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New York Common Fund’s Hedge Fund Target Is “Under Review”

New York’s Common Retirement Fund says it is “reviewing” its hedge fund investments, including the allocation targets for such investments as set in its investment policy.

The Common Fund makes investments for the New York State and Local Retirement System (NYSLRS) as well as other systems. Pension360 previously covered the fund’s investment policy, which allows for higher allocations towards hedge funds.

Now, the Common Fund is reviewing those allocations. From Business Insider:

“We are currently reviewing our asset allocations with the goal of maximizing our risk-adjusted return on investments,” a spokesman for state Comptroller Tom DiNapoli told Business Insider on Tuesday.

[DiNapoli] stressed that only a small amount of their investments are tied up in hedge funds, however — only about 3.2% or $5.6 billion for the DiNapoli’s fund, for example.

“The target allocation, which is currently under review, was set at 4% in 2009,” DiNapoli’s office added. If he decides to maintain that target, he would actually have to move more money into hedge funds.

[…]

Scott Evans, the chief investment officer of New York City’s retirement system, said the Big Apple’s pension fund has no plans to divest from its investments in hedge funds. He pointed to the relatively small size of the city’s hedge fund investment in his explanation for why he had no plans to eliminate it.

“Hedge funds are an alternative asset class that can help improve the balance between risk and return. They are optional,” Evans said in a statement. “Two of our five systems have opted to pass on those allocations. The other three have allocated 4-5% of assets to hedge funds. We have no current plans to recommend changes to this program.”

A spokesman for the fund later clarified to Business Insider that the review was routine and scheduled, and not connected to CalPERS’ decision to end its hedge fund program.

Photo by: Christopher Chan via Flickr CC License

Advisors, Fund Managers React To CalPERS’ Hedge Fund Pullout

We’ve heard what CalPERS officials had to say about the decision to cut ties with hedge funds. But how are advisors and fund managers within the industry reacting to the news?

A few anonymous hedge fund advisors have claimed that CalPERS’ problem wasn’t hedge funds as an asset class—the problem was that the pension fund was bad at picking which hedge funds to invest in. From Business Insider:

“I think CalPERS is not a particularly good hedge fund investor,” one prominent hedge fund manager told Business Insider. He cited the pension fund’s lackluster annualized rate of return of 4.8% over the last ten years. “I would redeem too.”

He continued: “I think it’s not hedge funds as an asset class. It’s the ones they invest in.”

Another prominent hedge fund manager echoed that same sentiment.

“They got what they paid for since they only invested in managers who would cut fees. So the best funds wouldn’t do that, so they had a mediocre portfolio.”

Another investment officer gave a more measured response to the New York Times:

“I think the industry is changing. There is less tolerance for underperformance in an environment when you have a relative huge outperformance with more liquid opportunities like an S.&P.-500 index fund,” said Elizabeth R. Hilpman, chief investment officer at Barlow Partners.

“There is a lot of disappointment that hedge funds have not been able to capture more of the market results,” she added.

Several advisors gave some interesting opinions to Wealth Management, too:

“All taxable investors should take notice of this decision, because if Calpers doesn’t think the asset class is adding value for them, how does any taxable investor believe the asset class can add value in their portfolio—especially those in the top couple tax brackets?” said Scott Freund, president of Family Office Research.

[…]

“We already ignore the [hedge fund] genre because they are the Groucho Marx club of investing: The only ones that will let us in are the ones in which we don’t want to be invested,” said Stephen Barnes, investment manager and chief compliance officer of Barnes Investment Advisory. “Fees are too high. Truly a ‘heads I win, tails I don’t lose’ proposition for the hedge fund manager.”

Some advisors defended hedge funds in light of CalPERS’ decision. From Wealth Management:

Ryan Graves, wealth advisor with FirstPoint Financial, said alternatives play an important role in mitigating the risks associated with traditional asset classes.

“The time for a ‘true’ hedge fund (and not the levered up investment vehicles that many morphed into pre-2008) is when valuations are high, not after the correction has already occurred,” Graves said. “Just wait for a pullback in next 12-24 months and see how they try to explain away dumping an absolute return strategy.”

