Pension360

A New York judge on Thursday approved a $335 million settlement, originally reached in March, between BNY Mellon and a number of the bank’s clients.

The settlement is the result of a class action lawsuit, led by several pension funds, filed against the bank for allegedly overcharging clients on foreign exchange deals.

More on the settlement from Bloomberg:

U.S. District Judge Lewis Kaplan Thursday allowed the settlement to go forward, paving the way for 1,200 clients to receive payments from the bank within 30 days. BNY Mellon agreed to the settlement as part of a larger $714 million resolution with the U.S., New York state, regulators and clients. Kaplan’s decision resolves investors’ class-action claims against the bank.

BNY Mellon promised investors the best rates on foreign-exchange deals, then overcharged them and pocketed the difference, according to the lawsuit. New York Attorney General Eric Schneiderman claimed the bank made $2 billion over 10 years. BNY Mellon agreed to fire executives involved in the alleged fraud, as part of its settlement with the U.S. and New York.

The suits followed investigations by states into whistle-blower claims of fraud.

“This is great news for the class,” Elizabeth Cabraser, a lawyer for the investors, told Kaplan after he approved the settlement.

Several pension funds, including the Ohio Police & Fire Pension Fund and the School Employees Retirement System of Ohio, were among the lead plaintiffs and stand to recover a few million from the settlement.

 

Photo by Sarath Kuchi via Flickr CC License

Research conducted by the Center for Retirement Research at Boston College has traditionally suggested that the trend of shifting from defined benefit plans to defined contribution plans harms retirement security and savings.

But in a new paper, Center director Alicia Munnel says new research has led her organization to change their tune: the paper says that retirement savings have not been harmed by the shift to DC from DB.

The paper does acknowledge, however, that DC plans shift risk to the participant.

BenefitsPro summarizes the findings:

The Center and its director, Alicia Munnell, have been producing data for years showing that the shift to 401(k) plans was resulting in less retirement savings.

The new paper looks at data on defined benefit accrual rates from the National Income and Product Accounts between 1984 and 2012 and compares those rates with defined contribution assets over the same period.

Munnell and her team of researchers conclude that the percentage of deferrals of total salaries has slightly declined over time as more sponsors shifted to defined contribution plans.

But that simple comparison doesn’t provide a full picture. The researchers then set out to assess returns on those deferrals.

Because more 401(k) and defined contribution assets were invested in equities throughout the period, the total annual change in pension wealth has been relatively steady, meaning the shift to DC plans has not led to less total saving.

“We are going to have to change our story,” write Munnell and the two other researchers.

Read the full paper here.

 

Photo by TaxCredits.net

Chicago, whose bonds are already rated as junk by Moody’s, got some rare praise from a credit rating agency this week.

Fitch weighed in on the city’s new budget proposal, which calls for a $543 million property tax hike to help pay for future pension contributions.

The agency called the budget a “positive” – but the budget still needs to pass, and the city risks a downgrade if that doesn’t happen.

From Reuters via Newsmax:

The fiscal 2016 budget unveiled by Chicago Mayor Rahm Emanuel on Tuesday would be a positive credit development for the fiscally troubled city if adopted by the city council, Fitch Ratings said on Wednesday.

But the credit rating agency said Chicago still risks a downgrade of its BBB-plus general obligation bond rating if it fails to adequately address pension funding or raids budget reserves.

[…]

While the plan assumes the enactment of an Illinois law lowering the city’s upcoming contribution to its police and fire pension funds to $318 million, Fitch said if that does not happen, Chicago would have to come up with $540 million mandated under a 2010 law.

“If they don’t get (the bill) passed, we’ll be waiting to see how that gap is filled,” said Fitch analyst Arlene Bohner, adding that the use of recurring or non-recurring revenue will be an important determinant of Chicago’s credit quality.

Fitch warned the city’s rating is likely to be downgraded unless it “implements solutions that move all of the pension plans on a clear path toward adequate, actuarially based funding, while also making progress toward a balanced budget.”

Fitch currently rates Chicago bonds as BBB+, which is two steps above junk.

 

Photo by Pete Souza

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Stephen Foley of the Financial Times reports, Harvard endowment warns of market ‘froth’:

Harvard is looking for investment managers with expertise as short-sellers, as the world’s biggest university endowment becomes more cautious about the outlook for financial markets.

