Lee Partridge | Pension360

San Diego Pension’s Risk Reduction Yields Mixed Short-Term Results

A series of investment policy changes made by the board of the San Diego County Employees Retirement Association (SDCERA) have saved the fund from losing tens of millions – but also prevented the fund from realizing tens of millions in returns during the third quarter.

Pension funds are particularly long-term investors and no investment policy should be judged based on one quarter’s worth of results, but the outcomes of SDCERA’s allocation changes are fascinating nonetheless.

From Bloomberg:

San Diego County’s pension fund avoided a $100 million loss in the third quarter by reducing its reliance on Treasury bonds although it forfeited about $114.4 million in gains in the past three months because it rolled back its “risk-parity” strategy, the fund’s investment adviser said in a report.

In April, the board of the San Diego County Employees Retirement Association lowered the fund’s fixed-income target to 15 percent from 60 percent by eliminating Treasuries and reducing fixed-income investments and inflation-protected securities. That helped cushion the fund from $100 million in losses in the three months ended Sept. 30, according to the report by Houston-based Salient Partners LP, which manages the $10.1 billion portfolio.

Instead, the fund for 39,000 current and retired county employees lost $4 million.

In September, the board reduced the amount of money that could be invested in futures and derivatives contracts, the so-called risk-parity category the board created in April at the urging of Lee Partridge, Salient’s chief investment officer.

Partridge objected to the September move. With retirees urging board members to reduce exposure to risk, they voted 5-2 to make the change.

Since then, the fund has lost out on about $114.4 million in returns, according to Partridge’s report.

Partridge and Dan Flores, a spokesman for the San Diego County Employees Retirement Association, declined to comment until the board discusses the report on Dec. 18.

SDCERA’s board voted to fire its outsourced CIO, Salient Partners, last month.

Photo by Andreas Poike via Flickr CC License

Questions Raised About “Dual Structure” of Governance At San Diego Pension Fund

Most of the news surrounding the San Diego County Employees Retirement Association (SDCERA) has been about the board’s decision to move on from its outsourced CIO, Salient Partners.

But also noteworthy are parts of SDCERA’s governance structure. At least one expert has raised concerns about the effectiveness of the fund’s “dual” reporting structure.

Dan McSwain of the San Diego Union-Tribune writes:

Structural woes were the main take-away from a parade of experts at a two-day workshop held last month by the system’s nine-member board of trustees.

[…]

One expert at the workshop, hired by the board to evaluate its governance, said the chief executive wasn’t clearly accountable for the fund’s investments. Indeed, the Houston-based chief investment officer appeared to report directly to the board.

This “dual structure” is found almost nowhere else. Instead, the CIO reports to the CEO, in a straight line of authority, at nearly every public or corporate pension fund in the world, not to mention insurance companies and private endowments.

Another expert said conflicts of interest were “inherent” in the county’s outsourced investment management structure. Yet another questioned the oversight of the retirement system’s outside lawyers, one of whom also reports directly to the board.

Still, the most obvious problem was the one nobody talked about, at least explicitly: Responsibility for this chronic buck-spreading lands squarely on White, the chief executive officer since 1996. If the county’s pension system has structural flaws, it’s hard to imagine how that’s not also a CEO problem.

Fund CEO Brian White defended the structure:

The outsourced CIO, Lee Partridge of Salient Partners, does in fact report to the CEO, White said, so the system already had the “linear” structure recommended by several governance experts.

“We’ve had a linear structure here, and I think what the board did Friday was confirm or reaffirm the linear structure,” he said, referring to the board’s vote on Nov. 21 to hire an internal CIO and have the position report directly to the chief executive.

White also said that, acting as investment strategist, Partridge was indeed supervising his own firm’s direct management of leveraged investments. But this wasn’t the “inherent” conflict of interest one expert asserted, because no money changed hands as additional fees, White said. Besides, the board of trustees endorsed the idea.

“I’m here to serve the board and support their decision,” he said. “That’s what they wanted.”

SDCERA manages $10.5 billion in assets.

Photo by Roland O’Daniel via Flickr CC License

San Diego Pension Begins Transition To In-House CIO

The Board of the San Diego County Employees Retirement Association (SDCERA) moved closer on Thursday to firing Salient Partners, the firm that acts as the pension fund’s chief investment officer.

