Author: Ted Ballantine

There are 227 institutional investors that have $1 billion or more invested in hedge funds, according to a recent report from Preqin.

Members of the “$1 billion club” range from family offices to endowments. But the most frequent member: pension funds.

Overall, 40 percent of the capital of the “$1 billion club” comes from public and private pension funds, according to the report.

Public pension assets make up 25 percent of the club’s collective capital, while private sector pension assets account for 15 percent.

Interestingly, members of the $1 billion club were far less likely to invest in hedge funds through fund-of-fund vehicles (see chart on right).

For the full report, see here.

Malaysia’s second largest pension fund is in the process of selling one of its successful international investments – a downtown London office building – and using the proceeds to help boost Malaysia’s domestic market.

The move is in response to a call from the government in August urging institutional investors to shift some of their foreign investments back home.

More from Bloomberg:

Kumpulan Wang Persaraan (Diperbadankan), which has about 120 billion ringgit ($28 billion) of assets, is finalizing an agreement to sell an office building at 88 Wood Street in the City of London that it bought in 2013 for 215 million pounds, according to the fund’s Chief Executive Officer Wan Kamaruzaman Wan Ahmad. As well as getting a higher sale price, the fund will benefit from the sharp rise in sterling against the ringgit over the past two years.

“We are selling the property because we stand to benefit from real estate and foreign-currency gains,” Wan Kamaruzaman said in an interview in Kuala Lumpur earlier this week. “It’s also in line with the government call to repatriate gains back to invest in the domestic market.”

Malaysia’s stock market and the ringgit have been hurt this year by investor worries about a political furore over Prime Minister Najib Razak’s dealings with the state-owned 1Malaysia Development Bhd, and by concerns about the effect of higher U.S. interest rates on Malaysia and other emerging markets.

KWAP, as the state-owned fund is known, expects to be able to repatriate the funds back to Malaysia by the end of the first quarter to invest in local markets, Wan Kamaruzaman said. He didn’t name the buyer of the London office building.

The London office building nearly doubled in value in three years.

Photo  jjMustang_79 via Flickr CC License

Over the holiday weekend, a judge rejected San Bernardino’s bankruptcy plan for the second time.

The plan is controversial for bondholders because they take the brunt of the pain; the city is repaying as little as one penny on the dollar for some debt classes.

Pensions will remain intact under the current plan, with very few exceptions.

More details from the Wall Street Journal:

U.S. Bankruptcy Judge Meredith Jury Wednesday rejected—for a second time—the city’s proposal to cut debts, saying it didn’t contain enough information for bondholders, retirees who face health-care cuts and others to vote on the proposal.

Several groups protested the bankruptcy-exit plan’s wording, arguing that city leaders should explain why they can’t pay a class of debt valued between $130 million and $150 million more than 1 cent on the dollar. That includes $52 million owed to bondholders who extended money to the city so it could pay pensions.

[…]

San Bernardino officials plan to continue making full payments into the pension fund run by California Public Employees’ Retirement System, also known as Calpers, which distributes that money to thousands of retired city workers.

City officials decided to make pension payments, even though federal judges in charge of Detroit and Stockton’s bankruptcy cases ruled that pensions could indeed be cut. In its plan, San Bernardino said it considered breaking ties to Calpers but determined that it wasn’t realistic if the city wanted to attract workers.

The judge will consider the next draft of the plan at a March 9 hearing.

Photo by Joe Gratz via Flickr CC License

GASB statements 67 and 68 have lifted the veil on a portion of Alaska’s pension debt, putting a larger burden on the state to make annual payments.

As a result, state-level lawmakers are discussing the possibility of offloading some of that debt to municipalities – an idea starkly opposed by the municipalities.

More details from the Juneau Empire:

Local leaders attended a meeting last week in Juneau to discuss possible changes to the system that would assign a portion of the system’s debt to municipalities, The Ketchikan Daily News reported.

A change in national accounting standards requires the state to show the approximately $10 billion in debt on its books. The Alaska Department of Administration in September sent a memo notifying local governments that they would shoulder a portion of that burden.

“By saying it’s not (its) responsibility, the state is essentially saying it’s somebody else’s,” said Scott Brandt-Erichsen, attorney for the borough, “and we don’t agree.”

[…]

[Municipal] leaders argue that the change could change the boroughs bond debt rating and cost taxpayers in the short run.

In a Monday letter to Department of Administration Commissioner Sheldon Fisher, Alaska Municipal League Execute Director Kathie Wasserman said communities would be unwilling to take on more costs and debt from the pension system and asked the Department of Administration to oppose legislation that would negatively impact municipalities.

The issue will next be brought up in January’s policy session.

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Researchers from universities in Canada, the U.S. and Italy released a paper this week examining the impact of institutional investors on corporate social responsibility.

When it comes to affecting change, institutional investors prefer engagement over outright divestment; they argue it gives them a “seat at the table” and more effectively allows them to engage with a firm. Does that line of thinking hold up?

The researchers studied large firms across 41 countries from 2004 – 2013. A summary of their findings:

We find that institutional ownership is positively associated with firm-level environmental and social commitments. Further, the “color of money” matters. Domestic institutional investors and non-U.S. foreign investors account for these positive associations, while U.S. institutional investors’ holdings are not related to environmental and social scores. Similarly, higher scores are associated with long-term investors such as pension funds but not with hedge funds. Evidence from a quasi-natural experiment shows that institutional ownership causes improvements in environmental scores. Overall, our results suggest that institutional investors, in aggregate, use their ownership stakes to promote good CSR practices around the world.

Download the full paper here.

Photo by  Horia Varlan via Flickr CC License

The U.S. Census Bureau conducts the Quarterly Survey of Public Pensions, which surveys the assets and allocation of the 100 largest public pension systems in the United States.

