Category / Institutional Investors

by dietrichknauth

SEC chair not eager to take action on unequal stock schemes, IPO arbitration

The chair of the Securities and Exchange Commission expressed reluctance to take additional action on dual-class stock structures and arbitration clauses in companies’ initial public offerings.

Jay Clayton, speaking at the Council of Institutional Investors’ spring conference in Washington, D.C. on March 12, said that his agency has limited resources, and that he was hesitant to commit to game-changing actions on topics of interest to the institutional investors in attendance.

One topic which has discussed frequently at the conference was dual-class capitalization structures, in which some classes of stock carry more voting weight than others. The issue has been more hotly debated by investors since the 2017 IPO of Snap, the maker of SnapChat, which sold shares of common stock that conferred no voting rights at all. SEC commissioner Robert Jackson, Jr. said in February that such structures were undemocratic, and called for listing standards addressing the use of perpetual dual-class stock that can be passed down to heirs without any diminishing of voting power. Clayton, however, was more circumspect when asked about dual-class shares at the CII event.

“I’m not putting this at the front of the agenda for something we should weigh in on,” Clayton said.

Clayton said that the “one share, one vote” model is not the only model of governance for successful public companies, although extreme examples like Snap were cause for concern.

“Where you draw the lines, and whether that’s something that should be done by the SEC or by the stock exchanges or some other authority – or by people with a great deal of capital to put to work in the markets – is a question worthy of debate,” Clayton said. “But from my own perspective, I’m not an absolutist on either end.”

Read the full story: SEC chair not eager to take action on unequal stock schemes, IPO arbitration

Published by Money Management Report/Pageant Media.

by dietrichknauth

Turmoil in LACERS’ board

Pension boards have an important duty to oversee the investment apparatus that ensure that retirees will be paid their promised benefits — but what happens if a board member goes too far, becoming more attack dog than watch dog?

That was an accusation recently leveled at a public meeting of the Los Angeles City Employees’ Retirement System (LACERS), when the $17bn fund’s recently-retired general manager spoke up to protest what he saw as “breakdowns in board decorum” that were interfering with the plan’s ability to recruit and retain the staff and consultants needed to meet the city’s investment goals.

Pension trustees face a difficult task in striking the right oversight balance — often working part-time to oversee investment staff that are making day-today decisions in a complicated industry where trustees often have little direct expertise. Education, training, and relationship management are all important tools in such a context, allowing board members to ask productive questions without being either needlessly antagonistic nor a rubber stamp for investment staff, according to Matrice Ellis-Kirk, a managing director at RSR Partners. Ellis-Kirk has offered governance consulting and recruiting services to the boards of pension plans, investment managers, and public and private companies.

“You’re not looking to have a monolith,” Ellis-Kirk told MMR. “The most important part of a board is having diversity of thought. What you’re trying to do is create an environment where you can get honest information, get transparency, and hold people accountable without making them want to run or hide. Hostile environments do not create that.”

Read the full story: Turmoil in LACERS_ board

Published by Money Management Report/Pageant Media.

by dietrichknauth

Montana moves cautiously on diversifying strategies

The Montana Board of Investments is proceeding slowly with a new allocation to diversifying strategies, moving forward only after a close board vote and a cautious initial allocation of 0-4% of the overall portfolio.

The board updated its asset allocation targets for the $11.3bn Consolidated Asset Pension Pool in November, including a brand-new target for diversifying strategies. The asset class includes a potentially wide mix of public markets investments that seek to provide downside protection while maintaining liquidity and providing a better return than
just holding onto cash.

Creating a new asset class was necessary, according to CIO Joe Cullen, to allow the state pension funds to take advantage of multi-asset strategies and other investments that otherwise would not fit within the state’s asset allocation structure.

“There’s no place for them in our current portfolio,” Cullen said at the fund’s February meeting. “The opportunity set for diversifying strategies is larger than what we collectively utilize across the other asset classes.”

Read the full story: Montana moves cautiously on diversifying strategies

Published by Money Management Report/Pageant Media.

by dietrichknauth

Iowa receives wide interest in ‘unconventional’ alpha search

The Iowa Public Employees Retirement System (IPERS) has received wide interest in its search for active management that can show high performance regardless of the manager’s asset class or benchmark, collecting more than 700 proposals by the December due date.

