Kolivakis Weighs In On Restructuring of CalSTRS Investment Staff

The CalSTRS Building
The CalSTRS Building

CalSTRS recently completed a restructuring of its investment staff, which including appointing its first chief operating investment officer.

The restructuring had a purpose: the fund is planning to move a significant portion of investment management duties in-house.

CalSTRS currently manages 45 percent of its portfolio internally. The fund wants to bring that number up to 60 percent, according to a CalSTRS press release.

Leo Kolivakis, who runs the blog Pension Pulse, weighed in on the changes in a recent post, which is printed, in part, below:


By Leo Kolivakis

The shift toward internal management is a smart move and I like the way they restructured their senior staff to implement this shift.

According to Reuters, Debra Smith, the new chief operating investment officer, will oversee the fund’s Investment Operations, Branch Administration, and a new unit comprised of Compliance, Internal Controls, Ethics and Business Continuity. And as stated in the WSJ article above, Smith will report to the investment committee twice a year, giving her a direct line to board members.

Pay attention here folks because this is a great move from a pension governance perspective. I’ve always argued that the head of risk and head of operations at public and private pension funds should report directly to the board of directors, not the CEO or CIO. If there is a disagreement on operational or investment risks being taken, the board can listen to the arguments and decide if the risks are worth taking.

I’ve also long argued that whistleblowers need to be protected and whistleblower policies need to be beefed up at all public pension funds so that employees who witness shady activity can safely report it without worrying about being fired. If some senior manager is accepting bribes from an external fund manager or from a big vendor peddling the latest most expensive software, there should be a way to detect and report this fraud.

Finally, go back to read my comment on why U.S. pension funds are going Canadian. The reason is simple. It makes sense to manage assets internally, saving on fees and having more control over your investments. CalSTRS isn’t the first big state pension fund to do this (Wisconsin is) and it won’t be the last.

Of course, to really go Canadian, U.S. public pensions have to pay their senior investment staff big bucks and they have to separate politics from their entire governance process. When I read articles on how John Buck Co., a real-estate investment firm whose executives contributed substantially to the campaign of Chicago Mayor Rahm Emanuel, has earned more than $1 million in fees for managing city pension money, I shake my head in disbelief. This is Chicago-style politics at its worst. No wonder Illinois is a pension hell hole!


Photo by Stephen Curtin

Survey: 81 Percent of Pension Funds Looking to Bring More Investment Management In-House

wall street

CalSTRS recently announced its plans to eventually manage 60 percent of its assets internally. According to a recent survey, a majority of pension funds are beginning to think the same way.

A survey by State Street released this week found that 81 percent of pension funds are planning to bring more investment management duties in-house in the near future.

From BenefitsPro:

81 percent of funds are exploring bringing more management responsibilities in-house over the next three years.

Cost concerns are driving the trend, as 29 percent of funds said it is becoming more difficult to justify the fees paid to outside managers.

“Pension funds’ desire to deliver strong investment returns to their participants coupled with improved oversight and governance is leading to a need for more in-house accountability for asset and risk management,” said Martin Sullivan, head of asset owner sector solutions for North America.

The State Street data doesn’t suggest that outside management will become obsolete, but rather that pension funds are becoming more judicious about how they select and manage outside relationships.

The largest funds have the capacity to handle multi-asset management in-house, but they are in the minority, Sullivan noted.

“The majority of pension funds will need to make a choice about where to be a specialist and when a sub-contractor is needed,” he said.

The survey examined responses from 134 defined benefit and defined contribution funds around the globe.

The survey also found funds are willing to take on more risk:

While pensions funds re-examine their relationships with outside managers, 77 percent are also reporting a need to increase their risk appetite to boost lackluster returns.

That means a greater push into alternatives, as equities and fixed-income “may look pricey.”

“Pension funds are finding that a small allocation to alternatives is not sufficient to generate the required growth. This is forcing many of them to place bigger bets on alternatives,” according to the report.

The full report, called “Pension Funds DIY: A Hands-On Future for Asset Owners,” can be found here.