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Survey: ESG Criteria Boosts Returns for Majority of Institutional Investors

Consideration of environmental, social, and governance (ESG) factors during the investment process has positively impacted investment performance, according to a survey of institutional investors conducted by LGT Capital Partners and Mercer.

[The full report can be read here.]

The survey reveals that less than 1 in 10 institutional investors felt ESG factors harmed investment performance. For the majority of survey respondents, ESG criteria had a positive effect on returns.

More on the results of the survey, from Ai-CIO:

Swiss alternative investments specialist LGT Capital Partners and global consultant Mercer surveyed 97 institutional investors from around the world, including decision makers for pension funds, foundations, and endowments. Of those, 57% said their use of ESG criteria had had a positive impact on performance. Only 9% said they felt it detracted from returns.

This shows that ESG analysis has moved beyond ethical concerns and has firmly found its place as a risk and investment management topic,” said Tycho Sneyers, managing partner at LGT.

He added that asset owners increasingly see ESG “as a valuable risk management tool.” “Long-term returns are more driven by avoiding bad investments than by picking all the winners,” Sneyers said, so screening for ESG risks is often seen as beneficial.

More than two-thirds of investors questioned said the primary reason for incorporating ESG into investment decisions was “reputational risk management.”

A report from the London Business School last month revealed that private equity firms have felt mounting pressure from European pension funds to implement ESG criteria into their investment strategy.

Photo by Paul Falardeau via Flickr CC License

Study: On Stocks, Public Pensions Excel at Picking Local Winners

When it comes to picking stocks, large public pension funds excel at investing in local winners.

That’s the main finding of a research paper issued this week by Jeffrey R. Brown, Joshua M. Pollet, Scott J. Weisbenner.

[The full paper can be found here.]

The paper studied the investment behavior of 27 state-level public pension funds that manage stock portfolios internally.

The authors found that the funds overweight their portfolios toward in-state companies, and those investments yield market-beating returns.

More on the research, from the Washington Post:

[The authors] discovered a surprising amount of local investment in publicly traded companies. On average, plans put 9.7 percent of their money in companies headquartered in their own respective states. Had they evenly spread out their money, they should have only invested around 5.6 percent of their U.S. portfolio in such stocks. This is three times more home-state enthusiasm than other researchers have measured at institutional funds.

Not only are state pension funds more likely to buy local stocks, but they are also supernaturally good at it. The stocks they picked outperformed the stocks they didn’t pick by 3 percentage points a year.

The advantage nearly tripled among small (non-S&P 500) companies in a state’s primary industry. In that arena, the chosen stocks beat their counterparts by 8.3 percentage points a year.

“Put simply, CALPERS appears to know which in-state small technology stocks to buy and which to avoid, and Texas Teachers knows which in-state small oil companies to buy and which to shun,” the authors write in their paper

The authors provide a few other theories as to why public pensions are so good at picking local winners – and one particularly interesting line of reasoning explores the correlation between stock-picking and political donations.

Read the full paper here.

Baltimore County Sues Consultant Over “Illegal” Pension Advice

Baltimore County was recently on the losing end of a $19 million lawsuit accusing the County’s pension plan of discriminating against older workers by making them pay more into their retirement plan.

[Read about the case here.]

But the County says it structured the plan that way based on advice allegedly given by Buck Consultants. Now, the County is suing Buck for the allegedly bad advice.

From the Baltimore Sun:

In a lawsuit filed in U.S. District Court, the county claims Buck Consultants gave bad actuarial advice that led to the defeat in court, and wants the company to pay for the millions the county is likely to owe former workers.

“The county’s pension system is based upon the advice received by Buck over the years, and the contract makes clear that Buck is responsible for any advice that may be illegal,” said county spokeswoman Fronda Cohen in a statement.

A spokesman for Buck countered that the company has provided “sound, industry-proven service.”

“This lawsuit is disappointing, and an unfortunate attempt by the county to deflect (from) the dispute that the county has been involved with the EEOC for the past eight years,” said Carl Langsenkamp, a Xerox spokesman.

[….]

The county filed its lawsuit against Buck Consultants in January. Immediately before filing the suit, the county ended its contract with Buck and hired another firm, the Baltimore-based Bolton Partners, on a short-term contract worth $25,000 — the maximum amount for a contract not needing approval by the County Council.

The County is suing Buck for the costs of the damages – $19 million – incurred as a result of losing the discrimination lawsuit.

The Baltimore City Council will decide on Monday whether to give Bolton Partners a contract extension.

Photo by Lee Haywood via Flickr CC License

Study Examines Herd Mentality in Pension Investing

Pension funds exhibit a herd mentality when formulating investment strategies, according to a new paper that studied the investment decisions of UK pension funds over the last 25 years.

The paper, authored by David P. Blake, Lucio Sarno and Gabriele Zinna, claims that pension funds “display strong herding behavior” when making asset allocation decisions.

More on the paper’s conclusions, from ai-cio.com:

According to the study, there was overwhelming evidence of “reputational herding” behavior from pension funds—more so than individual investors.

Pension funds are often evaluated and compared to each other in performance, the paper said, creating a “fear of relative underperformance” that lead to asset owners picking the same asset mix, managers, and even stocks.

Data showed herding was most evident at the asset class level, with pension funds following others out of equities and into bonds at the same time. They were also likely to herd around the average fund manager producing the median return—or a “closet index matcher.”

The paper can be found here.

Photo by Nick Wheeler via Flickr CC License

Pennsylvania Gov. Budget Proposal: Overhaul Pension Investment Strategy and Cut Fees, Managers

Pennsylvania Gov. Tom Wolf released his first budget proposal last week, and there were several items of interest related to pensions.