The $31bn system is using the unconventional RFP to help it take a more holistic view of its public markets portfolio options and identify topperforming managers across a range of traditional asset class “silos.” IPERS is open to a wide range of investments that are primarily comprised of liquid, publicly traded securities, looking for strategies that show
“persistent risk-adjusted alphas that are uncorrelated with IPERS’ strategic asset allocation, liabilities, and the alphas of other public market products within the IPERS investment program.” It issued a request for proposals in October, with assistance from Wilshire Consulting, and proposals were due December 8.

The response has been overwhelming, according to IPERS spokeswoman Judy Akre. All 25 of IPERS’ current active public markets managers and products were automatically included in the search, Akre said. No decisions have been made yet, and IPERS has not yet set a timeline for the next stages of the search.

“There is no established timeline,” Akre told MMR. “We are still evaluating the manager responses.”

IPERS also has not set a firm target for the amount it would invest through the RFP, or the number of managers it would hire, Akre said.

Read the full story: Iowa receives wide interest in unconventional alpha search

Published by Money Management Report/Pageant Media.

by dietrichknauth

NYC police pension not on board with city’s fossil fuel divestment plan

The New York City Police Pension Fund, one of the five city pension plans overseen by the Comptroller’s Office, voted down a proposal to divest the city’s pension funds from companies that own fossil fuel reserves.

Mayor Bill de Blasio and Comptroller Scott Stringer announced the divestment proposal earlier this month, saying that the $189bn New York City Pension Funds should divest from companies that own fossil fuel reserves in the next five years, becoming the first major U.S. pension plan to do so (MMR, 1/10/2018). The comptroller introduced a resolution to begin the process at the common investment meeting last week, starting with a broad request for information from experts, stakeholders, industry, and members of the public and following with a request for proposals for a consultant to study divestment and guide the pension funds’ efforts.

One of the pension funds, the $63.2bn New York City Employees Retirement System has passed the resolution thus far, and the plan also has majority support from the Teachers Retirement System and the Board of Education Retirement System, which will vote soon. But the $39.8bn New York City Police Pension Fund did not sign on to the divestment effort, with one trustee saying that he felt that the board was being pressured to go along with a plan that was formed without its input.

“I don’t know what the sudden urge to do this was,” said trustee Joseph Alejandro, representing the Patrolmen’s Benevolent Association. “I see that a lot of work was done without us being involved in the very beginning of it…. I don’t think we need another resolution with another undefined process being pushed by someone who may or may not be here four, five years from now.”

Read the full story: NYC police pension not on board with city_s fossil fuel divestment plan

Published by Money Management Report/Pageant Media.

by dietrichknauth

Public pensions forced to play defense on ESG investments

As environmental, social and governance (ESG) concerns become more prominent in public pension plans’ strategies, sponsors sometimes struggle to justify their actions without the benefit of a clear consensus on how to measure ESG success. Board members, in particular, are feeling squeezed between divergent opinions on whether ESG is a core part of their fiduciary duty.

Different investors take different approaches to ESG and its role in a portfolio, and they use different metrics and frameworks to measure success, with competing frameworks being offered by the Global Reporting Initiative, the Sustainability Accounting Standards Board, UN Principals for Responsible Investment, G20’s Financial Stability Board’s Task
Force on Climate-Related Financial Disclosures (TCFD), and International Integrated Reporting Committee, among many others. The continued debate about how to approach ESG investing leaves plans sponsors vulnerable to critics who call ESG a distraction from investors’ core mission of maximizing returns.

The California Public Employees’ Retirement System (CalPERS), which devoted a portion of its January meeting to discussing ESG strategy, is often caught in the crossfires on ESG debates.

“It’s almost ‘damned if you do, damned if you don’t,’” CalPERS board member Richard Costigan said at a recent board meeting. “As a fiduciary, if I focus too much on this, I risk lower returns which opens me up to [criticism]. Now we’re talking about inaction raising the risk of a fiduciary breach. As a trustee I’m sort of stuck in the middle.”

Read the full story: Public pensions forced to play defense on ESG investments

Published by Money Management Report/Pageant Media.

by dietrichknauth

San Francisco pension resists calls for fossil fuel divestment

The $24bn San Francisco Employees Retirement System (SFERS) resisted calls from activists to divest from fossil fuels, instead approving a more limited plan to identify and engage with the worst sources of greenhouse gas emissions.

