Chicago Treasurer: Investment Firms Overcharging Chicago Pensions By $50 Million

chicago

Chicago’s new Treasurer, Kurt Summers, said last week that he believes investment firms are overcharging the city’s pension funds to the tune of $50 million annually.

Summers says firms are levying higher fees on the city’s smaller pension funds than on the larger funds, for the same work.

From DNA Info:

Since taking office in December, Summers claims he’s discovered that investment managers are wringing upwards of $50 million a year in extra fees out of the city and Cook County’s 10 employee pension funds by charging substantially higher fees to the smaller pension funds for the exact same investments.

“I don’t begrudge any firm from making as much money as it can, that’s what they’re in the business to do,” Summers said in an interview last week. “It’s our fault for operating in silos and not looking at this sooner.”

Summers said when he came into office he found that just 23 firms are raking in half of the $142 million in fees the pension funds pay out to manage $35 billion in funds.

“Let’s go have 23 conversations,” Summers said. “Let’s start with the firms who have gotten plenty of their fair share.”

[…]

Summers plan is to aggregate pricing, similar to New York City’s system, and convince investment managers to offer the lowest fee to all the pension funds, not just the largest ones.

He said he’s already spoken with four firms and gotten a commitment from one to lower fees by a third.

Summers has previously advocated using pension money to make direct investments within Chicago.

 

Photo by bitsorf via Flickr CC License

Benchmarks, Transparency Could Bring More Pension Funds to Infrastructure, Says Group

Roadwork

The European Association of Paritarian Institutions (AEIP) last week called for greater transparency and more performance data in the infrastructure sector.

These changes, according to the AEIP, could help attract more pension funds to the sector.

From Investments and Pensions Europe:

Infrastructure markets need to be more transparent, with greater emphasis placed on the development of sector benchmarks, according to the European Association of Paritarian Institutions (AEIP).

Setting out its views on infrastructure, the association said that while pension funds were long-term investors – and therefore well-suited to invest in the asset class – they first and foremost needed to abide by their fiduciary duties to members.

“The reality is that infrastructure represents a valuable asset class and for sure a viable option for long-term investors, but these latter face several hurdles to access it,” the AEIP’s paper noted.

It said the lack of comparable, long-term data was one of the hurdles facing investors and that the absence of infrastructure benchmarks made it difficult to compare the performance of the asset class.

It also identified an organisation’s scale as problematic to taking full advantage of the asset class.

“Direct investments, those that yield the most interesting returns, are the most difficult to pursue, as their governance and monitoring require skilled individuals and a strict discipline regulating possible conflicts of interests,” it said.

“National regulation does not always simplify direct investments, and pension regulators in some cases limit the use of the asset class in a direct or indirect way.”

The association called on governments to play their part in making infrastructure accessible.

“Often the lack of infrastructure investments is not due to a lack of projects but not finding the right match with investors,” the AEIP added. “Some form of standardisation might be investigated.”

Read the paper here.

Canada Pensions Team With Spanish Bank on Energy Investment

Canada blank map

Two Canadian pension funds – the Ontario Teachers’ Pension Plan Board and the Public Sector Pension Investment Board – have teamed up with Spanish bank Banco Santandar S.A. to manage a $2 billion portfolio of renewable energy assets.

From the Financial Post:

Santandar, which already owned the portfolio, will transfer it to a new company owned equally by the bank, the Ontario Teachers’ Pension Plan Board, and the Public Sector Pension Investment Board (PSP Investments).

The portfolio includes wind, solar and water infrastructure assets that are either operating or in development in seven countries.

The three partners said in a statement Monday they intend to make significant investments in the new company over the next five years.

“This investment fits well with our strategy of deploying capital in sizeable opportunities that offer long term revenues and growth potential along with solid partners,” said Bruno Guilmette, senior vice-president of infrastructure investments at PSP Investments.

