Pennsylvania’s largest pension plan, the $50 billion-plus Public School Employees’ Retirement System, didn’t bet big on the U.S. stock market before the March skid amid coronavirus shutdowns.

But board and staff are still worried and seeking guidance amid volatile markets, its investment committee conference call on Friday made clear.

The PSERS board, chaired by Chris Santa Maria, a history teacher in the Lower Merion public schools, has in recent years favored private equity, real estate, and hedge funds, and other exotic investments.

The board has taken that direction over the objections of a minority of board members, including state Treasurer Joe Torsella and State Rep. Frank Ryan (R., Lebanon), who questioned whether high-priced private investment advisers are worth the extra fees they charge compared with cheap Vanguard-style index funds.

But at Friday’s investment committee meeting, PSERS’s trustees and staffers confessed they were uncertain about what to do next now that stocks are weak and bond yields are near records lows. Experts are also divided over whether inflation or deflation forms the more imminent threat to future returns.

Trustees listened to mainstream and contrarian presentations by investment pros and pleaded for more information before their planned investment review in August.

Louis Gave, an advocate of investment in venture capital and Asian companies, warned of inflation for years to come as the U.S. dollar declines in value. The greenback will be dragged down by record government debt and President Donald Trump’s moves to intentionally weaken the currency to make the U.S. more attractive as a lower-cost manufacturing center, he said.

Gave acknowledged most investors don’t share this view, and still prefer U.S. stocks and tech companies. (Ryan and another board member, acting state Banking Secretary Richard Vague, have warned that price deflation is more likely.)

But Gave said U.S. tech stocks have already risen so far, and the national debt has reached such record-high levels that it’s time to invest elsewhere. He likes Chinese bonds.

Claire Shaughnessy, a partner at Aon Hewitt Consulting, one of PSERS’s investment advisers, said her firm’s analysis suggested PSERS was unlikely to fully meet its target of 7.25% yearly investment returns with its current investment mix.

But she also said its current choices would likely perform better than a Vanguard-like 60%-40% mix of stock and bond index funds.

Torsella disputed that. Under his questioning, Shaughnessy acknowledged flaws in her comparison. Torsella asked Shaughnessy to come up with an apples-to-apples comparison for the next meeting.

Torsella has praised the pension plan in Montgomery County and others that have dropped private investments and stock pickers in favor of index funds. He says the state’s 529 college-savings plan, which he oversees, posted better returns once he went to indexing and let go of private money managers.

Tom Bauer, PSERS’s deputy chief investment officer, sounded a dour warning. He called PSERS “an underfunded plan with negative cash flow,” and already one of the largest and fastest-growing expenses in both state and school budgets. (It is funded by both.)

The pension fund already costs taxpayers an additional 35 cents for every dollar paid to teachers and other school staff.

“I’ve been in this business since 1987, and this is the most opaque” investment market he has faced, Bauer said.

He said the U.S. government and world political leaders, having poured trillions into the economy to forestall recession, are now more powerful than markets in setting asset prices.

“We’ve had negative oil prices,” in which companies declined to buy oil because it cost more to store than they could collect by selling it, and “negative interest rates,” with Germany and other countries requiring investors to pay interest instead of receiving it from national bonds.

“Prepare to be surprised,” he warned. We need “even more humility than usual.”

During economic crises, investors usually fall back on U.S. Treasury bonds, which gain value because of the rise in demand and their security compared with other investments.

But this year, the government is borrowing so much that bond values have collapsed, and investors can’t profit from them.

Bauer asked the trustees to guide the professional staff. “Your job is not so easy,” he added. “Uncertainty is high. The range of [possible] outcomes is wide.”




Jason Davis, a Westmoreland County economics teacher who chairs the investment committee, at the end called it a ”robust meeting. It’s important that we have an open discussion in this very tumultuous time.”