Author: Ted Ballantine

A recent study examined how the composition of 210 public pension boards affected private equity investment performance.

It found that boards with the most state-appointed and/or elected members performed the worst, either because of poor manager selection or category allocation.

Ai-Cio.com summarized the results:

From a study of 210 US public pension funds with more than 13,000 private equity investments from 1990 to 2011, the authors found funds with boards heavily made up of elected officials or members appointed by state representatives underperformed the worst.

Specifically, state-appointed board members were linked to the lowest performance, with a 10-percentage point increase in the proportion of such members resulting in about a 0.9 percentage point drop in annual net internal rate of return (IRR).

And ex officio board members followed suit, with a 10-percentage point rise in their representation leading to a drop in annual net IRR of between 0.53 and 0.67 percentage points.

“This underperformance is related both to investment category allocation and to selection of managers within category,” Antonov, Hochberg, and Rauh continued.

The research revealed funds whose boards housed more state officials and elected plan participants invested more in real estate and fund-of-funds.

These poorly governed funds were also “strongly correlated” with poor investment decisions in private equity including overweighting in small and in-state funds, as well as allocating to inexperienced general partners.

Read the study here.

 

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Japan’s Government Pension Investment Fund (GPIF) has never disclosed its specific stock holdings, for fear that it would affect the country’s market too much.

But that will soon change. The pension fund said on Thursday it would disclose its stock holdings over next summer.

From the Financial Times:

Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world, will disclose the stocks it holds for the first time later this summer.

GPIF said in a statement today that it will review the way it discloses information about the assets being held, “paying attention to the impact on the market, enhance its information disclosure.”

A spokesperson said that specific methods of disclosure were still to be decided.

The fund will disclose the assets it holds, including individual stocks, on July 29, when it will report the investment results for fiscal 2015.

GPIF oversees $1.2 trillion in assets.

 

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In the last quarter of 2015, institutional investors pulled more money out of hedge funds than they put in.

That’s the first time that’s happened in four years, and it encapsulates a growing trend of institutions and pension funds wondering aloud whether their hedge funds portfolios are working.

From the Wall Street Journal:

Marc Levine, chairman of the $16 billion Illinois State Board of Investment, had a provocative question this month during a board meeting about hedge funds.

“Why do I need you?” Mr. Levine asked. A lot of big investors are asking the same question.

Investors globally asked for more money back from hedge funds than they contributed in the fourth quarter of 2015, according to HFR Inc.—the first net quarterly withdrawal in four years. They pulled an additional $15.3 billion in this year’s first two months, according to eVestment.

[…]

Overall, big investors pulled an additional $19.75 billion out of hedge funds in January, according to eVestment. That was the largest outflow for the year’s first month since 2009.

[…]

Hedge-fund commitments as a percentage of U.S. public pension-plan portfolios have dropped from a peak of 2.31% in 2012 to 1.37% at the end of 2015, according to Wilshire.

[…]

The proliferation of lower-price alternatives is one reason the Illinois Municipal Retirement Fund decided last month to end its $500 million hedge-fund program.

The commitment was expensive, said Dhvani Shah, the plan’s chief investment officer.

“So do I really want to scale up?” she said. “The answer is no.”

The article notes that some investors are happy with their hedge funds portfolios – including the Florida State Board of Administration, which has nearly $4 billion in hedge funds commitments and has no plans to reduce that number.

 

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The Ontario Teachers’ Pension Plan owns a 39 percent stake in the Brussels Airport that was the location of a recent terrorist attack.

The pension fund owns large stakes in a handful of airports around Europe, and is one of the largest infrastructure investors in the world.

But the recent Brussels attack, and the specter of terror in general, isn’t going to deter the pension fund from continuing to invest in infrastructure.

From the Financial Post:

“It’s not changed our view on infractructure, it’s not changed our view on the role, the important role, that infrastructure plays in satsfiying our liabilities,” Teachers’ CEO Ron Mock said during a media briefing Thursday to discuss the plan’s performance in 2015.

“We remain completely firm on infrastructure as an investment and we continue to scour the world for the right opportunities and will continue to do that,” he said, adding that the pension plan remains “100 per cent” committed to owning airports within the pension plan’s portfolio.

Mock said the threat of a terrorist attack is “one of many risks” taken into consideration when Teachers’ makes an investment, whether it is in an infrastructure asset like an airport, or a large real estate asset such as a shopping centre.

[…]

“There is a whole human side of this that has to be thought through carefully, just in terms of people and personnel adjusting to what took place, as you can imagine,” he said. “So they’re pretty much focused on that and we’ve been in touch with the prime minister’s office, offering our support and our sympathies, and of course we’ve told the board and the CEO that we are behind them.”

Ontario Teachers’ infrastructure portfolio totals $15.7 billion, and returned 21.4 percent in 2015.

 

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In this video, CalSTRS CIO Chris Ailman has an interesting conversation with Kristi Mitchem of State Street Global Advisors. The topic: gender diversity in financial services.

Video credit: Chief Investment Officer

 

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Fitch this week downgraded Chicago’s debt rating another notch in the wake of a state Supreme Court ruling that overturned the city’s 2014 pension reforms.

The rating now sits at BBB-negative, only one level above junk status.

More on Fitch’s decision, from Crain’s Chicago Business:

The decision “was among the worst of the possible outcomes” for the city, Fitch said in its assessment, since it not only overturned the legislation, but “made clear that the city bears responsibility to fund the promised benefits, even if the pension funds become insolvent.”

Added Fitch: “Since last week’s ruling appears to eliminate the option of reducing the liability, the city will need to rely on its ability to increase revenues and control spending.”

