Indiana’s pension system lost $200 million within two months of Russia invading Ukraine, according to its chief investment officer — but that’s pocket change for a system with $45.8 billion in assets invested worldwide.
The bulk of the Indiana Public Retirement Fund System’s assets are invested in the United States, with the next largest investments being in the United Kingdom, Germany, China and Japan. It has also parked money in laissez-faire Hong Kong – the subject of recent crackdowns by ruling China – and the tax haven of the Cayman Islands.
Chief Investment Officer Scott Davis said the system diversifies across dozens of countries to minimize the financial impact of a country’s risks. Less than 4% of the portfolio is invested in another country; about 70% of assets are invested in the US
In this way, the system lost a significant chunk of money, but not a large percentage of wealth, to the Russian invasion of Ukraine.
In January, ahead of Russia’s first attack in February, the system had invested $266 million in Russia, Ukraine and Belarus, according to a presentation at an October meeting of the Pension Administration Oversight Committee. But by March, when system leaders told their outside money managers to pull out of those countries, the value of those investments had fallen to $62 million.
“Unfortunately, a lot of that drop that you’re seeing here from January through March was really just a matter of losses in those markets,” Davis said.
By June, when Indiana seceded from the three countries at the center of the conflict and economic conditions in them continued to deteriorate, the state had $43 million in investments left that it could not cancel.
“The remaining exposure you see here is really just securities that we cannot trade. [that] We still maintain our record,” Davis said. “So we just tell the managers: since there is liquidity, trade these securities when the market is open to get out of them as quickly as possible.”
But he wasn’t optimistic about the fate of those remaining investments.
“At this point I would rate these as almost worthless in my opinion, but hopefully our managers can salvage at least some of these assets,” Davis said.
However, scheme leaders were not overly concerned about the impact of this financial turmoil given that these investments represent such a small part of the scheme’s total assets. For example, the original $266 million represented only half a percentage of the portfolio.
Still, Senator David Niezgodski, senior minority member on the Senate Committee on Pensions and Labor, said he had “no problem at all” with proposals that formalize or mandate a sale of Russia. But he also suggested Russia’s measures could be applied to a recent law he authored – one mandating the divestment of investments in counties found to foster terrorism.
“No social problems”
Another topic of discussion at the recent meeting was investing in environmental, social and corporate governance – the framework for managing risk at the heart of another culture war raging in Indiana.
Indiana Attorney General Todd Rokita, a Republican, issued an advisory in September denouncing the system, writing that “outside investment firms tasked with managing Indiana’s investments threaten to erode that financial stability.” .
Davis assured lawmakers last month that the system “intends to yield to the democratic process and abide by the law.” The external managers, he said, “must invest these assets solely for the benefit of our members and therefore must focus on financial returns rather than social issues.”
That message didn’t get through: Todd Huston, Speaker of the Indiana House, told reporters last week that he wanted the state’s pension fund managers to focus on “return on capital, not energy and social policies.”
He said this could include “a variety of different things,” such as politically motivated decisions to secede from other countries. Indiana has already divested as much of Russia-related companies as possible, and some lawmakers have expressed skepticism about the system’s investments in China-related companies.
The system already complies with government regulations such as Niezgodski’s requirements to divest investments in countries that sponsor terrorism and the mandatory divestiture of investments in Sudan and in anti-Israeli companies.
The system also follows Trump- and Biden-era restrictions on Chinese military firms and surveillance technology companies, as well as a public trading ban on foreign companies with opaque accounting firms. It has sold nearly $16 million.
But some, like Rep. Chris Judy, R-Fort Wayne, expressed interest in going further, asking Davis about the feasibility of exiting China-related investments and the performance of those stocks. Davis said the system monitors those assets and holds its managers accountable for their investment decisions, though he didn’t have specific performance metrics on-site.
Huston didn’t respond Tuesday specifically about how Indiana would avoid the same consequences as Texas, which passed its own anti-ESG investment law in 2021. Researchers estimate Texas companies will pay an additional $303 million to $532 million in interest after the ESG ban due to reduced bond competition.
House Ways and Means chairman Jeff Thompson offered non-committal comments on proposed legislation at the intersection of financial and social issues.
“You might see some files,” he told the Capital Chronicle. “But again, what do we do with it? I’m not sure at this point. There are so many unknowns.”