Would you continue to push your investments with someone who had lost hundreds of million dollars? Under the right circumstances, it might not be a bad idea.
Bloomberg reports on the recent moves on behalf of the almost $58 billion Oregon state pension fund and its – and other funds' – increasing hedge on the possible explosion in value of commercial real estate debt as a positive investment for the future.
The argument, besides the fact that one particular funds manager making similar investments on Oregon's behalf lost approximately $100 million in 2008, is that the long-awaited recovery in the construction industry might boost gains on high-yield commercial real estate debt, as that sector was practically decimated during the earliest days of the recession.
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The mechanism for growth has seen asset management firms paying more attention to bonds created by grouping together commercial mortagages back from the pre-crash property boom. Bonds which were at one time given high credit ratings have been reduced to junk trades at a 63.2 cents on the dollar, even after considerable increases last year: The securities are potentially more profitable than the buildings they actually finance.
In Oregon's case, the retirement board opted to continue to secure the continued investment talents of New York's Talmage, which oversees $1.7 billion, saying that the firm did indeed recoup the 2008 losses and that the future prospects for growth in property debt are strong.
"I would rather go with an experienced team that's kind of been through a horrible storm … Maybe there are some dings. But I think he's learned some things from it," said pension council member Katherine Durant.
Back in 2008, Talmage used the $100 million to fund a joint venture with Guggenheim Partners LLC, though the value of the assets they purchased fell drastically after the collapse of Lehman Brothers; lenders including JPMorgan Chase & Co. seized the collateral and wiped out the fund.
Oregon's pension system has done well in other areas, including the third-best returns in the nation on real estate investments. Oregon's overall fund has still made 6.9 percent so far this year and returned 13.3 percent over the past three years.
New bond sales are up drastically again, with $7.9 billion of construction debt issued last month.
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