investment strategy | Pension360

Newspaper: Report on Canadian Investment Expenses “Misses the Point”

Last week, Pension360 covered a report questioning the Canada Pension Plan’s new investment strategy, which had led to a more than 100 percent increase in investment expenses since 2006.

But one newspaper, the Hamilton Spectator, says the report missed the point entirely. From the Hamilton Spectator editorial:

Rousing displays of verbal fireworks could not conceal the study’s failure to find out what Canadians need to know. […] The country needs to know whether private-sector plans or the public plan is a more efficient way of saving for retirement.

The authors found the government collects the contributions to the Canada Pension Plan and pays out the pensions, for an administrative cost of around $550 million a year. The government recovers that cost by skimming an administrative charge off the contributions. If the CPP Investment Board counted that cost as part of its operating costs, those costs would be $550 million higher.

But we need to know if the government’s costs for collecting contributions and mailing out cheques are out of line with operators of private-sector pension plans. The study’s authors make no inquiry on that point.

A more useful study would produce evidence both from the public and private spheres. That study would have to be written by authors who gather the evidence first and then draw their conclusions. The study published last week seems more like the work of an agency with a narrow agenda — what you might call a self-serving bureaucracy.

The report, released last week, found the Plan’s investment expenses had increased from $600 million or 0.54% of assets in 2006 to $2 billion or 1.15 per cent of its assets in 2013.

Memphis Fund Ramps Up Risk With New Investment Strategy

It’s been brewing for months, but now the decision is unanimous: the board that governs the City of Memphis Retirement System has decided to turn to a higher-risk investment strategy involving increased allocations toward private equity, hedge funds and foreign stocks and bonds. From the Commercial Appeal:

The Memphis pension board cast a unanimous voice vote Thursday morning to shift hundreds of millions of dollars in retirement assets out of U.S. stocks and bonds and into assets with higher risk and potentially higher rewards, such as international stocks and bonds, and new investments in private equity and hedge funds.

The city would sell a large portion of its U.S. stocks and bonds and increase its holdings of foreign stocks from 22 percent of the portfolio to 31.7 percent. The fund would also invest 13.4 percent of the portfolio in bonds from abroad.

The pension fund would invest 4.4 percent of its portfolio in private equity companies and 4.2 percent of its holdings in hedge funds.

These numbers are “targets” — the actual percentage of investments in each class can change depending on various factors, such as investment performance.

Earlier this summer, the fund approved doubling its real estate allocation—from 5 percent to 10 percent.

Some members of the board wondered what would happen it the strategy turned sour. The Commercial Appeal reports:

“If we went with these changes, what’s the worst case scenario?” pension board member Derek Brassell asked before the vote.

“The worst case is the same worst case we would have with the existing portfolio. So it’s no different than it was before,” responded Lawrence H. Marino, senior vice president with the city’s investment advisory firm Segal Rogerscasey.

“What we’ve done is by diversifying, we can get lower risk with the same return, or we can get higher return with the same risk. Here we’re opting to get higher return with the same risk.”

Other experts had previously advised the fund that, though higher risk was guaranteed, higher returns were not a given.

“Only time will tell,” said Don Fuerst, senior pension fellow at the American Academy of Actuaries.

American Century Lands $530 Million Investment From Arizona State Retirement System

The Arizona State Retirement System has invested $530 million with American Century Investments. As reported by the Kansas City Business Journal:

The investment will be placed in the American Century Non-U.S. Growth strategy, which looks for companies with a market capitalization of $3 billion or more, with accelerating growth and improving fundamentals. The overall portfolio typically invests in about 90 to 135 companies.

The investment management team is led by Senior Portfolio Manager Rajesh Gandhi, a 17-year financial services veteran who joined American Century in 2002.

The Arizona State Retirement Systems manage $34 billion in assets for 500,000 members.

Portfolio Manager Rajesh Gandhi explains his investment strategy in this video, courtesy of American Century.

CalPERS Weighs Withdrawal From Commodities

California is often on the cutting edge of trends that eventually reverberate throughout the rest of the country. The same is true of CalPERS, the pension fund that was among the first to invest in real estate, hedge funds and private equity.

So when CalPERS announces a dramatic change in investment strategy, other funds drop what they’re doing and listen. Funds are certainly listening lately, as CalPERS is considering a handful of moves that would shift its asset allocation significantly.

Among them: the fund is considering taking all of its money out of commodities. From the Wall Street Journal:

One of the more-dramatic moves under consideration is a complete pullback from tradable indexes tied to energy, food, metals and other commodities, according to people familiar with the discussions. Calpers began making such investments in 2007 as a way of diversifying its portfolio and it currently has $2.4 billion in such derivatives, or less than 1% of total holdings.

[…]

The discussions are taking place between the fund’s interim Chief Investment Officer Ted Eliopoulos and Calpers’s other top investment executives. The Calpers board hasn’t yet been informed about any possible changes and no final decisions have been made, the people said.

The move, however jarring, wouldn’t be out of step with other recent investment decisions by CalPERS. The fund has shown a willingness to exit large investments it considers risky. From Wall Street Daily:

CalPERS’ potential retreat from riskier investments is evidence that it’s trying to simplify its portfolio and guard against losses during the next market downturn.

In a sense, CalPERS is turning to a bit of a “risk off” mode in this time of uncertainty.

Ultimately, with the realization that we’re in the midst of the Fed’s continued tapering, talk of interest rates hikes, and geopolitical unrest from the Middle East to the Ukraine, it may be time to dial down risk and play it safe.

In fact, this move is reflective of last fall, when CalPERS hinted at a shift away from complex investments, warning that the fund “will take risk only where we have a strong belief we will be rewarded for it.” This decision came after it had approved a new set of investment goals that reduced future exposure to equities and private equity, while increasing allocations to bonds and real estate.

A similar move by CalPERS also took place at the end of 2012, when the fund chopped commodities investments by more than half – prompting reports that it was shifting from commodities to inflation-linked bonds.

And in both incidences, the commodities markets experienced corrections.

CalPERS is weighing several other ideas, including whether forgo individual stocks in favor of securities that track broader industries.

CalPERS also made headlines last month when it announced it would cut its hedge fund allocation by 40 percent.

Photo by Terence Wright via Flickr CC License

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