Teachers’ investment was led by its infrastructure group, which manages a global portfolio of $11.7-billion of direct infrastructure investments, including water and wastewater, electricity distribution, gas distribution, airports, power generation, high-speed rail and port facilities.

Pending regulatory approval, the transaction is expected to close in the first half of 2015.

The Ontario Teachers’ Pension Plan manages $138.9 billion in assets. The Public Sector Pension Investment Board manages $94 billion in assets.

Chicago Treasurer Considers Using Pension Money To Make Direct Investments in Local Black Communities

chicago

Newly appointed Chicago Treasurer Kurt Summers last month announced his plans to invest portions of the city’s pension money locally.

Last week, he met with some local business owners and residents and talked further about his ideas, which include making direct investments in Chicago’s predominately black neighborhoods.

Heard by Progress Illinois:

Summers told the crowd that his office manages a combined $50 billion in investments as well as employee pension funds and retirement plans. He said he would like to see some of that money invested in neighborhoods like Bronzeville.

“I don’t view a neighborhood investment strategy as a risky strategy,” said Summers, a product of Bronzeville. “I don’t view that as any more risky than investing in Korea’s debt, which we do, or investing in a cement company in Mexico. I don’t believe investing in Bronzeville is any riskier than that.”

In fact, investing in neighborhoods makes good business sense, he said. It would boost the local economy, create jobs and a stronger tax base from new businesses and the entrepreneurs those investments would generate, Summers pointed out.

To invest in neighborhoods, changes need to be made to the city’s investment policies. Currently, Summers said, there is no mandate to invest pension fund money back into the city, even though cities in other states like New York, California and Florida already do so.

“City Council gives me an investment policy and parameters that I can invest with,” he said. “I likely will be proposing a new one to allow me to do some of the other things I want to do like invest in this community, which it doesn’t have a mandate for today.”

The plan doesn’t come without controversy. As a pension trustee, Summers has a fiduciary duty to make the city’s pension funds as healthy as possible. That means maximizing investment returns – a concept that may or may not square with local economic development.

Illinois Teacher’s Pension CIO Talks Investing in Hedge Funds, Reaction to CalPERS’ Pullout

talk bubbles

Stan Rupnik, CIO of the Teachers’ Retirement System of Illinois, sat down with Chief Investment Officer magazine for an extended interview this week.

He talks about how he increased the fund’s exposure to hedge funds and how he reacted to CalPERS’ high-profile decision to pull out of hedge funds.

Rupnik on how he increased TRS’ exposure to hedge funds after he took the CIO job in 2003:

When Rupnik arrived in 2003, he inherited control of a portfolio with no hedge fund exposure. After gaining board approval in 2006, he started with funds-of-funds. Later, after the hiring of Musick, direct investments commenced (one pities the poor funds-of-funds).

“It was the right way to start the program,” Rupnik now says. Likening it to co-investments in private equity, he comments that “with the first of anything, you feel an extra level of pressure.”

When you only have a few investments, Musick adds, it’s naturally not as diversified as it will end up, leaving the program’s future vulnerable to any upset. With a diversified hedge fund portfolio, he says, you can lose money in one or two funds and still have a phenomenal overall portfolio. Funds-of-funds solved this—for a time.

Letting go of the middlemen required “professionals on staff,” Rupnik says. Once they were in place, Illinois “could flip the model and go direct. You’re still always nervous when you change models and have one or two hedge funds in the direct portfolio—”

“—but don’t view it as sticking your neck out when you’re really behind it,” Musick adds.

“Agreed, entirely agreed,” Rupnik responds.

