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Sustainable Investing Experts Weigh In On Fossil Fuel Divestment; Is Engagement A Better Strategy?

Different pension funds have different opinions on how climate change should affect investment strategy.

Some, like Norway’s largest pension, are willing to divest from certain fossil fuels entirely.

Others, like CalPERS, prefer to use their leverage as major shareholders to engage with companies rather than divest. Many others cite their fiduciary duties to pensioners as a reason they can’t divest from fossil fuels.

What do sustainable investing experts have to say? The Financial Times talked to them:

“The idea that shaming an industry will somehow reduce greenhouse gas emissions is not correct,” says Jonathan Naimon, managing director of Light Green Advisors, a New York asset management firm that specialises in environmental sustainability investing. “It isn’t like divestors are bringing any solutions to the table.”

“It’s actually projects and technologies that reduce emissions and the people developing them are in energy supply companies as well as energy-using companies,” he adds.

[…]

But Bill McKibben, the US environmental activist and writer who co-founded the 350.org climate campaign group spearheading the divestment push, says engagement strategies only suited some companies.

“If we have a problem with Apple paying Chinese workers bad wages you don’t need to throw away your iPhone and boycott Apple stock. You need to put pressure on them so they pay people better and the price of an iPhone goes up a dollar and everyone’s happy,” he says.

But he argues fossil fuel extraction companies are a very different case because their value is so dependent on their reserves of oil, gas and coal. “There’s no way that engagement can persuade them to get out of this business as long as it remains a profitable business,” he says

“The idea that anyone else is going to merrily persuade Chevron or BP that they want to be in the renewables business or something is nuts,” he says. He argues this would only happen with government pressure and that in turn would require the dilution of energy companies’ political power by efforts such as the divestment movement.

[…]

Carbon Tracker itself does not recommend a pure divestment strategy.

“We’re not advocating blanket divestment,” said Anthony Hobley, the group’s chief executive. “We think both engagement and divestment together will achieve more. The sum is greater than the parts because either alone isn’t going to achieve the ultimate objective of a climate-secure energy system.”

What does an oil executive think about fossil fuel divestment? Click here to read his take.

Photo by Paul Falardeau via Flickr CC License

Pennsylvania Auditor General Urges State Pensions to Pull Back From Hedge Funds, “Dramatically” Reduce Risk

Pennsylvania Auditor General Eugene DePasquale has been vocal in the past about his desire for the state’s pension systems to decrease their allocations to hedge funds.

He doubled-down and expanded on that stance Thursday, saying the state-level pension funds’ risk appetite needs to be “dramatically pulled back”.

He also called on the pension systems to reduce investment fees and change funding models.

DePasquale made these announcements after examining the pension system of Montgomery County, which uses a low-cost investment approach that includes investing heavily in passive index funds. The approach represents a stark contrast with the state-level pension systems.

Montgomery County Commissioners Josh Shapiro explains how his county’s pension fund operates:

Historically the county invested money from the pension fund with Wall Street money managers, Shapiro explained.

“What we found was that they just were simply not getting the returns our retirees needed,” Shapiro said. “We, as a pension board, worked hard at looking at different models of funding our pension system that would work better than what we historically had.”

Shapiro said the county began investing 90 percent of the fund in Vanguard two years ago and has since has seen a return of 16.23 percent while saving more than over $1 million in fees.

“We knew we were creating a template that could be used by other municipalities and maybe even by the state,” Castor said. “The obligation that we have to our retirees is to make sure the funding is there today, tomorrow and 40 years from now. The health of that plan is part of the covenant we have with the people who do the work here at Montgomery County and at the state.”

DePasquale then suggested that the state-level pension systems could learn from the successes of Montgomery County, according to the Times-Herald:

DePasquale said the state needs to emulate Montgomery County, where the pension funds are invested in a stock index fund.

“Before you get there we have to reduce our exposure into the hedge fund area,” he said.

According to DePasquale, the public school retirement system has 10 percent of its investments in hedge funds, while the state employee retirement system has approximately 6 percent of investments in hedge funds.

“That risk needs to be dramatically pulled back,” DePasquale said.

A final point DePasquale made about the state pension system is that the fees going to private equity and hedge fund managers need to be reduced.