The most recent iteration of the survey was released last week, and found that the funds’ assets had declined by 5 percent in the 3^rd quarter of 2015. Details from CNBC:

Public pension assets dipped in the third-quarter as increasing exposure to corporate bonds was offset by a decline in international holdings.

According to U.S. Census Bureau data published on Wednesday, the holdings of the largest 100 U.S. public pension systems dropped 4.9 percent to $3.2 trillion because of negative earnings.

Earnings fell from a gain of $32.6 billion in the second quarter of 2015 to a loss of $145.9 billion in the third. Total holdings were also 2.5 percent lower than the same quarter last year.

Corporate stocks, which comprise more than a third of major public pension holdings, fell almost 5 percent while corporate bonds only rose by 1 percent in the third-quarter. International and federal government securities also dipped in the same period.

Access the survey results here.

Japan’s Government Pension Investment Fund, the largest pension fund in the world, released plans this week to create a mostly-independent board to oversee investments.

The plan is part of a years-long overhaul of the fund’s portfolio and governance.

Details from Bloomberg:

The $1.1 trillion Government Pension Investment Fund will establish a 10-person committee consisting of nine outsiders and GPIF’s president, the ministry said in a proposal Friday in Tokyo. The new body will be responsible for decision-making and supervising how the pension fund invests its assets, the health ministry said. The aim is to submit a bill to the ordinary session of Japan’s Diet, which usually starts in January.

[…]

“It’s good that change is happening after all these discussions,” Hiroaki Hiwada, a Tokyo-based strategist at Toyo Securities Co., said by phone. “The revamp of the governance structure is in tune with the times.”

The management committee will have one representative of labor, one from the business world and at least one full-time member, according to the ministry’s proposal. They will have five-year terms. GPIF’s chief investment officer, currently Hiromichi Mizuno, can attend meetings but will not be on the committee, according to the plan.

GPIF manages $1.1 trillion in assets.

Photo by Ville Miettinen via Flickr CC License

Secretary of Labor Thomas E. Perez this week named five new members to the 15-member ERISA Advisory Council.

The Council’s official mandate is to “advise the Secretary and submit recommendations regarding the Secretary’s functions under ERISA”.

Who are the new members? BenefitsPro has the details:

Beth A. Almeida, representing the general public, is principal researcher with the Center on Aging at the American Institutes for Research, where she writes on employee benefits, transitions to retirement, and long-term care. She is the former executive director of the National Institute on Retirement Security, and served on the executive board of the Labor and Employment Research Association. Almeida is a member of the Gerontological Society of America.

Patricia M. Haverland, representing employers, is vice president, pension fund management for Siemens’ North American operations, with more than 25 years of experience as a plan sponsor. She has led the investment, design, compliance, and communication of multiasset class investment and funding strategies for U.S. and international pension and 401(k) plans.

Tazewell V. Hurst III, representing employee organizations, is a senior research economist with the International Association of Machinists & Aerospace Workers. His work focuses on contract negotiations on defined benefit pension plans, and he teaches classes on pension fundamentals to rank-and-file union members. His research interests include the impact of financial economics on pension funds and pension fund investments.

Cynthia J. Levering, representing actuarial counseling, retired from Aon Consulting as a senior vice president and consulting actuary in 2009 after 33 years with the firm. She consulted on qualified defined benefit, defined contribution plans, nonqualified plans, and other post­retirement benefits for plan sponsors of various sizes, and also served previously as chair of the Society of Actuaries’ Pension Section Council and the Pension Section Research Team.

Stacy R. Scapino, representing investment counseling, has worked in pensions, investments, and banking for more than 25 years. She is a partner and global leader for Mercer Investments’ Multinational Corporate Consulting activities.

Mark E. Schmidtke was announced as the incoming chair of the Council, and Jennifer Kamp Tretheway the vice-chair.

Photo by jypsygen via Flickr CC License

The Illinois budget impasse isn’t helping the state’s pension situation – in fact, it’s making it tangibly worse in three respects: first, Illinois has been forced to delay its $560 million pension contribution, due last November.

Second, the situation has spooked investors and made it more expensive to borrow. And third, the impasse has prevented lawmakers from working on pension-related legislation, although Rauner and top lawmakers have still held talks on the subject.

From Bloomberg:

As 2015 draws to a close, Illinois marks half a year without a budget. No spending plan has driven up borrowing costs, sunk its credit rating, and perhaps worst of all, exacerbated the state’s biggest problem: its underfunded pensions.

“The delay on the budget is definitely delaying anything being done about the pensions,” said Dan Solender, head of municipals at Lord Abbett & Co. in Jersey City, New Jersey, which manages $17 billion of local debt, including Illinois general-obligation bonds. The firm is underweight Illinois. “The longer you wait to try to catch up on funding, the worse the situation gets.“

Illinois’s fiscal health will deteriorate further without a budget, hindering its ability to mend its pension system. Moody’s Investors Service dropped Illinois, already the worst-rated state, to the lowest investment-grade tier in October as the budget stalemate dragged on. Last month, Moody’s warned that pensions are Illinois’s “greatest challenge.”

[…]

The lack of a budget forced the state comptroller to delay a $560 million November payment to the state retirement system. Illinois’s unpaid bills totaled $7.6 billion as of Dec. 18, according to that office. The November retirement payment will be paid in the spring when the state has more revenue from income tax collections, according to the comptroller’s staff.

[…]

Illinois is like a patient in the emergency room, said Paul Mansour at Conning, which oversees $11 billion of munis, including Illinois securities. The budget stalemate is the crisis at hand, and the unfunded pension liabilities is the chronic disease that’s only getting worse. The budget standoff is hurting future negotiations on pension changes, he said.

This current budget impasse is the longest in Illinois history.

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