The firm also noted that legislation to allow the city to stretch out payments to its police and fire pension funds, saving it $220 million a year now, has been passed by state lawmakers but not sent to Gov. Bruce Rauner, who has threatened to veto it unless other steps are taken as part of his turnaround agenda.

Fitch lowered its rating on more than $10 billion in city debt from BBB-plus to BBB-negative, with a negative outlook.

“The decision by the Illinois Supreme Court is disappointing, but the city’s ability to pay our debt and meet our current commitment to the pension funds has not changed,” Carole Brown, Chicago’s chief financial officer, said in an e-mailed statement today.

Moody’s, for it’s part, has already assigned a junk rating to the city’s debt.

 

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The largest U.S. corporate pensions have diversified their investment strategies and broken out a herd mentality, according to new research.

Bob Collie of Russell Investments studied the regulatory filings of the twenty largest U.S. corporate pensions. He found:

For me, the most striking feature is the divergence between the investment approaches. Once upon a time, pension plans paid a lot of attention to peer group comparisons.

Among the twenty corporations in the $20 billion club, we today see significant differences in just about every aspect of investment strategy:

– Return-seeking vs. liability hedging: Ford’s U.S. plans have 77% of their assets invested in fixed income, and just 7% in listed equity. Johnson & Johnson has 79% of their worldwide pension assets invested in equity, just 21% in fixed income.

– Global or domestic bias: over half of UPS’s U.S. plan equity assets are international. Honeywell’s U.S. plan equity assets are 76% domestic.

– Real estate: Dow, Northrop Grumman and Verizon each have around 10% of worldwide pension assets invested in real estate. Exxon Mobil has none.

– Private equity: Verizon has a 19% allocation to private equity; Federal Express less than 1%.

– Hedge funds: Over 12% of UPS’s pension assets are invested in hedge funds. Five club members have no allocation.

Read the full blog post here.

 

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The Illinois Supreme Court on Thursday overturned Rahm Emanuel’s 2014 pension reforms, which would have increased employee contributions and cut COLAs.

But officials inside Emanuel’s office believe “the door [is] open” to future pension reform through collective bargaining, according to a report.

From the Chicago Sun-Times:

The Illinois Supreme Court dealt Mayor Rahm Emanuel an expected body blow in his fight to solve Chicago’s daunting pension crisis, but it wasn’t a knockdown.

In fact, the ruling Thursday that overturned Emanuel’s plan to save Municipal Employees and Laborers Pension Funds, on pace to run out of money in eight and 12 years respectively, all but invited the mayor and the unions to go another round.

The Supreme Court declared that, “as a matter of law, members of the funds did not bargain away their constitutional rights.”

That’s even though 28 of 31 unions signed off on Emanuel’s plan to raise employee contributions — to 11 percent by 2019 — and end compounded cost-of-living adjustments for retirees ineligible for Social Security.

The ruling also states, “The pension protection clause was not intended to prohibit the legislature from providing ‘additional benefits’ and requiring additional employee contributions or other consideration in exchange.”

The Emanuel administration seized on that as charting a path forward.

“Obviously, we would have preferred a win, but we don’t think the door is completely shut. They left the door open to collective bargaining,” said a top mayoral aide who asked to remain anonymous.

 

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Japan’s Government Pension Investment Fund bought $11.5 billion worth of foreign equities last quarter, bringing overseas holdings to an all-time high for the world’s largest pension fund.

In 2014, the fund raised its target allocation for foreign equities from 12 percent to 25 percent.

More from Bloomberg:

The funds bought a net 1.3 trillion yen ($11.5 billion) of overseas securities, bringing their total to 59.5 trillion yen, and also added to investments in domestic equities, Bank of Japan data published Friday show. They offloaded a net 704.4 billion yen in Japanese government bonds, leaving them holding 51.8 trillion yen of such debt, the lowest total since the third quarter of 2004.

The shifts may reflect trading by smaller peers of the $1.2 trillion Government Pension Investment Fund, which decided last year to align their investment strategies with GPIF’s from October. The retirement managers’ stock buying also came after a third-quarter rout in equities eroded the value of shares they already held, taking them further from target allocations.

Pension funds for civil servants, local government officials and private school teachers, which managed about 30 trillion yen at the time, said a year ago they would adopt targets of 25 percent each for domestic and foreign equities, 35 percent for domestic bonds and 15 percent for overseas debt as of Oct. 1. GPIF doubled its equity allocation the previous year.

The GPIF oversees $1.2 trillion in assets.

 

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CalPERS this week purchased a large stake in Desert Sunlight Investment Holdings, which operates two solar plants in California.

The purchase price hasn’t been disclosed, but was likely in the hundreds of millions.

Details from the Sacramento Bee:

The California Public Employees’ Retirement System said it has agreed to buy up to 25 percent of Desert Sunlight Investment Holdings, which owns two big solar generation facilities near Palm Springs.

The price wasn’t disclosed. But previous deals suggest it was substantial: Last June, a 25 percent share of Desert Sunlight was sold to a New Jersey company called NRG Yield Inc. for $285 million, according to Securities and Exchange Commission filings.

The two solar plants, opened in late 2014, sell their energy to California utilities via long-term contracts.

“Desert Sunlight presents a great opportunity for CalPERS, allowing us to invest both in California and in clean renewable energy,” said CalPERS Chief Operating Officer Ted Eliopoulos in a prepared statement. “Infrastructure has been one of our best performing programs and is an important part of the CalPERS portfolio.”

CalPERS manages nearly $300 billion in assets.

 

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