“Pennsylvania is a large state,” he said. “We have a huge leverage tool in the amount of money that we have in our pension system. For some reason our Public School Employment Retirement System and our State Employment Retirement System refuses to use that leverage to negotiate lower fees.”

This isn’t the first time DePasquale has asked the state’s pension funds to pull back from hedge funds.

That led pension officials to defend their hedge fund investments. The chairman of the Pennsylvania’s State Employees Retirement System board of trustees said this in September:

Industry experts generally agree that while hedge funds are not for every pension system, the unique needs of each system must shape their individual asset allocation and strategic investment plans. Therefore, the actions taken by one system may not be appropriate for all systems. Investors need to consider many factors including their assets, liabilities, funding history, cash flow needs, and risk profile.

[…]

To date, the strategy has been working. As of June 30, 2014, our diversifying assets portfolio, or hedge funds, made up approximately 6.2 percent of the total $28 billion fund, or approximately $1.7 billion. In 2013, that portfolio earned 11.2 percent or $197 million, after deducting fees of $14.8 million, while dampening the volatility of the fund. That performance helped the total fund earn 13.6 percent net of fees in 2013, adding more than $1.6 billion to the fund.

Photo by Paul Weaver via Flickr CC License

CalPERS Commits $100 Million to San Francisco Bay Apartment Developments

CalPERS has committed $100 million to the AGI Resmark Housing Fund, which invests in three apartment development sites in the San Francisco Bay area.

More details from IPE Real Estate:

CalPERS, which declined to comment, has now allocated a total of $300m into its emerging manager program for real estate, having previously backed Sack Properties and Rubicon Point Partners in the office and data centre sectors.

[…]

With leverage at 70%, total investment could be as much as $330m.

Development properties are unlikely to be sold to other institutional owners, as was the case with Avant Housing.

Holding apartment developments and transferring them to another CalPERS account once the properties become core is a more likely option, IP Real Estate understands.

AGI Capital and the Resmark Company are serving as the respective emerging and mentoring managers for the fund.

CalPERS has previously worked with AGI in its Avant Housing venture with TMG Partners, to which it made a $100m allocation.

Resmark, which has since replaced TMG, expects three development sites to be placed into the new relationship with AGI.

An existing, 259-unit project, previously under the control of TMG and Avant Housing, has been moved to the new venture.

Ground-breaking is scheduled in the next 30 days, with the project due for completion in 19 months.

CalPERS is in the midst of a plan to increase real estate investments by 27 percent over the next few years.

NYC Comptroller Explains Boardroom Accountability Project in Open Letter

New York City Comptroller Scott Stringer is pushing corporations to give their biggest investors – often pension funds – more power over corporate boardrooms.

Stringer says pension funds can use their leverage as large shareholders to rein in excessive executive compensation and make corporate boards more diverse.

From a piece written by Stringer in Wednesday’s Daily News:

In partnership with the city’s pension funds, recently launched the Boardroom Accountability Project, a national initiative designed to improve the long-term performance of American companies by giving shareowners the right to nominate directors using the corporate ballot — also known as proxy access.

Proxy access promises to transform corporate elections from rubber-stamp affairs, where one slate of candidates is listed on an official ballot determined entirely by current officeholders, to true tests of merit and independence.

Bringing accountability to the boardroom will have real benefits for the retirement security of millions of Americans, including the 700,000 municipal workers , retirees and their beneficiaries who rely on city pension funds.

A recent report by the CFA Institute, the world’s largest association of investment professionals, concluded that on a marketwide basis, bringing more democracy to the boardroom could increase U.S. market capitalization by up to $140 billion.

We have focused our initial list of 75 companies being targeted around three core issues: those with excessive CEO pay, those with little or no gender or racial diversity on their board, and many of our most carbon-intensive energy companies. They include Urban Outfitters, ExxonMobil, Abercrombie & Fitch and Netflix.

Excessive CEO pay is a problem in itself and can create perverse incentives for management to focus on short-term profits at the expense of long-term value creation. It is also often a sign of a captive board that puts the interests of management ahead of the interests of shareholders.

And while most agree that more diverse boards make better decisions, the pace of change is glacial. In 2006, women made up 11% of S&P 1500 board seats. By last year, that number had barely budged (to 15%), and also as of last year, 56% of S&P 100 companies had no women or minority-group members in their highest-paid senior executive positions.

That’s bad for business, investors and our economy, and we will use our leverage to change it.

