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New Dynamic Emerging Between Pension Funds and Asset Managers As Pensions Look for Lower Costs, More Transparency

Many pension funds are moving portions of asset management duties in-house in a bid to reduce costs; many more funds are pushing for more transparency from their external asset managers.

In the wake of these trends and others, a recent State Street survey claims that a new dynamic is emerging between pension funds and their asset managers.

More details on the findings of the survey, from State Street executive Rob Baillie:

Many pension funds are looking for a new type of relationship with their asset managers. In interviews conducted as part of our research, pension funds stressed how important it was to find asset managers who can understand their objectives and investment philosophy. The ability to align interests around shared goals is also key to success in these relationships. More than half of pension funds (52 per cent) find it difficult to ensure their asset managers’ interests are tightly aligned with their own. By contrast, asset managers that can build solutions around their clients’ objectives can gain an edge in a highly competitive market.

Transparency is also a key differentiator. In today’s highly regulated environment, pension funds need granular information on the issues that drive risk and performance across their investments. This is a huge challenge in the multi-asset world: almost three out of five pension funds surveyed (58 per cent) say it is a challenge to gain a complete picture of risk-adjusted performance. Asset managers that develop the analytical tools and reporting capabilities to address this need will again have a huge advantage.

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In recent years, many pension funds have decided to insource some of their asset management. This was one of the strongest findings in State Street’s survey of pension funds: 81 per cent said they intended to manage more of their assets in-house.

Insourcing doesn’t remove the need for external asset management, but it does create a new dynamic in the relationship between pension funds and their service providers. They are less willing to pay a premium for straightforward investment strategies that they can easily support in-house. What they value, however, is asset managers that are able to deliver strong and reliable returns through a tailor-made investment solution.

San Diego County Pension Trustee Decries Investment Strategy, CIO in Newspaper

Samantha Begovich, a trustee for the San Diego County Employees Retirement Association (SDCERA), has penned a column in an area newspaper decrying the fund’s outsourced CIO, Salient Partners, and its investment strategy.

The fund voted last year to move on from Salient Partners and hire an in-house CIO after critics called Salient’s investment strategy too risky. But the process has been slow, and Salient could retain asset management duties until November 2015.

The public nature of Begovich’s complaints is unprecedented for a trustee of a fund that, until late last year, didn’t allow its board members to talk to the media at all.

From the column, published in the San Diego Union-Tribune:

I have repeatedly asked that Salient be sent a 30-day termination letter. CalPERS and CalSTRS posted 19 percent returns for 2014. SDCERA? 9 percent. The fund will be short $700 million of its Salient moonshot this fiscal year. How did this happen?

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Critics allege one-sided staging in support of Salient. In August, realists took the mic. Expert after expert said our fund was at-risk. They said it is conflicted and imprudent having one subcontractor direct all $10 billion. They erupted at the irrationality of this adviser investing 50 percent of our money in his product line. If speech bubbles were above the experts, they would’ve said, “Say what?”

Imagine dealing with someone both clergy and salesperson to you. A word picture: Your rabbi/priest/cleric says, “It would be wise and virtuous for you to invest $2 billion in Advanced Manufacturing in the CaliBaja Mega Region. I have no track record, but you should invest in my CaliBaja Advanced Manufacturing firm.” See the tension? Asked why we weren’t in rival funds with stellar track records, Salient’s Lee Partridge said: “I don’t want to talk about my competition.”

Kudos to University of California Chief Investment Officer Jagdeep Singh Baccher, manager of $91 billion, for not laughing when I asked: What do you think of our investment strategy wherein 25 percent of our portfolio puts total value at risk of loss? He paused in disbelief and sagely said: “Well, I think you have your answer, don’t you?”

The fund’s board voted 8-1 last November to move CIO duties in-house and thus cut ties with Salient Partners.

Photo by Gene Han via Flickr CC License

Fired CIO of San Diego Pension May Retain Role Until Nearly 2016

Trustees of the San Diego County Employees Retirement Association (SDCERA) voted in November to fire the firm acting as its outsourced CIO, Salient Partners, and hire an in-house official.

The pension fund could make that hire by March. But trustees learned this week that Salient Partners could retain its asset management duties until November 2015.