“To a contrarian this might mean it is time to consider investing in hedge funds,” said Kris Maksimovich, president of Global Wealth Advisors. “The decision could push hedge funds, especially the more expensive variety, to reconsider their pricing.”

There are plenty more quotes in the linked articles.

Photo credit: Lending Memo

San Francisco Fund Delays Hedge Fund Investments Again

The San Francisco City & County Employees’ Retirement System (SFCCERS) decided earlier this summer to invest 15 percent of its assets in hedge funds. But the fund has never invested in hedge funds before – and some board members aren’t on board with the plan in its current form.

So, for the second time in three months, the board delayed a vote on the hedge fund investments. From FinAlternatives:

The $20.6 billion public pension delayed a vote on a planned $3 billion hedge-fund allocation for the second time last week, Pensions & Investments reports. The board first put off a vote in June.

The planned alternative investments allocation has become a source of contention at the San Francisco fund. Board member Herb Meiberger has vocally opposed it, going so far as to seek—and win—the support of Berkshire Hathaway chief Warren Buffett, who urged the pension to use index funds rather than hedge funds.

Meiberger remains the only board member in certain opposition. But the other board members appeared open to joining him, as well as to supporting Chief Investment Officer William Coaker, who has championed the plan. Coaker presented a detailed report to the board on Wednesday, but his fellow members demanded still more information before voting to table the matter for another 90 days.

The key issue for board members seems to be the specific allocation of the money. Board members wanted to know, specifically, what hedge funds were to be invested in. But that information wasn’t available.

The board will vote again in early December.

Photo by Kevin Cole via Flickr CC License

New York Retirement System Is Prepared To Increase Its Allocation to Hedge Funds, Alternatives

CalPERS is running away from hedge funds, but, as Pension360 has covered in the past, most pension funds aren’t following. In fact, some are running in the opposite direction.

Case in point: the New York State and Local Retirement System (NYSLRS). The fund hasn’t made any decisions yet, but it is open to the possibility of expanding its allocation in hedge funds and other complex investments. From Public Sector Inc:

A bill passed by the New York State Senate and Assembly at the end of their session in June would expand, to 30 percent from 25 percent, the share of pension fund investments that can be allocated in “baskets” of assets not otherwise specifically permitted by law. These include hedge funds and private equity funds, which involve more complex financial risks and are more difficult to value and monitor than traditional stocks and bonds. The change has been supported in the past by Comptroller Thomas DiNapoli, NYSLRS’ sole trustee, although the lobbying effort for the bill this year appears to have been spearheaded by the New York City pension funds.

The bigger-basket pension bill hasn’t yet been sent to Governor Andrew Cuomo for his signature. If his approval or veto message contains so much as a single sentence’s worth of substantive explanation, it will exceed the sum total of all public comment devoted to the subject by state lawmakers this year. (The issue has also gone virtually unnoticed by State Capitol news media.)

In fiscal 2007, when DiNapoli became comptroller, NYSLRS paid out $162 million of investment management fees, including $27 million for alternative investments. By fiscal 2013, the latest year for which data are available, investment fees had risen to $454 million, including $163 million in the “absolute return” category alone, which includes hedge funds.

The NYSLRS has ramped up its allocation towards alternative investments in recent years. It the fund’s official investment policy is any indication, it is planning on devoting an even higher percentage of its assets towards such investments. From Public Sector Inc:

Total NYSLRS assets in the alternative category came to 11.8 percent last year, including 3.2 percent invested in absolute return strategies. However, according to its annual report, the fund’s long-term goal is to increase its alternative allocation to 21 percent, including 10 percent in private equity and 4 percent in absolute return assets including hedge funds, plus 4 percent in the newer category of “opportunistic” investments and 3 percent in “real assets” including commodities, infrastructure and timberland meant to create “inflation hedging strategies,” the annual report said.

The pension funds also announced recently a partnership with Goldman Sachs. Sachs will receive $2 billion to manage.

Pennsylvania Lawmaker Speaks Out Against “Irresponsible” Reform Efforts

Pennsylvania Gov. Tom Corbett spent most of his summer traveling the state and touting the need for pension reform. The legislators are now back from their breaks, but pension reform bills continue to gather dust.