In its latest annual report, which showed investment returns fell to 5.8 per cent in the year to June, the $38 billion endowment said its managers had started to increase cash holdings and feared that some markets had become “frothy”.”We are proceeding with caution in several areas of the portfolio,” Harvard Management Company chief executive Stephen Blyth wrote in the report.

“We are being particularly discriminating about underwriting and return assumptions given current valuations.

“In addition, we have renewed focus on identifying public equity managers with demonstrable investment expertise on both the long and short sides of the market.”

Mr Blyth, a British-born statistician, was promoted to run the endowment last year after the resignation of Jane Mendillo, whose returns failed to keep pace with those at other Ivy League institutions.

Mr Blyth unveiled an overhaul of Harvard’s asset allocation process which is likely to be examined widely among other institutions.

Endowments such as those at Harvard, and particularly Yale under its chief investment officer David Swensen, have been seen as pioneers in asset allocation and portfolio management theory.

Harvard is ditching its traditional approach of assessing the likely risk and return of each separate asset class and instead focusing on five key factors: the outlook for global equities, US Treasuries, currencies, inflation and high-yield credit.

The result is that Mr Blyth will be sharply scaling back the university’s holdings of overseas equities, dialing up real estate and bond investments, and giving himself more flexibility.

He set out a new promise to beat inflation by 5 per cent a year over 10 years.

The 5.8 per cent gain for the Harvard endowment in the year to June 30 compared with 15.4 per cent the previous year, when global equity markets were rising more sharply.

Its $6 billion allocation to hedge funds also held back performance, returning only 0.1 per cent.

While disappointing hedge fund performance has led some big institutions, including the California public pension fund Calpers, to pull out of the sector all together, Harvard is understood to be happy with its hedge fund portfolio, which outperformed its benchmark in the five previous years.

The endowment’s real estate portfolio was its top performing asset, up 19.4 per cent last year.

So, Mr. Blyth will scale back the endowment’s holdings of overseas equities but dial up real estate and bond investments and is giving himself more flexibility.

Interestingly, the real estate portfolio was the endowment’s top performing asset, up 19.4 per cent last year, which makes me wonder if there’s a performance bias attached to the decision to dial up this asset class while other big investors are dialing down real estate risk.

Mr. Blyth should go back to read David Swensen’s thoughts on real estate in his seminal book, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment (page 116; added emphasis is mine):

“Real estate markets provide dramatically cyclical returns. Looking in the rear-view mirror in the late 1980s, investors generated wild enthusiasm for real estate as historical statistics dominated numbers for traditional stocks and bonds. A few years later, after the market collapse, those same investors saw nothing other than dismal prospects for real estate. poor returns nearly eliminated interest in real estate as an institutional investment asset. Reality lies somewhere between the extremes of wild enthusiasm and despair.”

It’s worth noting that Harvard’s endowment may have hit record assets but as Geraldine Fabrikant of the New York Times reports, its performance is hardly exceptional and it’s lagging its peers:

The Harvard University Management Company, which oversees an endowment of $37.6 billion, the academic world’s largest, generated a 5.8 percent return for its most recent fiscal year, significantly lower than several of its rivals.

The return, for the year that ended June 30, beats the preliminary 5.6 percent figure that Cambridge Associates released as the average for endowments over $3 billion that it tracks.

Still, “the Harvard result was disappointing,” said Charles Skorina, owner of a company that recruits chief investment officers for endowments.

Mr. Skorina noted that Harvard had consistently underperformed its rivals over the last few years despite having one of the biggest and most expensive endowment offices.

While Harvard’s biggest rivals in the universe of large endowments — including Princeton and Yale — have yet to release their returns, several people in the endowment sector said that those schools were all expected to release results of well over 10 percent. The people spoke on the condition of anonymity.

Massachusetts Institute of Technology, for example, just reported a 13.2 percent return. Bowdoin College, a far smaller school with a $1.3 billion endowment, this week reported returns of 14.6 percent.

Still, results varied widely. The University of Texas Management, which has $26.6 billion to manage, reported that it had a weighted 3.5 percent return for its two funds.

Weak returns in the market are expected to depress investment performance at schools where portfolios are limited to stocks and bonds. But schools such as Harvard have access to a range of alternative investments such as private equity, hedge funds and real estate.

