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South Carolina Pension Seeks Smaller Hedge Fund Managers

The South Carolina Public Employee Benefit Authority (PEBA) allocates a large portion of its assets towards hedge funds – 17 percent, as of June 30.

But PEBA is looking for a change. It isn’t considering moving away from hedge funds, but it is looking at different kinds of hedge funds. Namely: smaller ones.

From Bloomberg Briefs:

South Carolina’s pension is interested in allocating to smaller hedge fund managers to enhance diversification and capture increased returns as it reduces holdings in larger funds, according to state treasurer Curtis Loftis.

The $30 billion pension had 14 investments in “strategic partnership funds” of $1 billion or more at the start of this year, of which it has “unwound about half,” Loftis said in a speech at the Alternative Asset Summit in Las Vegas last month. It is “very interested in emerging managers” to help with this “fear of non-diversification, and to enhance returns” he said in the Oct. 28 speech. The pension has already made “several or so investments of $50 million or less the last few of months,” he said. This includes a commitment of $25 million to $50 million last month to a small manager that Loftis declined to identify.

“I love alternative investments. I love Wall Street. I don’t mind paying fees,” Loftis said in 2013. “But I want returns.” The pension last year had investment fees and expenses of 1.59 percent of assets, compared to a national average of 0.57 percent, according to a presentation on its website.

[…]

The state treasurer suggested emerging hedge funds to “come show up” at public meetings of public pension plans, including the South Carolina Investment Commission. “If I were an emerging manager and I wanted to understand how public pension plans work, I would attend the meetings, shake hands and pass out cards.”

The move is interesting because there is data out there suggesting pension funds can get the best returns by investing with newer, smaller hedge funds.

Dr. Linus Wilson writes:

Most institutions and their consultants implicitly or explicitly limit their manager selection criteria to hedge funds with a multi-year track record (three years or more) and assets under management in excess of $250 million. The AUM screen is probably higher; $1 billion or more. Unfortunately, all the evidence shows that choosing hedge funds with long track records and big AUM is exactly the way to be rewarded sub-par returns.

A recent study by eVestment found that the best absolute and risk-adjusted returns came from young (10 to 23 months of performance) and small (AUM of less than $250 million) hedge funds. My anecdotal evidence is consistent with this fact. My young and small fund, Oxriver Captial, organized under the new JOBS Act regulations, is outperforming the bigger more established funds.

Dr. Wilson believes pension funds are ignoring data that suggests newer, smaller managers perform better than the older, larger hedge funds that pension funds typically prefer

Read Dr. Wilson’s entire piece here.

Oklahoma Pension Officials Report Big Improvements in Funding, Liabilities Since 2010

Four years ago, Oklahoma’s state-level pension systems were collectively 58 percent funded. Now, their aggregate funding ratio stands at 74.4 percent, and unfunded liabilities have declined by $6.5 billion.

Pension officials reported the figures to state lawmakers on Wednesday during a House hearing.

More details from the Associated Press:

The improvements reflect the impact of legislation approved by lawmakers in recent years designed to improve the financial health of the systems, including bills passed in 2011 that increased the retirement age of some state employees and required that any retiree cost-of-living raises be fully funded, said state Rep. Randy McDaniel, R-Edmond, author of many pension overhaul bills.

“We’ve been monitoring this for several years,” McDaniel told members of the House Economic Development and Financial Services Committee. “I’m very proud of what Oklahoma has done.”

McDaniel, chairman of the committee, made the comments after officials from the Oklahoma Teachers Retirement System, the Oklahoma Public Employees Retirement System and other major retirement systems outlined their financial conditions.

In 2010, the state pension systems’ unfunded liability — the amount owed to pensioners beyond what the system can afford to pay — was more than $16 billion. The Teacher’s Retirement System was only 48 percent funded and had a $10.4 billion unfunded liability, and the Public Employees Retirement System was 66 percent funded and had $3.3 billion in unfunded liability.

At the time, officials said the pension systems threatened to place financial burdens on the state’s ability to finance road and bridge construction and other capital projects.