On Wednesday, Pension360 covered Wolf’s proposal for issuing $3 billion in pension bonds to attempt to shore up the funding of the state’s two major pension systems.

But Wolf is also proposing an overhaul of the systems’ investment strategy.

Specifically, Wolf is calling for the systems to take a more passive approach to investing and to cut down the fees it pays to managers.

The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”

Institutional Investors Cite Regulatory Risk, Transparency as Obstacles to Infrastructure Investment

The Organization for Economic Cooperation and Development (OECD) recently surveyed 71 pension funds on their interest in alternative investments.

[The full survey can be found here.]

The findings when it came to infrastructure investing were among the most interesting.

The survey found that the funds had increased their alternative investments across all categories between 2010 and 2013.

But when it comes to allocation, infrastructure still occupies the lowest rung on the totem poll.

The OECD sat down with institutional investors recently to ask why they might be hesitant to invest in infrastructure. From Investments and Pensions Europe:

At the recent OECD roundtable on long-term investment policy, institutional investors in attendance cited two main obstacles to infrastructure investment. First was the lack of a transparent and stable policy framework and regulatory risk was a top concern. Second was a lack of bankable investment opportunities.

Other important issues raised included clear and predictable accounting standards, long-term metrics for performance valuations and compensations, standardisation in project documentation, and transferability of loans and portability of guarantees. The expansion of financial instruments available for long-term investment (eg, bonds, equity, basic securitisation of loans), and the need for a clear risk allocation matrix to assign to the potential risk owner (government, investor or both) were also raised.

Ultimately, the primary concern for investors is investment performance in the context of specific objectives, such as paying pensions and annuities. Infrastructure can become an alternative asset class for private investors provided investors can access bankable projects and an acceptable risk/return profile is offered.

The study and roundtable were conducted as part of the OECD Long-term Investment Project.

Chicago Slapped With Credit Downgrade; Moody’s Cites Pension Liabilities As City Flirts With Junk Status

Credit rating agency Moody’s hit Chicago with a credit downgrade on Friday, cutting the city’s rating to Baa2 – two steps above junk bond status.

Notably, Moody’s indicated that the city could face future downgrades even if its 2014 pension reforms withstand legal challenges.

Pension360 has covered the city’s ballooning pension payments, which could exceed $1.5 billion annually by 2019.

Court: New Jersey Must Make Full Contribution to Pension System

A New Jersey Superior Court judge on Monday ruled that Gov. Chris Christie acted outside the law when he cut state pension contributions by more than $2 billion through fiscal year 2015.

Through FY 2015, the state’s scheduled pension contribution was $3.85 billion; but in an effort to divert funds to the general budget, Christie cut the pension payment down to $1.38 billion.

Unions sued him shortly after, alleging a breach of contract.

A judge now says Christie must make the full payments.

The full payments, however, are not included in Christie’s budget proposal. That’s because the state is appealing the ruling.

“Phantom Savings”: Top Illinois Senator Questions Gov. Rauner’s Pension Cuts

Illinois Gov. Bruce Rauner laid out his budget plan on Wednesday, and it included a number of pension cuts – decreasing annual COLAs, freezing benefits, and moving employees into a plan that yields fewer benefits.

(Under Rauner’s proposal, police and firefighters would be exempt from these changes.)

One lawmaker on Wednesday accused Rauner of using “fuzzy pension math” to calculate the savings the cuts would yield.

That followed the accusatory words of another top lawmaker, who claimed Rauner’s pension changes produced “phantom savings”.

Here’s Illinois Senate President John Cullerton:

The basic math still doesn’t work in his proposal. Governor Rauner leaves a $2.2 billion hole in the budget by relying on unrealistic revenues from a questionable pension proposal. Even as the courts review a significant test case, the governor’s plan banks phantom savings for a pension plan that may fail key legislative and judicial tests. When we passed pension reform last year, we took care to exclude possible savings from budget plans pending a legal resolution. The governor’s plan rejects that wisdom.

Indeed, when the state passed its pension overhaul in late 2013, it never included the savings in the budget. That’s because a legal challenge was sure to be brought against the law and Illinois didn’t want to assume savings only to get burned later.

Rauner’s proposals, if enacted, are likely to end up in court as well, depending on the outcome of the state’s current pension lawsuit.

Photo by Tricia Scully via Flickr CC License

South Korea Pension, In Bid to Boost Birth Rates, Considers Offering Loans to Couples For Wedding Expenses

South Korea is grappling with a number of demographic problems, including a rapidly aging population and a one of the lowest birth rates of any advanced economy.

The state’s public pension fund is particularly concerned, as it must pay out more benefits to the elderly even as its revenue stream (in the form of worker contributions) slows to a trickle.

The fund is now forced to consider creative solutions. One, discussed this weekend, is loaning money to young couples to encourage them to get married – and, ideally, have children.

From Korea Biz Wire:

South Korea’s national pension service is considering lending money to singles who delay or are reluctant to tie the knot because of wedding costs as a way to promote marriage and help raise chronically low birth rates, officials said Sunday.

South Korea is faced with mounting demographic problems as the ultra-low birth rate and the rapidly aging population are expected to seriously shrink the size of the labor force and depress economic growth. Such changes are also pressing on the pension operators who have to deal with increasing payments for the elderly while revenue drops.

The National Pension Service (NPS), under the wing of the Ministry of Health and Welfare, has been considering a wedding loan for singles, or those of a marriageable age, to support their housing plans, the biggest part of wedding costs, and other expenses.

In a fund management meeting in December, Health Minister Moon Hyung-pyo suggested using some of the pension funds on loans for singles to improve the welfare of young subscribers and reap higher returns from the loan businesses, according to ministry officials.

Korea’s National Pension Service manages about $300 billion in assets.

Photo by Leland Francisco via Flickr CC License

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