In the last fiscal year, private equity and real estate fared particularly well. Although Harvard did not disclose its asset allocation in its most recent report, it had roughly 20 percent of its assets in private equity in the 2014 fiscal year; Yale, by contrast, had about 33 percent of assets in that sector. Harvard’s decision not to provide its asset allocation numbers made it harder to evaluate the impact of allocation decisions on performance.

And although Harvard outperformed the internal benchmarks it sets for itself in all but the “absolute” or hedge fund category, the outperformance may not necessarily have been as impressive as those at other endowments. There were, however, some savvy moves, such as eliminating investment in commodity indexes when such investments were posting steep declines.

Endowment performance is crucial at all colleges because a portion of the returns are used to finance their annual budgets. Harvard relies on the endowment for roughly 35 percent of its yearly expenses.

Still the Harvard endowment’s leadership team has had a lot of turnover ever since Jack Meyer stepped down as its head in 2005. Harvard had — and continues to have — a strategy in which a portion of its money is managed internally and a portion is managed externally by investment firms including hedge funds. It is the only large university to use such an approach. Most endowment chiefs allocate the school’s funds to outside managers.

Before Mr. Meyer’s departure, some members of the Harvard faculty had complained that money managers who worked at the Harvard Management Company were paid enormous sums of money compared with academics. The negative publicity was said to be a factor in Mr. Meyer’s decision to leave, despite a stunning record. He was replaced first by Mohamed El-Erian who had been at Pimco. Mr. El-Erian left in 2007 to return to that firm.

He was followed by Jane Mendillo, who had once worked at Harvard and then ran the endowment for Wellesley College, but she quit in 2014 after returns proved disappointing.

She has since been replaced by Stephen Blyth, who was promoted to president and chief executive after many years at the endowment firm. Mr. Blyth had previously held posts as head of internal management and public markets.

In a long letter released with the performance figures, Mr. Blyth signaled that he intended to keep with Harvard’s history of managing some of its money internally, but he suggested that he would make changes.

For example, he wrote that he would aim to have his internal money managers work more closely with one another by tying their compensation not just to the assets each one managed but also how the endowment as a whole performed.

Still, Harvard may not pay the same sums as private firms, which could lead to difficulties in attracting and keeping talent.

You can read Mr. Blyth’s long letter here. I think his proposed changes to the way managers are compensated is right on the money and here he’s following the compensation model many large Canadian pension funds have successfully implemented.

Below are two figures I want to bring to your attention from HMC’s Annual Report (click on image):

Every single investment fund should post these figures. You will notice the standard deviation of fiscal year endowment returns in Figure 1 is 12.5%, which is a bit high but mostly owing to risks the endowment takes to achieve its return objective.

More importantly, the long-term performance (ten and twenty years) over the domestic and global 60/40 stock-bond portfolios in the second figure is what ultimately matters and it’s stellar (provided these returns are net of all fees and internal costs).

While HCM seems satisfied with their hedge funds, the truth is small and large hedge funds took a beating this summer but the former were better able to navigate through this turbulence.

As far as HMC’s warning of market froth, I would agree that all assets are priced richly but some investors are betting big on a global recovery while others are warning of more pain ahead.

You already know my thoughts. I’m preparing for a long period of global deflation but in the meantime there’s plenty of liquidity in the global financial system to propel risk assets much higher. In the current environment, I continue to steer clear of energy (XLE), oil services (OIH) and metal and mining stocks (XME) and anything related to emerging markets (EEM) and Chinese shares (FXI).

In fact, check out the price destruction in the stocks I covered in my comment on betting big on a global recovery, it’s just brutal (click on image):

On the long side, I still like tech (QQQ), especially biotech (IBB, XBI and SBIO) and keep tracking what top funds are investing in. For example, today I noticed shares of Heron Therapeutics (HRTX) popped 20% after the company announced positive results from its Phase 2 clinical study of HTX-011 in the management of post-operative pain in patients undergoing bunionectomy (click on image).

And who are the top holders of Heron Therapeutics? Who else? The Baker Brothers, Fidelity, Broadfin, Tang Capital Management, ie. the very best biotech funds. This is why I tell you to pick your spots carefully when investing in single biotech names, diversify and focus on companies where you see many top biotech funds investing at the same time.

Still, investing in biotech isn’t for the faint of heart and as I warned you in my comment on time to load up on biotech, it will be extremely volatile. Earlier this week, a tweet by Democratic candidate Hillary Clinton sent biotech shares plunging. It was much ado about nothing and she was right to blast the CEO of that drug company for price gouging.