Board members indicated that the firing was all but official, but that the transition to a new CIO still needs to be worked out.

From Bloomberg:

If the San Diego County Employees Retirement Association goes ahead with the proposal, it would mean the end of the fund’s five-year relationship with Houston-based Salient Partners LP, said board member Dianne Jacob, a San Diego County supervisor.

Just two months ago, the board voted 5-4 against firing Salient after some officials criticized the chief investment officer, Lee Partridge, as needlessly risking retiree income through use of futures contracts tied to securities and commodities.

“It sounds like we are going to terminate the contract,” Jacob said yesterday in a board meeting in San Diego. “It’s just a matter of timing and the transition.”

The company remains committed to its work in San Diego, said Chris Moon Ashraf, a spokeswoman for Salient at Jennifer Connelly Public Relations.

“Should the board determine that a change in provider is in the best interest of its members, Salient will work to ensure a smooth and expeditious transition,” she said in a statement.

The pension board directed its staff to set the timing for terminating the contract with Salient. The board didn’t schedule a vote on ending the contract, or take action on hiring an internal investment chief.

SDCERA pays Salient Partners around $8 million a year. Board members have previously indicated that the salary for a new CIO would likely be around $260,000.

San Diego Pension Board Votes to Move CIO In-House; Approves Other Governance Changes

The San Diego County Employees Retirement Association formally voted on Friday to begin searching for an in-house chief investment officer to replace Salient Partners, the firm currently serving as the fund’s outsourced CIO.

The board also made several changes in governance structure. From the San Diego Union-Tribune:

Near the end of a two-day board retreat this week, trustees voted 8-1 to return to an in-house chief investment officer rather than rely on an outsourced portfolio strategist.

Trustee David Myers was sole opponent to the reversal.

The board is likely to start the recruiting process for a CIO as soon as next month.

Pension officials also reversed course on their unusual governance structure, a model that had both CEO Brian White and Salient principal Lee Partridge reporting to the board.

Under the new organizational chart, the in-house chief investment officer will report to the CEO, who in turn will report to the board.

Consultants invited to the two-day retreat told trustees that retaining the dual-reporting model was not among the best practices for public pension systems.

One area of concern for trustees: could the pension fund offer a high enough salary to attract a talented CIO? More from ai-cio.com:

Board members aired their views on Friday about how much the county would be willing to pay. The matter concerned Dick Vortmann, who said he did not want SDCERA to end up with “the best of the rest” if the fund was not allowed sufficient budget to hire someone with the requisite skillset to manage investments.

Jacob said the annual salary would be in the $200,000 to $300,000 a year range. She referenced the $4.5 million that was agreed for the four year contract with Salient and said the county “would probably baulk at that.”

[…]

Board Chairman “Skip” Murphy voted with the motion, but said if the county did not agree to a pay package that would attract the right candidate, he was “in a world of hurt”.

Read more coverage of the decision here and here.

San Diego Pension Close to Firing Outsourced CIO, Bringing Investment Management In-House

The San Diego County Employees Retirement Association (SDCERA) is on the verge of firing its controversial outsourced CIO, Lee Partridge of Salient Partners.

Board members held a mock vote on the issue, and the firing was “approved” 7-0.

If Salient Partners is indeed fired, the SDCERA would move its investment management in-house.

More on the situation from the Union-Tribune:

The county retirement board has made an informal decision to end its five-year experiment with a Texas portfolio strategist and return oversight of the $10 billion pension fund to an in-house expert.

The vote came late Thursday toward the close of another marathon meeting of the San Diego County Employees Retirement Association board, which has been racked with discord in recent months over its leverage-heavy investment policy.

An hour into a late-afternoon discussion on governance models, Trustee Dick Vortmann suggested their time might be better spent if they knew whether the board majority still supported using an outsourced chief investment officer.

“Can we take a straw poll right now?” he asked. “For Christ’s sake, if it isn’t a close debate, why are we debating?”

Minutes later, all seven trustees in attendance raised their hand to show they are ready to hire an internal investment officer to manage the fund — a function that has been served by Salient Partners of Houston.

The 7-0 vote isn’t as clear cut as it sounds.