Republicans have been vocal about Democrat lawmakers’ unwillingness to work with the reform bills currently on the table. Now, one Democratic lawmaker has clarified why her party refuses to engage with the Republicans. Rep. Michelle F. Brownlee (D) writes in the Patriot News:

Republican leaders have already acknowledged the real pension problem is debt, not benefit costs. The solution to pension debt is the same as the solution to credit card debt: Pay the bills. Yet the Corbett/Republican pension proposal focuses on cutting benefits for future workers.

Act 120 of 2010 already cut new worker benefits starting in 2011 by nearly 50 percent, saving Pennsylvania $34 billion. Further cuts will sacrifice the retirement security of tens of thousands of future teachers, nurses, first responders, counselors and other public workers. The strain on safety net programs would stress future state budgets. Why do that when the Corbett plan offered by the Republicans, by their own admission, will do nothing to pay down the pension debt any faster?

If “reformers” truly believe we need to pay down the unfunded liability more quickly than Act 120 does, then they need to offer additional revenue so the state and school districts can do that.

It’s irresponsible, and a huge disservice to Pennsylvania, for those who do or should know better to continue misstating the pension problem and misleading the public about the solution.

She was responding to an editorial lambasting both parties, written last week by Dwight D. Weidman, vice-chairman of the Franklin County Republican party. He wrote in the Patriot News:

A very wise Pennsylvania politician recently opined, “In Pennsylvania, the unions buy Democrats, and rent Republicans”.

No doubt what the author of this statement was thinking about when he made it was the fact that close to twenty Republican legislators have steadfastly opposed any attempt to help enact urgently-needed reform to Pennsylvania’s public employee pension system, because of their ties to public sector unions.

To be sure, not a single Democrat legislator is willing to step up and save the state from certain bankruptcy, but that shouldn’t really matter, since the Republicans control both the Senate and the House and could fix our pension debt crisis, but won’t, and that is disturbing.

[…]

If lawmakers fail to act, this issue will, in time turn Pennsylvania into a large-scale version of Detroit, with both businesses and population fleeing ever more burdensome taxes that will be needed to fund the growing pension obligations.

Weidman criticized the 16 Republican assemblymen who “won’t get on board” with pension reform efforts. Many of those lawmakers receive campaign support from various unions.

Emanuel Draws Flak For Retiree Premium Increase

Chicago Mayor Rahm Emanuel increased retiree health premiums by 40 percent this week, and it didn’t take long for his challenger, Bob Fioretti, to criticize the decision. Fioretti, currently an alderman, told the Sun-Times:

“This will place an unsustainable financial burden on our retirees, who are already facing cuts to their pensions,” the 2nd Ward alderman said.

“Our retirees dedicated their lives to making our city work. How does this administration repay them? By breaking its promises and pushing struggling Chicagoans closer to poverty. It’s unconscionable at a time when we should be looking to build our [economy] from the middle out and lifting up our working families.”

Fioretti was asked where he would find the $27 million that Emanuel hopes to save in the city’s 2015 budget by continuing to phase out Chicago’s 55 percent subsidy for retiree health care.

“A lot of this they’ve known was coming down the road for a long time. It’s long-term bad planning. We should work to find ways to fund the promises we made,” he said.

“There are ways — whether it’s looking at a [1 percent] commuter tax [or] complete reform of TIFs — all of those are the real tough decisions we have to make to move this city forward. Those are solutions my administration will find.”

The city defended the premium increase as a fiscal necessity. From the Sun-Times:

Budget and Management spokesman Carl Gutierrez has called the increase “part of our efforts to right the city’s financial ship” and save Chicago taxpayers $27 million in 2015.

“For pre-Medicare retirees, there will be an additional reduction in their subsidy by only 25 percent, and the city is offering four plans to provide them with options for health care and to reduce their costs, including an option that would reduce their premiums,” he wrote in an email.

Bob Fioretti is running against Emanuel in Chicago’s mayoral race. Emanuel’s other main challenger, Karen Lewis, has not yet commented on the premium hike.

