Author: Ted Ballantine

Bloomberg put together this interesting graphic, above, of pension funds and endowments that have yanked their money from hedge funds in 2016.

The third quarter of 2016 saw investors pull a net $28 billion from hedge funds — a small slice of the industry’s overall assets under management, but still the highest outflow since 2009.

More details on the trend from Bloomberg:

Unhappy with mediocre results and high fees, pensions in states like Illinois, New York and Rhode Island are slashing their allocations to hedge funds. More than one in four endowments and foundations, from colleges to museums to hospitals, are doing the same or considering it, according to a survey by consultant NEPC. Many are demanding lower fees and better terms to stick around, and usually getting it.

[…]

The backlash is part of a broader rebellion that has seen an avalanche of money move from actively-managed funds to low-cost passive products like index funds. The $3 trillion hedge fund industry, however, has become the poster child for the sins of active management because it charges among the highest fees even as performance lags. That doesn’t sit well in the political world of public pensions and endowments. They face pressure to boost returns as an aging workforce enters retirement and tuitions rise.

Three employees have sued Xerox HR Solutions for violating ERISA by inflating fees in cohort with investment adviser Financial Engines.

Read the complaint here.

From Bloomberg BNA:

The lawsuit, filed Nov. 9 in federal court in Michigan, seeks class treatment for thousands of plan participants for which Xerox provided record-keeping services and for which FE served as investment adviser. The workers allege that Xerox HR violated the Employee Retirement Income Security Act by entering a “pay to play” scheme that wrongfully inflated the price of professional investment advice services that were critical to the successful management of the workers’ retirement savings.

Kickback Scheme

Xerox HR contracted with FE to provide professional investment advice services to participants in the retirement plans serviced by Xerox HR through an agreement that dictated and controlled certain terms and conditions on which FE would provide its services.

Because FE was “interested” in securing an arrangement with Xerox to be the exclusive provider of investment advice to participants in plans administered by Xerox, it was “willing” to charge excessive fees to participants in order to meet Xerox’s demand for a kickback, the complaint said.

Xerox allegedly breached its fiduciary duties by requiring FE to charge excessive fees to plan participants. FE is paying Xerox over 30 percent of the fees it receives from the Ford plans, the complaint said.

The Canadian government is trying to recruit institutional investors to pour money into the country’s infrastructure, according to a Reuters report.

Though Canada’s pension funds rank among the world’s largest infrastructure investors, they typically put their money to work on overseas projects.

More from Reuters:

Canada’s Liberal government is speaking to sovereign wealth funds and global private equity firms as well as domestic pension funds as it ramps up efforts to attract funding for its new infrastructure bank, according to two sources.

The overseas investors that the officials developing the infrastructure bank are speaking to include the Government Pension Fund of Norway, one of the world’s largest sovereign wealth funds, said the sources, who declined to speak on the record because of the sensitivity of the talks.

The government said earlier this month it would set up an infrastructure bank and give it access to C$35 billion ($26 billion) to help fund major projects.

[…]

Meanwhile, the Caisse, Quebec’s public pension fund, is planning to build a new 67 kilometer public transit system in Montreal, investing C$3 billion and seeking to supplement that with C$2.5 billion of federal and provincial government funding.

That project could be one of the first to be funded by the new infrastructure bank, the sources said.

Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world with $1.3 trillion in assets, moved this week to get more women on the corporate boards of portfolio companies.

The GPIF joined the U.S.’ Thirty Percent Coalition, an organization of institutional investors who use their influence to push for women on boards of public companies. CalSTRS is also a member.

More from CityWire:

GPIF has joined the 30% Club in the UK and the Thirty Percent Coalition in the US, both of which are seeking to achieve a minimum of 30% women on boards.

The JPY135 trillion (€1.14 trillion) fund, the world’s largest, said it believed the integration of environment, social and governance (ESG) factors into investment process mitigated investment risk, and gender diversity is widely regarded as one of major social and governance factors.

Launched in 2011, the Thirty Percent Coalition is a US organisation of more than 80 members committed to the goal of women, including women of colour, holding 30% of board seats across public companies. Among its members are representatives of such institutional investors as California State Teachers’ Retirement System (CalSTRS), Ohio Public Employees Retirement System, and City of Philadelphia Board of Pensions & Retirement.

Recent research has found board diversity to be correlated with fewer governance-related controversies and higher returns:

According to a November 2015 MSCI ESG report ‘Women on Boards’, women comprise only 3.4% of directors in Japan, which was the lowest number across developed markets, and even below the level of many emerging markets.

[…]

Among the key conclusions of the research is the finding that companies in the MSCI World Index which lacked board diversity suffered more governance-related controversies than average.

It also revealed that companies with strong female leadership generated a return on equity of 10.1% per year versus 7.4% for those without, measured on an equal-weighted basis. However, the authors of the study said that in this case they could only establish correlation, not causality.

The head of the Canada Pension Plan Investment Board (CPPIB) this week told Reuters he sees opportunities in the U.S. after Donald Trump’s win on Tuesday.

Particularly intriguing for CPPIB chief Mark Wiseman was Trump’s promise of massive infrastructure spending.