 

Photo credit: Flickr/Chaval Brasil via Flickr CC License

The board of the New Jersey Public Employee Retirement System has been trying since April to initiative an audit of the system’s investments; of particular interest to the trustees is the fees paid by the system to outside managers, and how they compare to peers and previous years.

But New Jersey’s deputy state attorney general and Gov. Christie have told the board that they have no authority to initiate such an audit – a circumstance that has left the trustees frustrated.

More from NJ.com:

Tom Bruno, chairman of the board of trustees for the Public Employee Retirement System, said the audit demanded by two pension boards that raised questions about how the money is invested has been stalled and blocked since April.

“We’re in a little bit of a stalemate here with this thing,” Bruno said. “We have a fiduciary responsibility but no authority to act.”

The trustees received a legal opinion last Wednesday from a deputy state attorney general saying that only the State Investment Council and the Division of Investment have are the power to order an audit, according to Bruno and Bill O’Brien, vice chairman of the retirement system.

“Frankly, it’s a bit off that the very people who we’re questioning … have the final authority in calling for an audit,” Bruno said. “The odds are that they won’t do it. Why would somebody kind of look over their own shoulder?”

[…]

Tom Byrne, chairman of the State Investment Council, said he was not clear what the trustees are seeking, and that the type of forensic audit they have requested could cost pensioners hundreds of thousands of dollars.

“I think most people are actually pretty happy with the amount of information we’ve provided,” Byrne said. “It remains true that some people are unhappy with our alternative investments because of the fees involved.”

The State Investment Board manages $80 billion in assets for the Public Employees Retirement System.

 

Photo by TaxRebate.org.uk

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Allison Lampert of Reuters reports, Canadian pension fund does not need to take greater risks:

The top real estate executive of Canada’s second-largest pension fund said he won’t have to make riskier investments to achieve his target of a 7 percent to 8 percent average annual return for the next decade.

Daniel Fournier, chief executive of Ivanhoe Cambridge, the real estate arm of Caisse de depot et placement du Quebec, said on Monday he won’t have to take bigger risks as yields weaken, a strategy he saw many investors take before the global financial crash.

“I don’t think the answer is to go way up the risk curve,” he told reporters in Montreal.

Ivanhoe Cambridge, which owns C$48 billion ($36.22 billion) in assets, generated an average 13 percent return a year over the last five years, a target that is no longer “sustainable” as markets cool, Fournier said.

He said Ivanhoe Cambridge would continue to use the same strategy of striking a balance between higher yielding, opportunistic transactions and the purchase of quality properties that deliver stable but comparatively lower returns.

“It’s the balance between the two that gave us the 13 percent over the last five years and where we’re trying to produce the 7 or 8 percent that the Caisse is expecting from us,” he said.

In January 2015, Ivanhoe Cambridge generated headlines for buying 3 Bryant Park in New York for $2.2 billion, a near-record price for an individual U.S. office building.

While commercial real estate prices have soared in global gateway cities like New York and London, Fournier said that unlike 2007 and 2008, he doesn’t see any froth, or trend of overbuilding in U.S. markets that was prevalent in the run-up to the global crash.

For those of you who don’t know him, Daniel Fournier is one of the most powerful under the radar real estate investors in the world. He heads a very experienced team at Ivanhoe Cambridge and doesn’t get the recognition he truly deserves (he’s a shoo-in to succeed Michael Sabia if he wants the top job at the Caisse in the future).

Fournier might not get paid the big bucks a few of his counterparts are collecting but he’s running one of the best real estate outfits in the world and definitely the best in Canada. In fact, when it comes to real estate, the Caisse’s subsidiary has few competitors in the world.

And when it comes to real estate benchmarks, there too the Caisse is leading its large counterparts in Canada. How do I know? I took the time to read the Caisse’s 2014 Annual Report which was released in late April. It’s packed with excellent information on the performance, benchmarks and a lot of other insights pertaining to the Caisse’s operations.

Below, you can read the real estate performance highlights taken from page 40 of the Caisse’s Annual Report (click on image):

As you can read, the real estate portfolio 10% in 2014, exceeding its long-term target. Moreover, as stated: “all the transactions had the same objective: to sell non-strategic assets so as to focus the portfolio on high-quality assets and to build critical mass in certain sectors and key markets.”