Photo by Pete Souza

John Bury On New Jersey’s Pay-to-Play Allegations: Let’s Move On To The Real Problems

John Bury is an actuary that tightly covers New Jersey pension news over at the blog Bury Pensions. He has an interesting perspective on the latest pay-to-play allegations thrown at Christie.

Bury’s point: if the pay-to-play allegations are true, it’s par for the course. But there are bigger issues with New Jersey’s pension system, and those issues are the ones we should worry about. Here’s Bury’s post in full:

____________________

By John Bury, Bury Pensions

“It’s a cheap political stunt based on shoddy, distorted reporting from an individual [David Sirota] who over and over again has been shown to be biased, willfully inaccurate, and just flat out wrong,”

– NJ Governor Chris Christie spokesman Kevin Roberts responding to allegations in an AFL-CIO lawsuit

He may have some points – though not the ones I would make:

Like the double-dipping non-issue I do not see Chrisitie allegedly steering investment contracts to campaign donors as the state Retirement System’s biggest problem. Remember, this is New Jersey. Find me someone who has donated to a politician or party who does not expect (and get) payback of some sort.

How about a law firm where the lawyers get together each election cycle to give $30,000 to the campaigns of freeholders and somehow wind up with annual billings from that county of over $1 million. That’s legal here so what’s the problem with hedge fund honchos working the system we have, though much less blatantly than DeCotiis according to Fortune Magazine?

Then there’s the issue of criticizing a rate of return of 16.9% (or 15.9% or 15.5%). Imagine you get any one of those as an annual return in your own portfolio. Are you complaining? The question in New Jersey is whether those Alternative Investment assets being reported are really there. I don’t think so.

Finally, there is this reality:

THE PLAN BARELY HAS 50% OF THE ASSETS NECESSARY TO ANNUITIZE ONLY (YES ONLY) THE RETIREES, WITH THE OTHER 475,000 PARTICIPANTS HAVING LESS THAN NOTHING.

Employ only investment advisers who have never donated to a political campaign (if you can find any) and get rid of all the double-dippers and you may have solved 1% of a $150 billion problem that will be a $250 billion problem in the years it will take your distracto-reforms to be implemented.

CalPERS, LACERS Ramp Up Real Estate Commitments

CalPERS already made headlines today for deciding to pull $4 billion from hedge funds and hedge funds-of-funds.

But there was another bit of news that was less headline-worthy, but still important: CalPERS has decided to invest an additional $1.3 billion in real estate funds, according to a report from Pensions & Investments:

The $298 billion California Public Employees’ Retirement System, Sacramento, added $600 million to Institutional Logistics Partners, a real estate partnership with Bentall Kennedy. CalPERS first invested $250 million in Institutional Logistics Partners in March 2013. The strategy seeks to invest in core industrial properties.

Separately, CalPERS added a total of $700 million to two real estate partnerships with GI Partners.

The pension fund added $400 million to TechCore and $300 million to CalEast Solstice. TechCore invests in “technology advantaged” properties in the U.S., such as data centers, Internet gateways, corporate campuses for technology tenants and life-science properties in U.S. metropolitan areas, according to a news release from CalPERS. The pension fund first invested $500 million in TechCore in May 2012. The size of the CalEast Solstice portfolio could not be learned by press time.

LACERS, meanwhile, is committing $190 million to real estate funds over the next two years, according to a separate Pensions & Investments report:

Los Angeles City Employees’ Retirement System plans to commit $140 million to four new open-end core real estate funds this year and make $50 million in additional commitments in 2015, minutes from the pension fund’s Aug. 26 board meeting show.

Townsend Group, real estate consultant for the $14.4 billion pension fund, is recommending the pension fund this year commit about $35 million each to Clarion Partners’ Lion Industrial Trust, Jamestown Premier Property Fund,Morgan Stanley(MS) Real Estate’s Prime Property Fund, and Principal Real Estate Investors’ U.S. Property Account.

The recommendations will be presented to the board for approval at a later meeting. The recommendation is part of the pension fund’s decision in May to double its exposure to core real estate to a 60% target and decrease non-core investments to 40% from 70%. LACERS has an overall 5% allocation to real estate, with $739 million funded as of March 31.