The reason for the delay: a consultant told the board that it would be best if Salient continued its duties while a new CIO adjusted to the job and developed and investment strategy.

From U-T San Diego:

Salient Partners, the embattled outside investment strategist for San Diego County’s pension fund, may continue managing much of the $10.3 billion fund through November.

The timeline, which was presented at a meeting Thursday by the pension system’s independent consultant, surprised some trustees who’ve been pressing to fire Salient since late summer.

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“I also thought I understood, at the end of the year (2014), it was stated that we would be terminating the Salient contract after we hired the CIO,” said trustee and county supervisor Dianne Jacob, who moved in September to terminate the contract and begin a transition. The board rejected the motion.

[The fund’s consultant] Scott Whalen advised the board to let Salient continue managing its portions of the portfolio until a new CIO was in place and trustees had settled on a new strategy.

He said the board could fire the firm and shift the investments into index funds, but that would amount to two major portfolio transitions in a brief period.

The SDCERA board voted 8-1 in November to move CIO duties in-house and thus cut ties with Salient Partners.

Why Pensions Rarely Sue Their Consultants, Managers

The UK’s British Coal Staff Superannuation Scheme has filed a lawsuit against consultant Towers Watson for investment losses stemming from allegedly “negligent investment consulting advice”.

These types of lawsuits – a pension fund suing their consultant or investment manager – are rare. Christian Toms, a lawyer who worked with a Dutch pension fund that sued its investment firm (Goldman Sachs) in 2012, explains why these situations are so rare.

From the Tally:

Why are these kinds of legal actions, where pension funds sue their investment consultants or fund managers, so rare?

Pension funds tend to look at legal actions in a different way to hedge funds or investment banks. They are very cautious about spending a lot of their members’ money pursuing something that’s not a ‘safe bet’. For this reason, the cases we see tend already to have a lot of meat to them – a clear failure to invest in a particular way that was promised, or a complex investment that was not right for the client.

Does the argument that investment is always risky, and investors should be aware they can lose their money, make these cases inherently harder to bring?

One of the big issues is this ‘hindsight’ argument. The focus of a legal case always has to be on what was going on at the time. Did the investment manager do enough due diligence on the investment? Did they properly understand the risks, and what the clients’ risk profile was? Would a reasonable manager have done what the investment firm did in this case?

This is particularly relevant for pension funds as they are not necessarily the most aggressive investors in the world, and if they end up in a riskier structure or a more complex investment than was necessary, that could give you grounds for an argument.

Toms also talks about the possibility that we could see more of these lawsuits:

Fiduciary management is a growth area in the industry. Could this lead to more disputes of this kind?

We are seeing this more and more. Consultants are taking on more asset management responsibilities. But even if they aren’t, there may still be grounds – a duty of care in relation to the advice given, perhaps. Was the advice appropriate?

In the Towers Watson/British Coal case, if they were specifically asked to implement a currency hedging strategy, it may be a question of what was appropriate. What was the need at the time and what did they do? Was what they did what a reasonable manager would do?

Generally, with pension funds, I’d say it would do all of them a benefit to more closely scrutinize their investment firms when something has gone wrong, rather than just saying ‘oh well, that’s life, it’s unfortunate, let’s fire the asset manager and move on’.

Read the full interview here.

Photo by Joe Gratz via Flickr CC License

Survey: Institutional Investors Often Driven Towards Short-Term Thinking

Previous surveys have shown that pension funds almost universally consider themselves long-term investors. But their investment decisions, by their own admittance, can often reflect short-term thinking.

A new survey sheds some light on the factors and pressures that cause pension funds to break away from long-term thinking.

Summarized by Chief Investment Officer:

Accounting demands, valuation models, and modern portfolio theory are driving institutional investors towards short-termism, Hermes Investment Management has claimed.

After conducting a survey of more than 100 European investors, the fund manager reported that 44% said external pressures were forcing them away from views in line with their long-term liabilities.

“The short-term factors driving the management of pension schemes require detailed attention,” said Saker Nusseibeh, CEO of Hermes Investment Management. “Schemes need to have the freedom to act and focus on longer term considerations to best serve their end beneficiaries, savers.”

Hermes is owned by the UK’s largest pension, the BT Pension Scheme.

