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Ohio s rare-coin fund surprising to experts



With the stock and bond markets struggling, it s not surprising that even once-conservative institutional investors like pension funds are looking for ways to bolster their investment earnings.

Pensions have dabbled in hedge funds until recently considered on the risky fringe of the investment world and other alternative investments.

Experts say there s a place for alternative investments in very institutional portfolios, but some eyebrows are raised when they learn that Ohio s Bureau of Workers Compensation invested $50 million of its $18 billion portfolio in rare coins offered through two Toledo rare-coin funds operated by Tom Noe.

It s unusual, if not unique, said John Burton, a professor in Rutgers University s school of management and labor relations and a specialist in workers compensation programs. I would be fairly surprised if any other [workers compensation system] had such an investment.

The investment of funds collected for state programs for workers hurt on the job is not subject to the same degree of regulation as pension funds. But 45 states allow businesses to use private insurance carriers to cover their workers, and insurance carriers would have trouble investing in rare coins, Mr. Burton said.

Ohio is among the five states without private carriers for workers compensation.

Officials of the American Association of State Compensation Insurance Funds based in Austin, Texas, said they are not aware of any states other than Ohio that have workers comp funds invested in rare coins.

I m hesitant to criticize how organizations invest their money, said Terry Frakes, secretary-treasurer of the group and a senior vice president of Texas Mutual Insurance Co. Every state and province sets guidelines. We, as an organization, don t. Those are local.

Randy Johnson, another senior vice president of the insurance firm, surveyed more than 30 workers compensation funds last year and found that the average investment allocation is 70 percent in bonds, 26 percent in stocks, 1 percent in real estate, and 3 percent in other, or alternative asset classes. The other category mostly consisted of hedge funds, he said.

In the United States, there are very few rare-coin funds such as those operated by Mr. Noe.

In September, Bulujian Capital Management LLC of Beverly Hills, Calif., announced the start of BMC Numismatic Capital Partners LP, which it billed as the first partnership to offer rare-coin investment portfolios to institutional investors.

The firm said it would acquire rare gold, silver, and copper coins and would use hedges such as futures options and short sales of precious metals. A short sale is a commitment to sell property the seller doesn t actually own in the expectation that the price will drop, which allows the seller to buy at a lower price to cover the commitment at a profit.

Bulujian officials did not return phone calls from The Blade.

Some coin funds in the past have offered portfolios to high-net-worth individuals, but they haven t always worked out as expected. In 1994, Merrill Lynch & Co. paid $30 million to 3,500 investors who lost money in three limited partnerships dealing in rare coins and ancient art in the late 1980s.

Typically, such alternative-investment offerings are made only to investors certified as high-net-worth individuals, said Ron Rowland, editor of All Star Fund Trader, a newsletter published in Austin and president of Capital Cities Asset Management, a money-management firm. Rare coins have done well over time, Mr. Rowland said, but most of the [performance] studies come from the people who are trying to sell coins.

He is skeptical of such an investment for public money.

I have never heard of any allocation in rare coins, he said. I would be very surprised if any boards investing public funds would be that aggressive.

He grouped rare coins with vintage automobiles and rare wines, in terms of people doing it because they love what they collect. If you make a profit on it, all the better, he said. I wouldn t advise investing in collectibles unless you enjoy the collectible.

James Owen, a partner in a hedge fund, said, On the one hand, the trustees [in Ohio] are doing what they re supposed to: diversify. The stock market looks wobbly, stocks have a high valuation, and bonds don t look too attractive, either.

This is what s pushing trustees outside the mainstream, for better or worse. In many cases, their investments are terrific, but in many cases they re horrible. We re in uncharted waters, said Mr. Owens, whose Austin Capital Management manages about $750 million spread across the hedge-fund industry.

When you start going into stuff like rare coins, there is really no ready market. If things don t work out, can you get out? And who says a coin is worth a million dollars? It might only be worth $600,000. Whether you like stocks or hate stocks, they re a ready market, and you can check the prices in newspapers, he said.

Any agency or institution dabbling in alternative investments should debate how far to go outside the mainstream, said Mr. Owen, author of several books on investing, including a new one, Cowboy Ethics: What Wall Street Can Learn from the Code of the West.

The buyer should ask a variety of questions, he said, including what other agencies or institutions have made such investments, how much can be made, and how easy it is to liquidate the investment. I don t think you want to be a pioneer if you have fiduciary responsibility for a workers comp type of account.

Some experts advise institutions to be careful not to have too much of their assets in a single class of alternative investments.

Ohio s workers compensation bureau has all its alternative investments in two places Mr. Noe s rare coin funds and a fund invested in foreign stocks.

Alternative investments which can include such things as mineral lands, timber, merger and acquisition arbitrage, and short-selling of borrowed stocks and bonds are a growing segment. Even as the bull market peaked in the late 1990s an era when stock values rose 20 percent or more annually some institutional investors, including pension funds, began looking for ways to enhance their portfolios.

By the end of the 20th century, some big pension funds like the California Public Employees Retirement System (known as CalPERS) ventured into hedge funds.

During the bear market of 2000-2002, which cut stock values in half, the search widened for alternative investments not tied to stocks and bonds.

Today, CalPERS, often used as a benchmark for other pension funds, has 89 percent of its $181 billion in the more traditional vehicles of stocks, bonds, and money-market securities. But it has $8.9 billion in alternative investments, or nearly 5 percent of its total portfolio, and $11.7 billion in real estate, or more than 6 percent of its funds.

Other public agencies have dabbled outside of stocks and bonds, too. Trustees of New Jersey s $66 billion pension fund voted to invest in hedge funds, real estate, and private equity, the latter of which includes such things as venture capital and funding leveraged buyouts of companies.

A study released last year by Merrill Lynch and the consulting firm of Capgemini found that 13 percent of the assets of 7.6 million high-net-worth investors around the world was in alternative vehicles in 2003, up from 10 percent in 2002.

For now, traditional investments like stocks and bonds still dominate.

About 9,000 U.S. stock, bond, or money-market funds manage more than $8 trillion in portfolios, according to the Investment Company Institute in Washington. By contrast, the Hedge Fund Association, also in Washington, estimates that 8,000 hedge funds control $875 billion in assets globally (about half in the United States).

Contact Homer Brickey at: or 419-724-6129.

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