Photo by thinkpanama via Flickr CC License

Rhode Island Gov. Candidate Allan Fung Is A Pension Reformer, Too

By now, everyone knows about Gina Raimondo’s track record on pensions. Despite the controversy surrounding her 2011 reform efforts and subsequent investment strategies, she made pensions a central facet of her campaign for governor.

Her Republican opponent, Allan Fung, is now taking up a similar strategy. Fung, currently the Mayor of Cranston, has this week begun touting his own record of pension reform. From Public Sector Inc:

Like Raimondo, Fung, who served on a reform panel that helped craft the 2011 state pension changes, has been an ardent backer of trimming pensions to make them more affordable. The difference is that the media hasn’t seemed to consider that such an unusual story for a Republican politician. Raimondo, by contrast, has benefited from a barrage of stories hailing her as a Democrat willing to take on public employees and their unions.

[…]

Cranston’s current employees participate in the state’s retirement system, so the city had a stake in the state-engineered reforms. But Cranston fire and police retirees and those workers who were hired before July 1, 1995 participate in a separate city-directed plan that was deeply in debt . Although the plan has just 483 members, the vast majority of which were already retired, the plan was so expensive that it cost the city $22.3 million to support this year, amounting to 20 percent of the city’s operating budget, excluding its school system.

Earlier this year Fung struck a deal with the majority of plan members to suspend cost of living adjustments and to cap any future COLA’s at 3 percent. The deal is expected to save Cranston about $6 million a year for a plan that was so expensive that the city began winding it down in 1995. When Fung took office in 2008 the pension system had just 15 percent of the assets on hand necessary to pay its current liabilities, and Fung warned beneficiaries that a day could come when the fund went bankrupt. Now the system is on track to be fully funded, but it will take two decades.

Cranston is also saving money because Fung struck a deal to place new city employees in a 401(k) style defined contribution plan.

A side note: this election will be a historic one for Rhode Island no matter who wins. Raimondo is vying to become the first woman governor in the state’s history. Fung, meanwhile, would be the first Asian elected to that office.

Photo credit: “Mayor Allan Fung visits Providence” by Office of Mr. Fung. Licensed under Creative Commons Attribution 3.0 via Wikimedia Commons

Legal Quirks Complicate New GASB Rules in Pennsylvania

The Governmental Accounting Standards Board (GASB) has rolled out new financial reporting rules for pension funds, and the expectation is that the new rules will expose some “red ink”, so to speak, at pension funds who previously kept some liabilities off the books.

But implementation and enforcement of the rules is hardly straightforward. Pennsylvania serves as a great microcosm of the rules’ complexity. Mark Guydish writes about the impact of the rules on small municipalities:

GASB standards do not have the weight of law and GASB has no enforcement powers. The standards are widely adopted because independent auditors look for compliance with GASB, and state and federal money may depend on that compliance.

Theoretically, a small township that has an elected auditor rather than a contracted auditor could disregard GASB standards…though the risk to state and federal funds would still exist.

There’s another quirk in Pennsylvania, and Luzerne County, that complicates how these standards play out: The high number of municipalities managing their own pension funds, creating a wide disparity in the size of those funds.

On the one hand, the sheer number of municipalities and authorities may prevent big swings in the numbers once the new standards are used, simply because so many pension plans cover only a handful of people in many townships and boroughs.

On the other hand, Dave Davare, retired director of research at the Pennsylvania School Boards Association, noted that the dollar figures are so small it wouldn’t take much of a change to move a fund from surplus to deficit.

Dreyfuss pointed out that the standards do not require a municipality to meet pension obligations, simply to report them differently. From the municipality’s point of view, the most important number in Pennsylvania is the state-mandated “Minimum Municipal Obligation,” or MMO. Fail to pay the MMO, and state money can be at risk.

Hanover Township Manager Sam Gusto said that’s the focus at his office, and that there is no way of knowing the impact of the new GASB standard until the actual book work changes are implemented.

You can read the rest of Guydish’s massive piece here. It goes on to explain how the rules might impact school districts and state-level pension funds.

Photo by www.SeniorLiving.Org

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