One of the major headaches for investors, the survey found, was quarterly results, with 44% demanding longer-term reporting. Pension accounting measures and triennial valuations were equally admonished by respondents.

This short-term thinking is also taking investors’ eyes away from their roles as good shareholders. Some 37% told the survey they thought focus on short-term investment performance acted to disconnect them from “their responsibilities as owners of actual companies”.

Additional questions were asked about innovation in the asset management industry. Some 42% said they wanted greater innovation around outcome-focussed investing, while 32% wanted better ways to reduce volatility.

More than half—56%—said they wanted innovation around the disclosure of costs.

The survey was conducted with 100 institutional investors from across Europe.

Photo by Santiago Medem via Flickr CC

New Jersey Pension Hires Deputy Director

New Jersey’s Division of Investment, the department that manages assets for the state’s pension systems, has hired Corey Amon as its new deputy director. From Chief Investment Officer:

The New Jersey Division of Investment has hired a deputy director to help manage $80 billion in state pension fund assets.

Corey Amon joins the fund from the corporate pension world. He has spent the last three years in Miami as assistant treasurer of Ryder System, a Fortune 500 trucking and logistics company. But Amon spent the bulk of his career to date as an asset manager. From 1995 through 2011, he worked at a BMO Global Asset Management division called Taplin, Canida & Habacht.

Amon’s first day at the pension’s Trenton offices is set for October 20, a treasury department spokesperson told CIO. He will report to and work closely with Chris McDonough, the fund’s director and #77 on this year’s Power 100 list. McDonough said he and the team are “delighted to have Corey joining the division of investment.”

McDonough noted Amon “has nearly 20 years of investment experience,” including service as a fiduciary. “We expect him to play an intricate role in all aspects of portfolio and operations management at the division,” the director concluded.

Despite its massive size and consistent outperformance, New Jersey’s pension fund has struggled to hold onto its top investment staff. Its pay packages are thin even by public fund standards, and offer no incentives for performance.

McDonough, for example, earns a $185,000 salary, according to public records.

Amon was previously Assistant Treasurer at Ryder System, Inc. Before that, he was the Director of Research at Taplin, Canida & Habacht where he managed a fixed income portfolio.

Australia Looks to Cut Down Investment Fees After Scathing Report

Pension funds are becoming increasingly allergic to fees eating into their returns, as CalPERS demonstrated this week when it announced a decision to cut hedge fund investments by 40 percent. But the United States isn’t the only country where this concern is taking hold. From the Financial Times:

Australia’s highly regarded private pension system faces sweeping reform following a sharply critical report into the fees charged by superannuation funds, which manage $1.8tn ($1.7tn) of assets.

Although Australia has the fourth largest private pensions savings pool in the world, the operating costs of the country’s superannuation funds are among the highest in the OECD, leaving scope for significant improvements in retirement incomes.

Fees should be cut by an average of 40 per cent (or 38 basis points) across the entire superannuation sector, according to an interim report released last week by the Murray inquiry, chaired by David Murray, a former chief executive of the Commonwealth Bank of Australia. This would deliver savings of about $7bn ($6.6bn) a year from annual running costs of $20bn ($18.8bn), boosting the average retirement payout by $40,000 ($37,574).

“There is an opportunity for innovation to deliver better outcomes for retirees and to better meet the needs of an ageing population,” said Mr Murray.

The report called for a “fundamental change” in the way the country manages its assets. It urged Australia to look at other parts of the world for ideas. From FT:

The report suggested Australia’s government should consider following the example of Chile and auction the right to manage default funds for all new pension accounts to the lowest cost provider. Fees charged by successful bidders in Chile have fallen 65 per cent since this approach was introduced in 2008.

The report also urged the government to consider introducing some form of compulsory deferred annuitisation that would pay out after the age of 85 – just as the UK is abandoning near-compulsory annuitisation.

The report said Australia was “unusual” in not encouraging citizens to convert their retirement savings into an income stream with longevity protection.

A “fundamental change” in the approach to asset management is required by Australia’s pension system, which focuses on maximising wealth on retirement rather than ensuring a sustainable income flow for life, said Mr Murray.

The panel that produced the report, called the Murray Inquiry, will send its official policy recommendations to the Australian government in November.