“The status quo was not sustainable,” McDaniel said. “Reforms were needed to ensure strength and security.”

Oklahoma’s most aggressive pension changes will be implemented next year, when new hires will be enrolled in a 401(k)-style plan instead of a defined-benefit plan.

A group of public employees are suing the state over the changes.

More Details Emerge About SEC, DOJ Probe Into State Street Pension Business

State Street won a $32 billion contract from Ohio’s retirement systems after the firm hired a lobbyist who had a cushy relationship with Ohio’s then-deputy treasurer. The deputy treasurer, in turn, had oversight of the contract.

That allegation is one among several levied against State Street by the Department of Justice and the SEC, who are probing the way State Street solicited public pension business.

From the Wall Street Journal:

Federal officials are examining the connections between Boston financial giant State Street Corp. and an Ohio lobbyist as part of a broader look at the company’s dealings with public pension funds, according to people familiar with the investigations.

The scrutiny from the Justice Department and the Securities and Exchange Commission centers on State Street’s hiring of the lobbyist in 2010, several months before winning a contract to provide administrative services for $32 billion in three of Ohio’s largest retirement systems.

[…]

In Ohio, the investigation in part concerns the relationship between lobbyist Mohammed Noure Alo and Ohio’s then-deputy treasurer, Amer Ahmad. The men were in touch roughly 14 times a day over a certain period via text and phone, according to court testimony from an agent with the Federal Bureau of Investigation. The treasurer’s office had oversight of the contract.

State Street’s interactions with Mr. Alo, the founding member of a Columbus law firm, began in early 2010, when Mr. Alo met a State Street representative at a campaign event for the state treasurer, according to the FBI agent’s testimony last week during a U.S. court hearing. State Street contacted him with a draft contract for work as a lobbyist and Mr. Alo forwarded that document to Mr. Ahmad, the FBI agent said.

Mr. Alo, who became a registered Ohio lobbyist in 2010, also approached Bank of New York Mellon Corp. with the same request, leaving a voice mail claiming the bank’s existing business with the state was “not really guaranteed to stay with you,” according to the testimony. Both banks were vying for a contract to handle assets held by three Ohio pension funds. Bank of New York Mellon didn’t retain Mr. Alo, while State Street eventually agreed in the contract to pay him $16,000 upfront, according to the FBI testimony. BNY Mellon declined to comment.

Federal officials uncovered what they described as a separate $3.2 million kickback scheme involving an Ohio securities broker and the Ohio treasurer’s office while investigating the State Street deal. They brought charges in that case against Messrs. Alo and Ahmad and two other men. All four have pleaded guilty.

The lobbyist, Mohammed Noure Alo, hasn’t been accused of breaking the law in this instance by the SEC of DOJ. But he does have a recent criminal history. From the WSJ:

Mr. Alo, who hasn’t been accused of any wrongdoing surrounding the State Street contract, pleaded guilty in December 2013 to wire fraud as part of a separate bribery and money-laundering case. A U.S. judge sentenced him to four years in prison on Wednesday for his role in the scheme, during which he accepted $123,000 from a securities broker picked by the treasurer’s office to handle certain trades for the state. Mr. Alo’s lawyer declined to comment.

Pension360 reported on Monday that State Street had admitted in a regulatory filing to being probed by the SEC and the DOJ.

Firms Managing Illinois Pension Money May Have Skirted Pay-to-Play Rules By Donating To Rauner Campaign

Over the course of his campaign, Illinois governor-elect Bruce Rauner accepted contributions from executives from firms that manage portions of the state’s pension money, according to a new report from David Sirota.

Those contributions may violate SEC pay-to-play rules, under which investment firms can’t make donations to politicians that have any influence—direct or indirect—over the hiring of firms to handle pension investments.

As Illinois governor, Rauner will have that influence – the governor has the power to appoint trustees to the state’s pension boards.