Below, you can view the shift in the sector and geographic exposure of the Caisse’s real estate investments over the last four years (click on image):

While the Caisse still has significant real estate investments in Canada (47%), it’s been growing its U.S. portfolio (so have others in Canada) and reducing its exposure to European real estate. In terms of sectors, the Caisse has been betting big on multi-family real estate over the last few years and shedding its opportunistic hotel assets.

Now, below is the most important table taken from page 48 of the Caisse’s 2014 Annual Report. It shows you the specialized portfolio returns in relation to the benchmark indexes (click on image):

As you can see, the Caisse’s real estate portfolio returned 9.9% in 2014, underperfoming its benchmark which returned 11.1%.  Over a four-year period, the the Caisse’s real estate portfolio returned 12.1% annualized vs a benchmark return of 13.8% annualized.

So, if the Caisse’s real estate subsidiary is underperforming its benchmark over a one and four year period, why am I praising it? Because when I analyze pension funds and their respective performance, it’s all about benchmarks, stupid!

I couldn’t care less about headline performance figures, I want to know the benchmarks governing the underlying portfolios and what risks pension fund managers took to beat their benchmark and whether those risks are appropriately reflected in the benchmark of each investment portfolio.

Similarly, when some hedge fund hot shot was touting their “super high Sharpe ratio,” I would rip into them if they were taking stupid risks in derivatives and trying to pull a fast one on me thinking I’m an idiot.

When I look at the benchmark governing the Caisse’s real estate portfolio (Aon Hewitt Real Estate index, adjusted), I can easily discern that the group at Ivanhoe Cambridge doesn’t have a free lunch when it comes to its real estate benchmark.

Again, I don’t want to beat a dead horse but go back to read my detailed comment on PSP’s fiscal 2015 results, especially the part about their Real Estate benchmark, and I’ll let you draw your own conclusions on who has it easy and who doesn’t when it comes to Canada’s pension plutocrats.

As far as other news related to the Caisse’s private markets, Reuters reports, Caisse, Mexican funds to co-invest in infrastructure projects:

Canadian pension fund manager Caisse de dépôt et placement du Québec said on Monday it has formed an investment platform with a group of leading Mexican institutional investors to put money into infrastructure opportunities in Mexico.

The new vehicle will invest C$2.8 billion ($2.1 billion) over the next five years in energy generation and distribution, along with investments in other areas like transportation and public transit, said the Quebec-based pension fund manager.

Caisse said it plans to commit some C$1.43 billion to the fund and retain a 51 percent stake in the investment vehicle. CKD IM will hold the remaining 49 percent.

The current shareholders of CKD IM are Mexican pension fund managers XXI Banorte, SURA, Banamex, Pensionissste and Infrastructure fund Fonadin. These pension fund managers together manage some 62 percent of Mexican pension fund assets, said Caisse.

“When we look around the world, especially in the infrastructure sector, Mexico stands out as an exceptional country to invest in,” said Caisse Chief Executive Michael Sabia in a statement.

Caisse has been a major infrastructure investor for over 15 years. Its infrastructure portfolio is currently worth more than C$11 billion and includes investments in the Port of Brisbane, Heathrow Airport, Eurostar and Colonial Pipeline in the United States.

The pension fund manager has stated that it plans to double the size of this portfolio by 2018.

“We believe recent reforms in the energy and infrastructure sectors have opened the possibility of win-win partnerships that will benefit the whole Mexican economy,” said Grupo Financiero Banorte CEO Marcos Ramirez Miguel in the joint statement issued by Caisse.

As part of the transaction announced Monday, CKD IM is also acquiring 49 percent of Caisse’s equity investment in the ICA OVT venture, which currently owns four toll road concessions in Mexico.

No doubt about it, Mexico is a big growth market for the Caisse and Michael Sabia has repeatedly gone on record to state this. That country has huge potential but its disorganized crime continues to be a source of major concern.

Still, Mexico’s new breed of cartel killers isn’t dissuading the Caisse from investing there and truth be told, if you read the nonstop coverage of Mexican crime, you’d think the country is a basket case, which it most certainly isn’t.

Also worth noting the Caisse has beefed up its infrastructure team headed by Macky Tall and hired some outstanding professionals with direct infrastructure investment experience. This will come in handy as it prepares to handle Quebec’s infrastructure projects.

