Apr. 23–Massachusetts Treasurer Timothy Cahill, who swept into office in January pledging to reverse the disappointing 2002 performance of the state’s $25 billion pension fund, had some dismalnumbers of his own in Norfolk County last year.

In 2002, the Norfolk County Retirement System fund plunged 12.1 percent, according to records obtained by The Boston Globe — worse than the 9 percent drop suffered in the statewide fund, the Pension Reserves Investment Trust.

The loss was the worst in at least a decade for the Norfolk pension system and marked the only loss under Cahill’s six-year oversight of the $336 million retirement system.

The loss was worse than expected, Cahill said, because two of the outside firms that manage stock portfolios for the system underperformed the market sharply.

Overall, Norfolk County took a pummeling from stocks last year, which make up nearly one-third of the portfolio. While the broad stock market declined 22.1 percent, Norfolk’s stock managers posted a 31.7 percent loss.

“We knew the numbers would be down,” Cahill said, citing the third year of a relentless bear market. But the red ink moved into the double digits, he said, because, “We had two managers who did extremely badly last year.”

Venture capital returns also were poor.

The two managers who hurt the fund most were Boston Co. and MFS Investments, two firms whose midsize stock portfolios had been winners for the fund in prior years. Last year, the Boston Co. Mid-Cap Value fund shed 38.6 percent of its value, while MFS’s Mid-Cap Growth style plummeted 47.4 percent, according to the Norfolk County fund documents.

“The bottom really fell out on both of them,” Cahill said.

The system put both managers on probation in the first half of 2002, he said, but kept them “because of the fine track record they had, helping us make money for the five years previous.”

Cahill, a Democrat and a veteran of the Quincy City Council who was relatively unknown in state politics until last year’s campaign, ran for office in part on his record of eking out a 0.6 percent gain for the Norfolk system in 2001. In 2000, he posted a 5.4 percent gain, while the Standard & Poor’s 500 Index fell 9.1 percent, followed by an 11.9 percent decline in 2001.

When Cahill became Norfolk County treasurer in 1996, one of his first moves was to pull Norfolk out of the statewide system run by the Pension Reserves Investment Management Board. He said he believed Norfolk could do better on its own. His three-year record appears to confirm his assertion; Norfolk lost about 2.3 percent per year, on average, on his watch, while the state fund has fallen 5.2 percent per year over the past three years.

The median public fund lost 4.3 percent annually over the past three years, according to the Trust Universe Comparison Service.

Cahill’s predecessor as state treasurer, Shannon O’Brien, who lost a race for governor last year, saw the state’s PRIT fund fall to the 48th percentile among comparable funds last year and to the 61st percentile over three years. (Over 10 years, the fund ranks in the 5th percentile, with a 9.2 percent average annual return.)

Norfolk’s poor 2002 performance is likely to raise concerns, as Cahill grapples with how to produce a positive return in the statewide pension fund in his first year at the helm.

He has said he opposed Governor Romney’s efforts to abandon the pension fund in favor of a 401(k)-style approach.

A 12.1 percent loss will put Norfolk well below median performance among county systems for last year. Results for all the state’s retirement systems won’t be compiled publicly until summer.

Cahill blamed the losses in part on Norfolk’s inability to hire hedge fund managers, or “absolute return” managers who short stocks and employ other methods to avoid ever losing money. Under Cahill, the Norfolk system had twice petitioned the state’s public pension oversight board, the Public Employee Retirement Administration Commission, to allow hedge funds as an investment class. Those requests were made in 2001; PERAC just this year approved hedge fund use by public funds with at least $250 million in assets.

“They tied our hands at a time when I wish they hadn’t been tied,” Cahill said. Had the Norfolk system been able to put 5 percent to 8 percent of its assets in hedge funds, he said, “We would have dramatically turned these numbers around.”

Retirement systems around the state are now reviewing the possibility of investing as much as 5 percent of their assets in hedge funds, as permitted under the new rules, Cahill said. “We may be looking at them for the state as well,” he noted, “as part of our asset allocation study.”

Recent studies show that hedge funds have helped large university endowments and foundations protect themselves against the worst of the losses served up by the bear market.

Asked whether, if he had it to do over, he would run Norfolk’s assets separately from the state’s, Cahill said, “I think so.” Smaller systems, however, with less muscle and flexibility to get into such vehicles as hedge funds, might do well to join the state fund that he now runs, he suggested.

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