The vote wasn’t official – and it didn’t include all the trustees. Two trustees had left the meeting before the vote was held. At least one of those trustees, David Myers, is likely to vote to retain Salient Partners. From the Union-Tribune:

The nonbinding vote excluded board members David Myers, who was absent, and Mark Oemcke, who left the meeting earlier in the day. Myers has been a staunch supporter of Salient and its main representative in San Diego, Lee Partridge. Oemcke has not.

Three of the seven board members to vote — Vortmann, Kristina Maxwell and E.F. “Skip” Murphy — said they were raising “half a hand” to reflect concern over finding the right candidate for the job.

“It’s qualified on the assumption that we can find the requisite skills to match our desired level of sophistication on our investment philosophy,” Vortmann said.

No one from Salient was at the meeting.

While not yet formalized, the decision to abandon the outsourced CIO model prompted trustees to begin the process of recruiting an in-house investment expert.

They plan to hire an executive search firm in two weeks, when the board convenes a special two-day retreat. Installing a chief investment officer is expected to take between four and six months.

SDCERA pays Salient $10 million a year to perform CIO duties.

A consultant told the SDCERA board that they could likely hire a new, qualified CIO for less than $250,000.

San Diego Fund Trustee May Have Breached Code of Ethics While Lobbying For CIO

The San Diego County Employees Retirement Association (SDCERA) board voted last week to retain its controversial chief investment officer, Lee Partridge, and his firm, Salient Partners.

The vote was 5 to 4, and trustees on both sides of the vote were adamant about their position.

But did one trustee go to0 far while lobbying to keep Partridge? Board Vice Chairman David Myers may have breached a code of ethics when he sent emails to his subordinates asking that they vouch for Partridge. From the San Diego Union Times:

Before the county pension board met last week and decided to keep its Texas consultant in charge of investments, Vice Chairman David Myers urged retired employees to email the agency to voice support for Lee Partridge and Salient Partners.

Myers’ request also was sent to current workers, including his own subordinates at the Sheriff’s Department. The communications raise the question of whether Myers put undue pressure on rank-and-file employees to send emails on a political matter.

Two weeks ago, when U-T Watchdog asked Myers whether it was appropriate for a senior commander to make such requests of subordinate employees, he declined to respond.

The San Diego County Employees Retirement Association responded on Myers’ behalf, saying he only contacted retirees — not the hundreds of deputies that serve beneath him.

But in emails since obtained under the California Public Records Act, Myers states that he included his own subordinates in his effort to retain Partridge’s services, sending them a three-page letter in support of Partridge’s contract and asking them to advocate for it.

“I sent to all law enforcement members, active and retired,” Myers wrote to pension system CEO Brian White on Sept. 24, adding that all 40 responses he received were positive. “I am asking them to also communicate that message via email to SDCERA.”

There may be further emails from Myers to employees on the subject. The county has delayed release of five additional emails pending input from the pension system.

Those actions could be in breach of the SDCERA Code of Ethics, according to U-T San Diego:

The SDCERA Code of Ethics says trustees must remain objective and says “misuse of influence” is unacceptable. The code does not specify what types of misused influence are at issue, and agency officials declined to discuss Myers’ actions.

Jan Caldwell, a spokeswoman for the Sheriff’s Department, said there is no issue with Myers’ communications with front-line staff.

“The San Diego County Sheriffs’ Department does not have a policy or procedure that would preclude an employee representative of the County’s Retirement Association from communicating to county employees on matters of interest to county employees relating to their retirement system,” she said.

Bruce Cain, a political-science professor at Stanford University, questioned the wisdom of a higher-up asking subordinates to become activists in any cause.

“Typically you don’t want senior people engaging in this kind of thing because it could be perceived as pressure,” Cain said.

Max Neiman, senior research fellow at the Institute of Governmental Studies at the University of California, Berkeley, agreed, saying, “I would find that unseemly, if not a violation of ethics or the law.”

SDCERA spokesmen have maintained that Myers didn’t violate any ethics codes.

San Diego Pension Trustees React To Retainment of Controversial CIO

The San Diego County Employees Retirement System (SDCERS) voted 5-4 last week to retain its controversial CIO, Lee Partridge.

The vote was close, and nearly every trustee had something to say about the decision. From Bloomberg:

“All the sudden we found out we have $22 billion in exposure,” [trustee Dianne] Jacob said by telephone prior to the vote. “That should have never happened. The process is flawed. The hiring of Partridge in the beginning was flawed. Let’s get back to basics.”