Hope you enjoyed reading this comment. If anyone has anything to share, feel free to email me your thoughts (LKolivakis@gmail.com) on this subject. As always, please remember to donate and/or subscribe to this blog (http://pensionpulse.blogspot.com/)  on the top right-hand side via PayPal. Thanks you!

 

Photo by  thinkpanama via Flickr CC License

Caisse de dépot et placement du Québec has teamed with a group of Mexican institutional investors to invest $2.1 billion in Mexican infrastructure projects over the next 5 years, the pension fund announced on this week.

Caisse is familiar with Mexico; last year, the fund announced plans to invest up to $500 million in the country’s residential and urban housing projects.

More from the Wall Street Journal:

The arrangement comes as the Quebec-based pension fund […] aims to double its current C$11 billion infrastructure portfolio by 2018.

Caisse said it plans to commit C$1.43 billion to the partnership, which it calls the first of its kind in North America, giving it a 51% stake in the new infrastructure-focused investment vehicle. The remaining 49% will be held by CKD Infraestructura Mexico, a newly created trust comprising some of Mexico’s largest pension funds, including XXI Banorte, SURA, Banamex, Pensionissste and infrastructure fund Fonadin.

“When we look around the world, especially in the infrastructure sector, Mexico stands out as an exceptional country to invest in,” Caisse Chief Executive Michael Sabia said in a statement.

Last year, Mexico’s government boosted its infrastructure investment plan, projecting spending on projects to reach around $590 billion by 2018.

Investments in bridges, toll roads and other infrastructure are a priority for Canada’s biggest pension funds because of the steady revenue these assets generate to help them meet long-term pension liabilities.

Caisse de depot et placement du Quebec manages around $180 billion (USD) of assets.

 

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

After the CalPERS staff gave the board a correction last week for providing misinformation about private equity fees, the board member who has been grilling staff on the issue walked out of a private staff meeting because he was not allowed to record it.

The nation’s largest public pension system, one of the first to invest in private equity firms and their lucrative leveraged buyouts, expected to be a leader again this year by launching a new fee tracking system after three years of development.

But when a question from board member J.J. Jelincic in April revealed that CalPERS did not know the amount of “carried interest” earned by its private equity firms, there was a small wave of criticism in the national media.

In the traditional “2 and 20” fee structure, the private equity firm gets to keep 20 percent of the profit after earnings reach a basic amount. This performance incentive is called the “carried interest,” a term said to date back to 16th Century sea voyages.

At a board meeting last month, Jelincic questioned staff at length about the 2 percent management fee. At one point the investment committee chairman, Henry Jones, threatened to rule him out of order.

After the meeting, Jelincic wrote a letter to Anne Stausboll, CalPERS chief executive officer, complaining that the private equity staff he questioned, Real Desrochers and Christine Gogan, gave inaccurate, evasive and condescending responses.

“Staff is perpetuating the talking points and mythology of PE fund managers, who are continuously — and largely successfully — trying to convince the limited partners (CalPERS and other institutional investors) that they receive a more favorable deal than they actually do,” Jelincic said.

His letter included an excerpt of his questions to the staff pointing out that a key reply by Desrochers was incorrect. Ted Eliopoulos, CalPERS chief investment officer, read a correction to the board last week.

“We were asked if a management fee is $100 and the fee to the portfolio company is $50 and there is a 100 percent offset to the limited partner, will the general partner (the private equity firm) ultimately collect $100,” said Eliopoulos. “The answer is ‘yes.’ We should have answered ‘yes’ instead of ‘no.’”

The Desrochers error and the Jelincic letter led to another small wave of criticism in the national media, notably in the Financial Times and Fortune magazine. CalPERS responded with a “For the Record” defense of its private equity investments, averaging 12.3 percent returns over the last 20 years.

Jelincic said in his letter to Stausboll that the staff should acknowledge a “breach of decorum” not only for being condescending and wrong, but also for “a general posture of implying that my questions about these topics were irrelevant, ill-informed, or silly.”

In a reply to the letter, Jones, the committee chairman, said he did not agree there had been a “breach of decorum” and would schedule a private meeting of Jelincic and top staff and consultants to get answers to his questions about private equity fees.

Jelincic said he walked out of the meeting last week after being told he could not record it. The former leader of the largest state worker union is a long-time CalPERS investment office employee, sometimes said to be at odds with top staff.

