Category: Asset Allocation

CalSTRS took its time deciding but in the end the pension fund chose to follow the steps taken by other state pension funds to pull their investment out of companies that operate private prisons.

Mary Childs filed this report in Barrons:

New York state’s pension plan became the first to withdraw fully from the industry when Comptroller Tom DiNapoli sold the last of the pension’s shares in private prison companies in July. The next month brought divestment, or votes to divest, from the New Jersey Pension Fund, Trenton, and the Chicago Teachers Pension Fund. New York City and Philadelphia have divested, and Cincinnati may be on its way.

CalSTRS worked to engage with CoreCivic (ticker: CXW) and the GEO Group (GEO) about their business practices, visiting detention facilities and meeting with senior management. CalSTRS staff confirmed that facilities run by those two companies are not separating children from their parents or families, and are not housing unaccompanied minors, the pension said.

“Based on all the information and advice we were provided, the board decided to divest,” Investment Committee Chair Harry Keiley said in a press release on Wednesday.

The process of divesting starts immediately, and should be completed in six months. The decision affects about $12 million in assets held between CalSTRS’s equities and fixed-income portfolios.

Seeking to boost returns on their investments, many state pension funds turned to hedge and private equity funds for help. Alternative investments grew from 11% to over 26% of the average public pension plan.

A Pew study reports that as of fiscal year 2016 (latest available data), state pension funds now have a combined $1.4 trillion deficit, up $295 million from 2015. State pension plans now have total pension liabilities of $4 trillion while having only $2.6 trillion in assets.

John Schoen filed this report in CNBC:

To try to make up that deficit, state pension fund managers have shifted investments away from the traditional mix of stocks and bonds to a greater reliance on alternative investments like hedge and private equity funds. Between 2006 and 2016, the average plan has raised its share of alternative investments from about 11 percent of assets to 26 percent.

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Despite paying higher costs, pension plan performance has fallen. Among the funds Pew studied, none met its investment target. The shortfall has left many retirement systems owing more in liabilities than they can afford to pay out, in some cases much more.

Pension fund systems in New York, South Dakota, Tennessee and Wisconsin had enough to cover at least 90 percent of their liabilities in 2016, while pension funds in Colorado, Connecticut, Illinois, Kentucky and New Jersey were less than 50 percent funded, according to Pew.

Another 17 states had less than two-thirds of the assets needed to pay future retirement benefits. Kentucky and New Jersey had the lowest funded ratios among states at 31 percent and Wisconsin had the highest at 99 percent.

The California Public Employees Retirement System (CalPERS) is considering launching two new investment partnerships that would manage more than $20 billion over the next ten years. But that plan has encountered fierce opposition from inside CalPERS.

The opposition to the plan has centered over the lack of control CalPERS will have over the investments that will be made by the partnerships. It was also not clear what were the benefits to be gained by giving up that control to the partnerships, said CalPERS investment Committee Member Margaret Brown.

Randy Diamond filed this report in Chief Investment Officer:

CalPERS plans to allocate $20 billion to two partnerships, one that would invest in later-stage companies in the venture capital cycle in technology, life sciences, and healthcare. The second would buy stakes in established companies like Warren Buffet and hold those stakes for extended periods of time.

(Former CalPERS CIO Ted) Eliopoulos told the investment committee at its Nov. 13 meeting that the pension plan’s investment staff had looked at CalPERS running the program itself or owning it directly as a captive company but what “we really settled on is the traditional partnership structure where you have a general partner and a limited partner.”

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Critics of the plan say it is misleading to call the program “CalPERS Direct,” since the pension system will not make direct investments in private equity, like some of the Canadian pension plans.

“What they are proposing makes no sense,” said J.J. Jelincic, a former CalPERS Investment Committee member as well as a former CalPERS investment officer. Jelincic said Eliopoulos and other CalPERS investment officials haven’t detailed a logical rationale as to why they are giving up control of investment decisions or showed that they will be saving on the high fees that are part of CalPERS’s traditional private equity program.