[…]

“This is an exorbitant amount of taxpayer dollars being spent and is unprecedented in any other county in California,” [County Treasurer and trustee] McAllister said by e-mail before the vote. “I have strongly opposed the adoption of an outsourced government structure.”

McAllister went on, according to the San Diego Union-Tribune:

“The CEO, Brian White, has put SDCERA in the spotlight for all the wrong reasons,” said County Treasurer Dan McAllister, who serves on the pension board as part of his elected duties. “This is not the behavior we should expect from the CEO of one of the largest public pensions in the state.”

Those trustees were echoing the sentiment of city employees, many of whom had shown up to previous board meetings or written the trustees to express their insecurity with the pension fund’s investment strategy. From the San Diego Union-Tribune:

“You have a responsibility to represent hard-working San Diego County employees,” county employee Tracey Carter, a member of Service Employees International Union 221, told the board prior to the vote. “We have done our due diligence. We have separated headlines from facts. It is time to change direction with the management of the fund.”

But the majority of trustees voted not to fire Partridge. From the San Diego Union-Tribune:

“For those who continue the fear-mongering, shame on you,” said [trustee and board vice-chairman David] Myers.

More of Myers’ reaction from Bloomberg:

“Going forward with the contract is in the best interest of this organization and its members — it saves money,” David Myers, the board’s vice chairman, said at a Sept. 18 meeting. “The dysfunctionality of what is going on right now is, in my opinion, a breach of our responsibility to this organization.”

Salient Partners LP, the firm that employs Partridge, released this statement to Bloomberg:

“ [We] delivered $4.4 billion to SDCERA plan members at a lower cost and with less risk than 80 percent of similarly sized pension plans,” said Chris Moon Ashraf, a spokeswoman for the company at Jennifer Connelly Public Relations. “The average SDCERA plan beneficiary realized more than $111,000 in gains under Mr. Partridge’s stewardship for a total fee over five years of $414.”

The fund’s investment strategy was controversial because the CIO was allowed to use up to 500 percent leverage on certain parts of its portfolio, without seeking approval from the board or the fund’s director.

SDCERS returned just over 13 percent in 2014.

San Diego Fund Votes 5-4 To Retain Controversial CIO

After a “tense” five-hour deliberation, the Board of the San Diego County Employees Retirement Association (SDCERA) voted 5-4 to retain its outsourced chief investment officer.

The pension fund and its CIO, Lee Partridge, have made headlines in recent months due to their high tolerance for risk and extensive use of leverage.

From Chief Investment Officer Magazine:

The board of the San Diego County Employees Retirement Association (SDCERA) declined to terminate its contract with outsourced-CIO Salient Partners at a meeting on Thursday.

As predicted by those close to the $10 billion fund, the vote came down to the wire. After nearly five hours of discussion, a motion brought by trustee Dianne Jacobs to fire Salient was blocked by five trustees, including Chairman Skip Murphy, and backed by four.

Several stakeholders presented formal recommendations about the action before the board’s vote. The majority of these representatives urged the fiduciaries not to reverse their course—a risk-parity oriented portfolio overseen and invested by Salient.

“We believe your board is at a serious juncture,” said Susan Mallett, president of the county’s retired employee association. “You are suddenly and unexpectedly considering a reversal from an investment strategy you had agreed on after years of considered discussion. As a representative of thousands of members who absolutely depend on their pensions, I have received as many worried letters about leverage as I have about the actions of this board.”

Though the majority of trustees opted not to vote for a firing, the minority was very vocal during the meeting. From the San Diego Union-Tribune:

“The CEO, Brian White, has put SDCERA in the spotlight for all the wrong reasons,” said County Treasurer Dan McAllister, who serves on the pension board as part of his elected duties. “This is not the behavior we should expect from the CEO of one of the largest public pensions in the state.”

Dianne Jacob, chairwoman of the Board of Supervisors, made a motion to terminate the Salient contract early in the meeting.

“It’s time to steer things back to the basics of simplicity and common sense not because we have received criticism but because it’s the right thing to do for retirees and taxpayers,” Jacob said.

Jacob received the support of only three of her colleagues on the nine-member SDCERA board — Samantha Begovich, Mark Oemcke and McAllister. Five votes were required to terminate the contract.

