By: Lisa Lerer

Pension funds, university endowments and other large investors are striking back at congressional proposals to curtail their ability to invest in lucrative oil and agricultural commodities.

Over the past few weeks, institutional investors have become the newest group to be scapegoated by oil producers, trucking companies, farmers, airlines and others eager to shift the blame for skyrocketing food and fuel prices.

Now the investors, labeled speculators by anxious lawmakers, are starting to play defense. Organizations representing a diverse set of financial interests are lobbying against measures that would hamper their commodities investments. Lobbyists fear that, as prices continue to rise, the investors will be subjected to increasingly intense scrutiny.

“This came up pretty fast, and there was an immediate concern,” said Judy Schub, managing director of the Committee on Investment of Employee Benefit Assets, which represents private pension funds.

The investors are an attractive target for politicians desperately trying to convince voters before the November elections that they’re acting to lower spiking prices. All the attention is making investors, who are already working in a difficult market environment, even more nervous.

Large investors are pouring more money into the commodities futures markets to hedge against inflation from the falling dollar. But unlike airlines and other traditional market players that have locked in oil at set prices, the speculators have no use for the actual fuel. Their paper barrels are financial bets that the price of oil will either rise or fall.

Whether speculators are actually affecting oil prices is debatable.

“One of the themes from the testimonies on Capitol Hill is that people don’t really have a good grasp on to what degree commodities investment is a factor in the rise of oil prices,” said a financial services lobbyist who represents pension funds. Even so, investors in the commodities market have been targeted in at least eight hearings and a dozen bills.

“We were in the market when oil was $30 a barrel and no one was suggesting then that our investment strategy was manipulative or driving up costs,” said Richard Baker, head of the Managed Funds Association.

Speculation is not illegal. But the Organization of the Petroleum Exporting Countries, the International Monetary Fund, Democratic congressional leaders, the presidential candidates and some economists say speculation is having negative effects on the economy. They argue that because the investors do not actually use the oil, their influx into the market is artificially inflating normal supply-and-demand pricing.

“The steady upward climb of the cost of food and energy in recent months is not simply the result of natural market forces at work,” said Sen. Joseph I. Lieberman (I-Conn.). “Our government must step in as soon as possible to protect our consumers and our economy because, against the forces of the speculative markets, the average person simply cannot protect himself or herself.”

But the investors, the Bush administration and Wall Street blame the price spike on increased demand from China and other developing economies, the falling dollar, and political uncertainty, particularly in Nigeria, Iraq and Iran.

“Some have confused speculation with manipulation or other abusive market practices,” six groups representing traders, funds and large financial services banks wrote in a June letter to Congress. “Blaming speculation or any specific trading practice for rising or falling commodity and energy prices, without real evidence of wrongdoing, is misguided.”

 

 

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Investors argue that raising margin requirements or changing the rules governing foreign regulators would drive them from U.S. markets to those abroad, at a time when capital is needed at home.

Pension funds stress how few of their total investments are in the commodities market. In June, Lieberman floated a proposal that would completely bar large pension funds from investing in energy and agricultural commodities.

The California Public Employees’ Retirement System, the nation’s largest public pension fund, has $1.3 billion of its assets in commodities. The investment is a significant increase from the $450 million initial investment the fund made in March 2007, but it’s only a tiny fraction of the fund’s total $247 billion in assets.

“We got into this long before the market took a dive last fall,” said Clark McKinley, a spokesman for the California retirement system. “We didn’t have any concept of getting a quick killing because we are a long-term investor.”

The pension funds also argue that legislation limiting their investment flexibility would conflict with their legal duty, as mandated by federal law, to diversify their investments in order to minimize the risk of large losses.

Congress has generally shied away from passing proscriptive laws on pension fund investing. But in several states and in some European countries, rules have been passed stipulating what kind of investments funds can make. And the result, according to financial lobbyists, has been lower returns.

“Put simply, mechanical approaches do not work as well as the American approach,” William Quinn, chairman of the Committee on Investment of Employee Benefit Assets, told the Senate Homeland Security and Governmental Affairs Committee. “The investment marketplace is constantly changing, and pension plans need to be able to adapt and evolve accordingly without having to comply with lists of permitted and impermissible investments.”

Higher returns, the funds say, have positive effects on local and state economies. Personal income from state and local government pensions exceeds the personal income from the nation’s farming, fishing, logging, hotel and lodging industries combined, according to the National Association of State Retirement Administrators.

“I don’t think this is going away,” Schub said. “And it really is a slippery slope. Today it will be commodities, and tomorrow it will be tobacco.”

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