More from David Sirota on the donations:

During his gubernatorial campaign, Rauner raised millions of dollars from executives in the financial sector — and, despite the pay-to-play rule, some of the money came from executives at firms affiliated with funds that receive state pension investments. That includes:

– $1,000 from Mesirow Financial senior managing director Mark Kmety and $2,000 from Mesirow Financial managing director David Wanger. ISBI’s 2013 annual report lists Mesirow Financial as a hedge fund-of-fund manager for the pension system, and lists $271 million in holdings in Mesirow investment vehicles. In an emailed statement, a Mesirow spokeswoman told IBTimes that a separate branch of Mesirow works with the Illinois pension system and that therefore “we do not believe these contributions violate the pay to play laws.” Neither Rauner donor from Mesirow Financial “has any relationship with and/or receives any compensation from any state entity, nor do they pursue state business,” she wrote.

– $2,500 from Sofinnova general partner James Healy. TRS lists Sofinnova as a private equity manager. The system’s 2013 annual report says the firm manages $8.1 million of state pension money, and was paid more than $900,000 in fees that year. In June, TRS committed to invest another $50 million of state pension cash in Sofinnova. Healy did not respond to IBTimes’ interview request.

– $5,000 from Northern Trust’s Senior Vice President Brayton Alley. Illinois TRS lists Northern Trust Investments as an equity manager. The system’s 2013 annual report says Northern Trust manages $2.3 billion of state money, and made $548,000 in fees from the system that year. A spokesman for the firm told IBTimes, “We are aware of the obligations under various Illinois and federal laws and regulations” and “we are unaware of any violation to such requirements.”

– $9,600 from employees of the real estate firm CBRE. The 2013 annual reports of TRS and ISBI show a combined $184 million worth of state pension investments in CBRE investment vehicles. A representative for CBRE told IBTimes that the employees are not covered by the SEC rule because they are not involved in state pension business and not employed by the subsidiary of CBRE that does pension investment work.

– More than $90,000 in in-kind contributions from John Buck of the John Buck Company, which is listed as an investment manager for TRS. A spokesman for TRS, David Urbanek, told IBTimes that the pension system’s investment in the John Buck Company “is now in wind-down mode” and added that “the company is no longer actively managing TRS money.” A representative for the John Buck company said, “We do not manage money for TRS.”

While some of the contributions are relatively small, the SEC recently prosecuted its first pay-to-play case over donations totaling just $4,500. SEC sanctions can be strong: The rule can compel investment managers to return all fees they have collected from the pension systems after the political contributions were made.

Illinois state law also restricts contributions from state contractors to candidates for governor, though the executive director of ISBI, William Atwood, told IBTimes that the pension systems are exempt from the statute.

Specifics of the SEC rule in question, as explained by law firm Bracewell & Giuliani:

Rule 206 (4)-5, which was adopted in 2010, prohibits investment advisers from providing compensatory advisory services to a government client for a period of two years following a campaign contribution from the firm, or from defined investment advisers, to any government officials, or political candidates in a position to influence the selection or retention of advisers to manage public pension funds or other government client assets. Some de minimus contributions are permitted, topping out at $350 if the contributor is eligible to vote for the candidate, and the contribution is from the person’s personal funds.

Read Sirota’s entire report here.

By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Ontario Proposes Rule Change That Would Let Pension Funds Put Larger Slice of Assets in Infrastructure

Under current rules, Ontario pension funds can only invest up to 30 percent of assets in infrastructure investments.

But the Ontario Ministry of Finance is proposing an amendment to that regulation, which would raise the cap on infrastructure.

The proposed change would exempt Ontario public infrastructure projects from being counted toward the 30 percent infrastructure cap – allowing pension funds to exceed 30 percent as long as they were investing in local infrastructure projects.

From the Financial Post:

The Ontario Ministry of Finance has proposed that pension plans be permitted to take a greater stake in infrastructure projects.

Currently, the Pension Benefits Act limits pension plan investments to a 30% equity stake in the securities of most public companies. Exemptions to the “30% rule” do exist for real estate corporations, resources companies, investment corporations and others. The proposed investments would add “infrastructure corporations” to the list of exemptions.

“Many stakeholders have advocated the elimination of the 30% rule [entirely] over the years,” notes a recent Goodmans Update.