Rupnik on how TRS reacted, from an investment standpoint, to CalPERS’ hedge fund pullout:

No discussion of direct public plan hedge fund investing would be complete without mentioning the headwinds: namely, the California Public Employees’ Retirement System (CalPERS). In September 2014, the fund announced that it was abandoning its Absolute Return Strategies portfolio. “Our analysis, after very careful review, was that mainly because of the complexity of the hedge fund portfolio and the cost, we weren’t comfortable scaling the program to a much greater size than it currently held,” explained newly appointed CIO Ted Eliopoulos. The reaction was swift: Hedge funds rushed to the defense, some public plan trustees hurried to follow suit, and CIOs everywhere—who know the symbolic value of CalPERS’ move—cringed.

But for Illinois Teachers’—a rose in a bed of weeds, given the state’s general public plan funding situation—the reaction was carefully judicious. “My worry isn’t so much investments or the plan or the team. What I worry about is some external force that causes some skittishness,” Rupnik says. This worry, both he and Musick assert, is decidedly present.

“I’m terrified every day,” the latter says. “I think it’s what makes us good at what we do. We’re just estimating things at the end of the day. We blend our estimates, monitor them as best we can, and structure investments to protect us as best as we can. As far as the cold sweats—I’m just super freaked out about anything. No one thing keeps me up at night.”

Read the full interview here.

Canada Pension Eyes Corporate India

India The Canada Pension Plan Investment Board (CPPIB) – the entity that manages assets for Canada’s biggest pension plan – has made a flurry of investments in India-based corporations over the past few years. And the flow of pension money to India isn’t likely to slow down – the country is a “key” part of CPPIB’s long-term plan, according to a CPPIB official. More details from Bloomberg:

Toronto-based Canada Pension Plan Investment Board […] is planning to add to the $1.5 billion it has already poured into the South Asian country since 2010, said Mark Machin who oversees its international investments division. “India is a key long-term growth market for CPPIB,” Machin said in an e-mail. “We will continue to seek investment opportunities which may include direct investments,” and will seek “smart” local partners, he said, without elaborating. […] “I can see many pension and sovereign funds coming to India,” said Khushru Jijina, managing director of Mumbai-based Piramal Fund Management Pvt., which has a $500 million realty joint venture with CPPIB. “Basically, the big boys with patient money who want to play the 8-10 year game are coming.” The Canadian pension fund, which made its first India investment in 2010, followed that up with three more in the past year. It invested $200 million in an alliance with construction conglomerate Shapoorji Pallonji Group in November last year followed by $250 million in a venture with billionaire Ajay Piramal-owned Piramal Enterprises Ltd. (PIEL) for debt financing of residential projects in February. The third was $332 million in L&T Infrastructure Development Projects Ltd. in June.

CPPIB manages $206 billion in assets for the Canada Pension Plan.   Photo by sandeepachetan.com travel photography via Flickr CC License

New York Common Fund Commits $200 Million to Urban Real Estate

Manhattan

The New York Common Retirement Fund has committed $200 million to a fund that invests in real estate in New York City, Los Angeles and other urban areas.

More from IPE Real Estate:

The fund has backed CIM Group’s Fund VIII, which is targeting established US urban areas.

The fund invests in New York City, San Francisco and Los Angeles, focusing on equity, preferred equity and mezzanine transactions between $10m and $250m.

Direct investments, mortgage debt, workouts, public/private partnerships and operating real estate businesses are being targeted.

CIM Group, which was given a $225m commitment for its Fund III by New York Common in 2007, is targeting $2bn for Fund VIII.

New York Common said it made the investment on the back of high returns with prior funds with the manager.

The investor has pegged the current investment at $311m.

CIM has previously distributed $40.1m back to the pension fund.

[…]

CIM is co-investing 5% of total commitments to the fund, with a cap of $20m.

The manager will make around 30 to 40 deals.

Limited partners in the fund are projected to achieve a gross 20% IRR, with a 2x equity multiple.

Leverage will not exceed 75%.

The New York Common Retirement Fund manages about $177 billion in assets.

 

Photo by Tim (Timothy) Pearce via Flickr CC License

Lessons In Infrastructure Investing From Canada’s Pensions

Roadwork

Canada’s pension plans were among the first in the world to invest in infrastructure, and they remain the most prominent investors in the asset class.

