many types of investments, including ETFs, for 30 days after buying them.
PSERS also has a broad ban on most day trading in its Code of Conduct for investment staff. It, too, says they must sit on investments for 30 days.
The fund cites other reasons to object to the practice: “The ban on short-term trading profits is specifically designed to deter potential conflicts of interest and front running transactions, which typically involve a quick trading pattern to capitalize on a short-lived market impact of a trade by an investment manager,” the policy says.
However, ETF funds are specifically exempt from the fund’s ban. Haverstick said the investment chief abstains anyway.