Despite such a recommendation from the Ontario Expert Commission on Pensions in 2008, the federal government, whose rules are incorporated into the PBA, has taken the position that it will not change the 30% rule “for prudential reasons.”

But in the 2013 Ontario Economic Outlook and Finance Review, the provincial government announced that it would modify the Rule by exempting infrastructure projects. The proposed amendment would apply to a host of “physical structures and associated facilities by or through which a public service is provided in Ontario” provided the infrastructure is located exclusively in the province.

[…]

“As with the current exemptions for real estate, resource and investment corporations, a pension plan administrator could only benefit from the exemption to the 30% Rule if it filed with the Superintendent a prescribed form of undertaking by the infrastructure corporation,” Goodmans advises.

The amendment is currently in a comment period, which ends January 9.

It can be found online here.

CalPERS Commits $100 Million to San Francisco Bay Apartment Developments

CalPERS has committed $100 million to the AGI Resmark Housing Fund, which invests in three apartment development sites in the San Francisco Bay area.

More details from IPE Real Estate:

CalPERS, which declined to comment, has now allocated a total of $300m into its emerging manager program for real estate, having previously backed Sack Properties and Rubicon Point Partners in the office and data centre sectors.

[…]

With leverage at 70%, total investment could be as much as $330m.

Development properties are unlikely to be sold to other institutional owners, as was the case with Avant Housing.

Holding apartment developments and transferring them to another CalPERS account once the properties become core is a more likely option, IP Real Estate understands.

AGI Capital and the Resmark Company are serving as the respective emerging and mentoring managers for the fund.

CalPERS has previously worked with AGI in its Avant Housing venture with TMG Partners, to which it made a $100m allocation.

Resmark, which has since replaced TMG, expects three development sites to be placed into the new relationship with AGI.

An existing, 259-unit project, previously under the control of TMG and Avant Housing, has been moved to the new venture.

Ground-breaking is scheduled in the next 30 days, with the project due for completion in 19 months.

CalPERS is in the midst of a plan to increase real estate investments by 27 percent over the next few years.

Video: Insights From Switzerland’s Pension System

The above talk was given by Monika Buetler (Universitaet St. Gallen) at the 2014 Pension Research Council Conference; Buetler spoke about her research into Switzerland’s three pillar pension system.

From the video description:

This paper takes Switzerland’s much praised three pillar system to illustrate some of the challenges pension system reforms face in an ageing society. It shows that policy makers are confronted by both individuals with behavioral anomalies and by others strategically exploiting the system. The trade-off between incentives and providing adequate retirement income limits policy options, especially if reforms do not want to impose too many restrictions on individual choice and avoid excessive burdens for the young generation. Reforms can also be seriously challenged by political constraints, in particular institutions of direct democracy.

Canada Pension Plan Returned 3.4 Percent in Second Quarter

The Canada Pension Plan Investment Board (CPPIB) has crunched its numbers for the second quarter, which ended Sep. 30.

CPPIB investments returned 3.4 percent over the period; that’s an improvement over the 1.6 percent return experienced by plan investments in the first quarter.

The CPPIB returned 16.5 percent in fiscal year 2013-14.

More on the return figures from the Globe and Mail:

CPPIB said its assets grew by $7.6-billion in the fiscal second quarter ended Sept. 30, with assets increasing to $234.4-billion from $226.8-billion in the previous quarter.

Growth consisted of $7.5-billion in net investment income and $0.1-billion from new contributions.

The modest return is in stark contrast to much higher returns posted last year, as growth in global markets slows.

“During the quarter, our investment portfolio reflected mixed performance from the global public equity markets, balanced by solid returns from our fixed income assets and positive contributions from our private investments,” CPPIB president and chief executive officer Mark Wiseman said.

“We continue to realize the benefits of a globally diversified, resilient portfolio that is designed to deliver superior returns over the long term.”

Canada’s largest pension fund manager said on Thursday that the Chief Actuary of Canada has projected that the fund will attain a 4-per-cent rate of return after inflation on a long-term basis.