From Reuters:

He also identified Trump’s commitment to spend big on infrastructure as a potential opportunity for investors.

“There’s a lot of expectation of increased fiscal stimulus, less regulation, more economic activity, that’s getting priced in here and that’s obviously helping the value of the assets that we own in the country and we would expect it will throw up some interesting opportunities over time,” Machin said.

Machin added that the expectation for rising interest rates in the U.S. was something that the CPPIB had been “anticipating for quite a time”.

“The market’s moving towards where we’ve had some positioning,” he said.

Machin said CPPIB, the world’s third biggest infrastructure investor, would be keen to invest in more U.S. infrastructure projects.

“We’d very much welcome more infrastructure opportunities. That’s terrific for us,” he said.

Dallas voters on Tuesday approved a ballot measure that raises the retirement age for new hires into the Dallas Employee Retirement Fund, cuts COLAs for those workers and tweaks the Fund’s benefit formula.

The changes are expected to save $2.15 billion over 30 years. The cuts work out to about $4,500 less in annual benefits (2016 dollars) for the workers to which the changes apply, vs. someone who is already in the Fund.

More from the Dallas Morning News:

The changes that voters approved will only affect new workers hired after Jan. 1, 2017, not current employees. Among the changes: new staffers will have to work until 65 — not 60 — to receive full retirement benefits. Cost-of-living adjustments will be capped at 3 percent, not 5 percent, and allow for different pension benefit calculations. A $125-per-month supplemental health benefit would be eliminated and survivor benefits would be cut.

[…]

Even with the benefit cuts, there is no guarantee the fund will stay in good financial standing. Taxpayers bailed out the fund in 2005, using debt, but the city hasn’t contributed as much as it could to pay off the debt. Shaky investments, including during the recession, have prompted more instability, and the ERF has collected hundreds of millions of dollars in unfunded liabilities — the amount of money it couldn’t afford to pay if all its members retired tomorrow.

The Kentucky Retirement Systems, which allocates 10 percent of its assets to hedge funds, said this week it plans to pull $800 million out of the investment vehicles.

That number represents about half of its total, $1.6 billion commitment to hedge funds.

New board members, appointed last year by Gov. Matt Bevin, are the ones making the push.

More from the Wall Street Journal:

The investment committee Wednesday drew up a plan to pull $600 million from hedge funds by July and the remaining $200 million by July 2019. The proposal must still be approved by the full board, which meets Dec. 1.

Mr. Eager said the investment committee hasn’t decided yet where those funds will be reinvested.

[…]

Kentucky Retirement Systems’s hedge-fund investments have trailed stocks and bonds on a five-year basis, according to fund documents. Pension dollars invested in hedge funds produced a five-year return of 3.93%, compared with 5.14% for equities and 4.74% for fixed income.

[…]

The investment committee that is pursuing a hedge-fund retreat is made up of officials new to the KRS board. All five voting members of the investment committee were appointed by Gov. Matt Bevin, who made shoring up the fund a key platform of his gubernatorial campaign last year.

October brought a handful of major changes in the investment departments of pension systems, foundations and endowments. Here’s a roundup:

Connecticut Treasury Names Deputy CIO for $30B Pension System

Laurie Martin joined the Connecticut Treasury Department this month to serve as the Deputy Chief Investment Officer for the $30 billion Connecticut Retirement Plans and Trust Funds (CRPTF).

Martin will serve directly under CIO Deborah Spalding, who was hired last year after the retirement of long-time CIO Lee Ann Palladino.

Martin’s background, per a Treasury release:

Martin joins the Connecticut Treasury after serving twelve years as Director of Treasury Services at Baystate Health, Inc. There, she managed the company’s integrated investment program which included endowment, pension (defined benefit and defined contribution), insurance assets and operating funds. Prior to Baystate Health, Martin held investment accounting positions at ITT Hartford and Mass Mutual Life Insurance Co. She began her career at KPMG Peat Marwick as an audit and tax specialist.

Mark Warner has been tapped as interim CIO of the University of Texas Investment Management Company (UTIMCO).

Previous CIO Bruce Zimmerman resigned in mid-October, and the search for his replacement is underway. In the meantime, Warner will be at the help of the $37 billion endowment.

Warner has been with UTIMCO for 8 years, and served as head of natural resources investments. He’s also been responsible for the endowment’s emerging markets and private equity portfolios.

New CIO for $28B South Carolina Retirement System

Geoffrey Berg has been tapped as the new CIO for the South Carolina Retirement System Investment Commission, the entity which manages investments for the state’s $28 billion retirement system.

Berg had already been serving as acting CIO for 12 months, following the departure of previous investment chief Hershel Harper.

The System hired executive recruiter Korn Ferry to search for the new CIO; but the firm found the best candidate was already working in the position.

Colorado Public Employees CIO To Retire

Jennifer C. Paquette announced, CIO for Colorado’s $44 billion Public Employees’ Retirement Association (PERA), will retire in the first quarter of 2017.

PERA is looking to hire a search firm to begin the process of finding Paquette’s successor, according to a release.