He has been on leave since 2010, when he was elected to the board by CalPERS members. After a sexual harassment reprimand was upheld, his fellow board members voted in 2011 to censure him, adding a six-month suspension of several board duties.

One thing that helped move private equity fees into the spotlight is financial reform legislation, the Dodd-Frank act in 2010, pushed through Congress with support from CalPERS and other public pension funds.

Private equity firms had generally been unregulated. The new law required firms with $150 million or more in assets under management to register as investment advisers, bringing an initial review of 150 firms by the Securities and Exchange Commission.

“In some instances, investors’ pockets are being picked,” Andrew Bowden, an SEC official, told the New York Times in May last year. “These investors may be sophisticated and they may be capable of protecting themselves, but much of what we’re uncovering is undetectable by even the most sophisticated investor.”

A Times report last October found, among other things, that CalPERS and other investors are on the hook for the uninsured part of a $115 million lawsuit settlement by the Carlyle Group for colluding to suppress the share prices of targeted companies.

Another force that has helped make private equity fees an issue is Yves Smith (the pen name of Susan Webber), who launched the “Naked Capitalism” website in 2006. She is mentioned in the national media stories this month and the Times report last October.

Smith published a 10-part series on CalPERS private equity fees, from Aug. 30 to Sept. 16, prompted by video of the board meeting last month when Jelincic questioned the two CalPERS private equity officials.

Her arguments often are supported or accompanied by comments she received from private equity experts, including Leon Shahinian, a former CalPERS private equity officer, and Michael Flaherman, a former CalPERS investment committee chairman.

“Thus the concerns we have raised about CalPERS’ program, that private equity has over the last decade persistently not generated enough in the way of performance to justify the risks, that private equity firms charge indefensibly high fees (and worse, CalPERS and other investors are ignorant of the full amount they are paying), and that SEC officials have determined many private equity general partners are stealing from investors, are all hazards to taxpayers’ health,” Smith said in her Sept. 16 post.

Smith said in a footnote to her Aug. 30 post that, to CalPERS credit, even though she lost a lawsuit to get CalPERS private equity data, CalPERS gave her the data anyway, which took six months of “often heated exchange” with CalPERS lawyers.

“If CalPERS continues to be unwilling to grapple with what the public can now see are both a huge expertise gap in private equity and a propensity to side with private equity general partners over its beneficiaries’ interests, the organization will lose its power in the wider world,” Smith said in the Aug. 30 post.

“Indeed, one can sense that is already starting to occur. Needless to say, we at Naked Capitalism do not want that to happen.”

This fall, CalPERS expects its new Private Equity and Accounting Reporting Solution to issue the first report of carried interest paid to private equity firms. About $30 billion of the $293 billion portfolio is in 700 private equity funds.

“In November, we are planning an educational session for the board on private equity that will be presented by staff and invited industry experts,” Eliopoulos told the CalPERS board last week. “This will be concurrent with our annual review of our private equity program.

“It’s important that we don’t let the recent attention on our presentation eclipse CalPERS long-standing commitment to financial transparency and reporting, and in particular, the significant steps we have taken recently to address what has been a challenge for the entire industry.”

 

Photo by  rocor via Flickr CC License

After almost 29 years at the Kentucky Teachers’ Retirement System, chief investment officer Paul Yancey is hanging it up at the end of the month. He’ll be retiring October 1, according to a report from the Lane Report.

Deputy CIO Tom Siderewicz will step into Yancey’s shoes.

More on Yancey and Siderewicz, from the Lane Report:

The KTRS Board of Trustees approved a resolution honoring Yancey on Sept. 21 for his career with the teachers’ pension system, which is Kentucky’s largest financial institution.

Yancey began with KTRS in November 1986 as an analyst and, more recently, has been CIO since December 2004. The agency had about $2.4 billion in assets when he arrived and that total has grown during his KTRS career to $18.5 billion as of June 30.

Siderewicz started with KTRS in September 2011 and became deputy chief investment officer Jan. 1. He is a Chartered Financial Analyst with a bachelor’s degree in economics from California State University Long Beach.

The teachers’ retirement investment team’s work resulted in a 5.1 percent return in the fiscal year that ended June 30, better than the 3.1 percent average of other large U.S. pension plans. The investment fees paid by KTRS in the prior fiscal year represented two-tenths of 1 percent of assets.

The Kentucky Teachers’ Retirement System manages $18.5 billion in assets.

 

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