CPPIB has a five-year rate of return of 8.2 per cent and a 10-year return rate of 5.6 per cent, above the actuary’s assumptions.

The CPPIB’s allocates 33 percent of its assets to public equities, 32.5 percent to fixed income, 10.8 percent to real estate, 5.4 percent to infrastructure and 18.3 percent to private equity.

Pennsylvania Teachers’ Pension Puts $2 Billion of Private Equity Stakes Up For Sale

The Pennsylvania Public School Employees’ Retirement System (PSERS) is attempting to sell a significant portion of its stakes in various private equity funds.

The pension fund is looking to sell off $2 billion of such investments, a total that amounts to about 22 percent of its private equity holdings.

PSERS is putting the stakes up for sale to cash in on high prices.

From Bloomberg:

Pennsylvania Public School Employees’ Retirement System is offering about $2 billion of private-equity fund stakes for sale after prices for such investments reached the highest levels since the 2008 financial crisis

The $53.3 billion system, known as Psers, hired Dallas-based investment bank Cogent Partners to manage the sale process, said three people with knowledge of the matter, who asked not to be identified because the information is private. The amount for sale is less than a quarter of the plan’s $8.7 billion private-equity holdings as of June 30.

“We are considering a secondary sale since we are overweight in our long-term allocation to private equity and have been since coming out of the financial crisis,” said Evelyn Tatkovski Williams, a spokeswoman at the plan.

The pension system’s level of private-market investments was near its 21 percent target as of June 30, according to data on the Psers website. Private markets includes private equity, private debt and venture capital.

Bill Murphy, a managing director at Cogent in New York, declined to comment on the sale process.

The pension plan reported a net investment return of 3.3 percent for private markets during the quarter ended June 30 and 14 percent for the latest fiscal year.

PSERS manages $53.3 billion in assets and is 63.8 percent funded.

Photo by Simon Greig via Flickr CC License

CalSTRS Stepped Up “Green” Bond-Buying By 300 Percent In 2014

CalSTRS released its Green Initiative Task Force report on Wednesday. The report highlights the pension fund’s “environmental-themed investments” and risk-management efforts related to climate change.

The report reveals that it increased its purchases of “green bonds” by 300 percent in 2014. Investopedia defines a “green bond”:

These bonds are created to encourage sustainability and the development of brownfield sites. The tax-exempt status makes purchasing a green bond a more attractive investment when compared to a comparable taxable bond. To qualify for green bond status the development must take the form of any of the following:

1) At least 75% of the building is registered for LEED certification;

2) The development project will receive at least $5 million from the municipality or State; and

3) The building is at least one million square feet in size, or 20 acres in size.

From a CalSTRS press release:

California State Teachers’ Retirement System’s (CalSTRS) eighth annual Green Initiative Task Force report shows an almost 300 percent increase in green bond purchases within the Fixed Income portfolio. This year, the Teachers’ Retirement Board identified sustainable investing as a key, strategic priority, which is reflected in the report and other initiatives.

The growth in green bonds aligns with a commitment that CalSTRS Chief Executive Officer Jack Ehnes made during his participation in the 2014 Climate Summit where he announced that CalSTRS will more than double the fund’s clean energy and technology investments of $1.4 billion to $3.7 billion over the next five years. The move is in response to United Nations Secretary-General Ban Ki-moon’s call for bold action to build resilience to the impacts of climate change.

“Targeting the clean energy and technology sector provides a good investment opportunity while positioning CalSTRS for a low-carbon future,” noted Ehnes. “But more importantly, we hope our actions will help catalyze incentives for comprehensive climate change policies that ultimately lead up to a global agreement in Paris in 2015.”

CalSTRS sees a growing number of investment opportunities in low-carbon solutions, especially as renewable technology costs come down and regional clean energy policies take hold.
“Our growth of green-related investments is a good example of successful engagement on environmental and climate risk issues,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “Looking forward, we hope to bring more attention to the role large institutional investor’s play in financing green bonds, clean energy and climate change initiatives.”

The entire Green Initiative Task Force report can be read here.

Photo by penagate via Flickr CC

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