Are there any lessons to be learned from Canada when it comes to infrastructure investing? Georg Inderst, Principal of Inderst Advisory, thinks so.

In a recent paper in the Rotman International Journal of Pension Management, Inderst dives deep into Canada’s infrastructure investing and emerges with some lessons to be considered by pension funds around the world.

The paper, titled Pension Fund Investment in Infrastructure: Lessons from Australia and Canada, starts with a short history of Canadian infrastructure investing:

Some Canadian pension plans, notably the Ontario Teachers’ Pension Plan (OTPP) and the Ontario Municipal Employees Retirement System (OMERS), were early investors in infrastructure in the late 1990s and early 2000s, second only to Australian superannuation funds. Other funds followed, and the average allocation has been growing steadily since, reaching C$57B by the end of 2012 (5% of total assets). Here, too, there is a heavy “size effect” across pension funds: bigger pension plans have made substantial inroads into infrastructure assets in recent years (see Table 2), while small and medium-sized pension funds have little or no private infrastructure allocation.

The main driver for infrastructure investing appears to be the wish to diversify pension funds’ assets beyond the traditional asset classes. While Canadian pension funds have been de- risking at the expense of listed equities, regulators have not forced them into bonds, as was the case in some European countries. Real estate and infrastructure assets are also used in liability-driven investing (LDI) to cover long-term liabilities.

Canada frequently makes direct investments in infrastructure, an approach that is now being tested by pension funds around the world. From the paper:

According to Preqin (2011), 51% of Canadian infrastructure investors make direct investments, the highest figure in the world. This approach (known as the “Canadian Model”) has attracted considerable attention around the world, for several reasons:

• lower cost than external infrastructure funds

• agency issues with fund managers

• direct control over assets (including entry and exit decisions)

• long-term investment horizon to optimize value and liability matching

This direct approach to infrastructure investment must be seen in the context of a more general approach to pension plan governance and investment. Notable characteristics of the “Maple Revolutionaries” include

• Governance: Strong governance models, based on independent and professional boards.

• Internal management: Sophisticated internal investment teams built up over years; the top 10 Canadian pension plans outsource only about 20% of their assets (BCG 2013).

• Scale: Sizable funds, particularly important for large-scale infrastructure projects.

Potential challenges for the direct investing approach include insufficient internal resources, reputational and legal issues when things go wrong, and the need to offer staff market-based compensation in high-compensation labor pools.

Despite these challenges, however, the direct internal investment approach of large Canadian pension funds is now being tried in other countries. Other lessons from the Canadian experience include the existence of a well-functioning PPP model, a robust project bond market, and long-term involvement of the insurance sector.

Finally, the paper points to some lessons that can be learned from Canada:

Lessons learned include the following:

• Substantial infrastructure investments are possible in very different pension systems, with different histories and even different motivations.

• Infrastructure investment vehicles can evolve and adjust according to investors’ needs. In Australia, listed infrastructure funds were most popular initially, but that is longer the case.

• Pension plan size matters when investing in less liquid assets. Private infrastructure investing is driven primarily by large- scale funds, while smaller funds mostly invest little to nothing in infrastructure. In Australia, two-thirds of pension funds do not invest in unlisted infrastructure at all.

• Asset owners need adequate resources when investing in new and difficult asset classes. Some Canadian plans admit that their own estimates of time and other inputs were too optimistic at the outset.

• New investor platforms, clubs, syndicates, or alliances are being developed that should also attract smaller pension funds, such as the Pension Infrastructure Platform (PIP) in the United Kingdom or OMERS’ Global Strategic Investment Alliance (GSIA). However, industry experts stress the difficulties of such alliances with larger numbers of players, often with little experience and few resources. Decision time is also a critical factor.

The full paper offers much more insight into Canada’s approach as well as Australia’s. The entire paper can be read here.