Credit ratings, as crude and corrupt as they are, still provide some information, even if they just lag market prices.
Except when they don’t.
Consider the Illinois Teachers Retirement System (TRS), and its fixed income investments.
As underfunded as public pensions are, it’s worth remembering how much money is in these things. On its own measure, the system only has about one-third of the assets needed for the promises made. But it still has almost $50 billion in invested assets.
Managed by experts, making lots of apparently valuable decisions. Like investing in a lot of risky assets, which can make sense, if taxpayers take the downside.
The TRS annual report includes a table every year showings a breakdown of all its fixed income investments by credit rating, in 21 categories.
And another category, which we will talk about shortly.
But in the rated classes, an alarming trend is the share of invested assets in safe vs. riskier investments. Assets reported in the “Triple A” (ha) category have fallen from 50% of rated fixed income assets in 2008 to about 10% in 2017.
But another category has a curious trend. A category that brings to mind Frank Knight’s wonderful distinction between risk and uncertainty.
There is a 22nd category in that table. For assets with a credit rating that is reported “not available.” Assets in that category rose from $15 million in 2008 to $1.4 billion in 2017.
And for some recent solid reporting on risk and investment management compensation for public pensions, see David Sirota’s article on developments in Colorado “Why is PERA in high-fee, high-risk investments?”