Begovich, a prosecutor who recently joined the board, used the strongest language against the consulting firm, saying it has taken advantage of the pension system and has a stranglehold on more than $10 billion of public funds. She said supporters of the firm for years have presented one-sided information about the wisdom and soundness of its investment approach. She called the firm poisonous for San Diego County.

The Board did express the desire to gradually unwind its contract with the CIO and directed its staff to come up with some options for taking control out of the hands of Lee Partridge.

Those options will likely be presented at next month’s board meeting.

Photo by Keith Ivey via Flickr CC License

Controversial San Diego Fund Could Fire CIO Thursday, But Vote Will Be Close

The San Diego County Employees Retirement Association (SDCERA) has made headlines across the country for having maybe the highest risk tolerance of any pension fund in the country.

Lee Partridge, the fund’s outsourced Chief Investment Officer, is permitted to use up to 500 percent leverage on portions of the portfolio.

But the fund will vote Thursday on whether to fire Partridge after retirees have said they fear for their pensions under the risky strategy. According to insiders who spoke to Chief Investment Officer Magazine, the vote is too close to call:

The nine trustees of the San Diego County Employees Retirement Association (SDCERA) are set to vote on Thursday whether to terminate its outsourcing contract with Lee Partridge’s Salient Partners—a deal they passed eight to one in June.

The outcome is too close to call, according to several sources familiar with the matter. Three trustees have consistently backed and defended the arrangement, including David Myers and David Moore, while three others adamantly oppose it. A September 18 motion by Dianne Jacob initiated the vote, seconded by new member Samantha Begovich. In June, Dan McAllister alone came out against the contract. The positions of the final three trustees remain unclear.

In the event of a majority vote to dismiss Salient, the board is expected to nominate consultant Wurts & Associates as interim portfolio manager. A partner from recruiting firm Korn/Ferry is also slated to present about its recent search for an internal CIO for the California Public Employees’ Retirement System. According to the agenda, the board may then vote on whether to solicit proposals from recruitment firms to undertake their own search.

One trustee who will likely vote to fire the CIO, Samantha Begovich, said this at a board meeting earlier this month:

“It is well documented that we’re paying exorbitant, outlier-type fees with no incentives except to grow the fund…a contract with no ties to performance is something that I cannot support. And so I will be voting ‘no’ on that when the time comes.”

Another trustee who supports the current CIO said he was “flabbergasted” that the board is considering firing Partridge. From Chief Investment Officer:

“All of our board members were fully aware of the investment portfolio structure and how it would perform in an equity bull market,” wrote Trustee Myers, a Salient supporter, in response to the conflict. Likewise, “all understood, or at least I thought they understood, that it is the long term sustainability and performance of the retirement fund is what matters.”

Myers continued to say he was “flabbergasted” at the proposal to fire Salient and exit its investment strategy “without thinking through all of the implications and any form of a backup plan or approach. There are many terms to describe such proposals, but I would not describe them as ‘measured,’ ‘well thought out’ or even ‘analytical.’”

The vote will be held on Thursday, October 2.

San Diego Fund To Consider Firing Risk-Keen CIO

The San Diego County Employees Retirement System (SDCERS) is by now notorious for its risky investment strategies, which include heavy use of leverage.

Pension360 has covered the pension fund’s board meetings this month, during which some trustees wondered aloud whether the fund should dial back risk.

Now, the board is considering another item: whether the fund’s chief investment officer should keep his job. Reported by the San Diego Union-Tribune:

The county pension board voted Thursday to formally consider firing their Texas investment consultant.

The decision on the future employment of Salient Partners of Houston was set for Oct. 2, one day after the last of the county’s in-house investment staff was scheduled to go to work for the investment firm as part of a years-long outsourcing push.

In the meantime, Chief Investment Officer Lee Partridge of Salient will no longer be permitted to risk up to five times the amount of San Diego County’s pension money invested under his “risk-parity” strategy.

The board considered yesterday the idea of allowing higher amounts of leverage in pension fund investments. But that idea was voted down by a measure of 5-2.

Now, the board has suspended its CIO’s ability to use any leverage at all until the board votes on the CIO’s future. That vote will be held in early October.

Photo by dktrpepr via Flickr CC