SFERS held a special board meeting January 24 to consider divestment, which was supported by board member Victor Makras and opposed by the system’s investment staff and consultant NEPC. In May, Makras made a motion to divest all fossil fuel holdings in its public markets accounts within 180 days. NEPC estimated that the divestment would cover about $500m in assets, or about 4.5% of SFERS’ public equity potfolio.

Investment staff countered with a proposal that would create a separate $1bn “carbon constrained” passive account strategy that aims to reduce carbon emissions by 50% compared to the S&P 500 Index, and take a phased approach to identifying and engaging with the “worst of the worst” companies in carbon emissions. The approved plan would also hire a director of socially responsible investing and partner with other pension plans, including the California State Teachers’ Retirement System (CalSTRS), NYC Retirement Systems and the New York State Common Retirement Fund, on carbon emission reduction efforts.

SFERS board approved the investment staff’s proposal at the meeting, drawing criticism from activist groups in attendance. San Francisco’s investment team prepared a 164-page report in response to the divestment resolution, saying that divestment would not do anything to reduce fossil fuels.

“This cannot be emphasized enough: divestment does not reduce fossil fuels,” Executive Director William Coaker wrote in a 164-page report. “Staff is concerned that fossil fuels are causing global warming. However, divestment does not reduce the amount of fossil fuels; it simply changes ownership.”

Read the full story: San Francisco pension resists calls for fossil fuel divestment

Published by Money Management Report/Pageant Media.

by dietrichknauth

Overuse of credit adds to PE crunch for pension funds

Public plan sponsors, already facing an overheated market for private equity investments, have to contend with a new obstacle in evaluating private equity managers and putting their money to work: the increasing use of credit lines.

General partners (GPs) are increasingly turning to subscription credit lines, which use limited partners’ (LPs) capital commitments as collateral to secure a line of credit from a bank, to fund acquisitions and delay calling on partners’ commitments. The approach began as a short-term tactic that benefited LPs, by giving them more time to meet cash calls instead of forcing them to pony up on a “just in time” basis. But institutional investors say the tactic has been expanded to delay capital calls in a way that could
inflate a private equity fund’s internal rate of return (IRR), making it more difficult for investors to evaluate potential partners and potentially triggering carried interest fees that would not have been warranted if the GPs put their partners’ money to work in a more timely manner.

“It’s like a baseball player taking human growth hormone and steroids — it can make an average player look terrific in terms of home runs, batting average, and slugging percentage,” David Fann, president and CEO of TorreyCove, a private equity and real assets consultant, told MMR. “It can make a mediocre fund look terrific on an IRR basis.”

Pensions are already feeling crowded out of private equity, with soaring demand for funds managed by top general partners. Entry prices for assets remain high, and dry powder has reached record levels — $906bn according to Preqin’s latest quarterly report on private equity, making for a challenging environment for managers looking to put capital to work. Credit only makes their jobs tougher.

Read the full story: Overuse of credit adds to PE crunch for pension funds

Published by Money Management Report/Pageant Media.

by dietrichknauth

Oregon aims to build world-class investment culture

When John Skjervem joined the Oregon Investment Council as CIO five years ago, he was surprised to find out that the nearly-$100bn system had long been operating with what he called “a skeleton crew.”

The system had been successful, but its small staff, antiquated equipment, and its division into two physically separate offices, all posed long-term risks, according to Skjervem. After making his concerns known, the Oregon state legislature responded this summer by passing a budget that adds 27 positions to the investment division over the next two years, for a new total of 66 positions.

“When I was hired, I was surprised to learn that we were managing a portfolio of such size and such complexity with such limited staff,” Skjervem told MMR.

The new hiring authority will help the investment division build a worldclass investment culture, Skjervem said, even in a relatively small market like Tigard, Oregon (population 52,000), where the investment division is housed. The new hires will create a stronger and more diverse investment staff, and build on previous improvements, like the consolidation of office space and the installation of new technology, Skjervem said.

“It’s like a do-over,” he said. “You get a brand-new office, you get essentially to double the staff, so you get to inject it with the types of people that you think are going to be most energizing and complement the existing staff in terms of diversity and inclusion. It’s really exciting to think about building a culture that’s unique to the Oregon investment division and a culture that people want to be a part of, that’s stimulating and inspiring so they want to come to work every day.”

Read the full story: Oregon aims to build world-class investment culture

Published by Money Management Report/Pageant Media.