Lastly, we know that transitioning the world’s energy production to low-carbon sources is essential if we are to stem the most extreme effects of climate change. But the CEOs of the world’s major energy companies have little incentive to make investments that may reduce earnings today to protect their companies’ long-term prosperity.

In corporate America, the buck stops with the board. As a result, the right of shareowners to nominate and elect truly independent directors that reflect a diversity of viewpoints is critical to ensuring that the interests of long-term shareowners triumph over the pressure for short-term gains that all too often drives decisions at our largest corporations.

Read the whole piece here.

Report: Pension Funds Agreed To Risky, “Unusual” Contract Clause When They Invested in Vista Private Equity Fund

Vista Equity Partners has written an “unusual” clause into their contracts with limited partners, which include some major pension funds.

When pension funds invest with private equity firms, they sign “limited partnership” agreements. But a Reuters report says a certain clause included in Vista contracts is “atypical” for the industry, and potentially shifts more risk onto limited partners.

Details on the clause, from Reuters:

Vista Equity Partners has worked in an unusual clause in its contracts with private equity fund investors that gives it more financing flexibility and a leg up in leveraged buyouts, but also carries more risks for it and its investors, according to people familiar with the matter.

The agreement allows Vista to temporarily finance large corporate buyouts just with the cash from its $5.8 billion fund, as against using both debt and equity to buy companies. Under the right circumstances, this flexibility allows Vista to be nimble in auctions and secure the best possible debt financing after it has clinched a deal.

Two months ago, Vista used the clause in one of the largest private equity deals of the year, committing to fund the $4.2 billion takeover of TIBCO Software Inc with equity. One day later, it secured debt commitments from JPMorgan Chase & Co and Jefferies LLC for the deal, reducing its equity exposure to $1.6 billion.

The maneuver helped it not only outbid rival Thoma Bravo LLC in the TIBCO auction, but also use JPMorgan and Jefferies, which where were originally backing Thoma Bravo during the auction and were offering better financing terms, the sources said.

Investors in the Vista fund, known as limited partners, include some of the largest U.S. public pension funds, including the New Jersey State Investment Council and the Oregon Public Employees Retirement Fund. These funds do not disclose to their members and retirees all the risks they undertake, because the agreements with Vista and other private equity firms are confidential. The revelations highlight how important aspects of the investment of public money in private equity are shrouded in secrecy.

Industry insiders told Reuters that the clause is “highly atypical”:

Several pension fund investors, private equity placement agents and lawyers interviewed by Reuters said Vista’s terms are highly atypical and not widely known even within the private equity industry. Most firms have caps – usually around 15 to 20 percent of the fund – on how much equity they can commit to a particular deal. Private equity funds also rarely make all-equity commitments for such deals, preferring to tie up debt financing ahead of time. When they do make such all-equity commitments, the equity checks tend to be much smaller.

The reason is that doing so poses the risk that investors see their entire capital tied up in one investment, potentially hurting returns and denying them the benefits of diversification, these industry sources said.

Such a situation can arise, for example, if the debt market conditions were to suddenly sour, as it happened in the summer of 2007 before the financial crisis. In the TIBCO deal, Vista’s financial liabilities are capped at $275.8 million. But if the banks walk away before the deal closes, TIBCO can try to force Vista to close on the deal with its fund.

“It’s a bit like walking on a wire without a net,” said Alan Klein, a partner at law firm Simpson Thacher & Bartlett LLP.

Public pension funds that have invested in Vista funds include the Oregon Public Employees Retirement Fund, the Virginia Retirement System, the Michigan Retirement System, the Arizona Public Safety Personnel Retirement System and the Indiana Public Retirement System.

Photo by Juli via Flickr CC License

San Francisco Pension Not Expected to Approve Hedge Fund Proposal, But Alternate Plan Could Pass

Trustees of the San Francisco Employees’ Retirement System will vote sometime in the next few weeks on a proposal to invest up to 15 percent of assets – or $3 billion – in hedge funds.

The vote has been proposed and tabled nearly half a dozen times since May.

According to reporting by Pensions & Investments, the proposal isn’t expected to pass a vote – although a toned-down version, where hedge fund investments are capped at 5 percent of assets, has a better chance at passing.

From Pensions & Investments:

The board of the San Francisco City & County Employees’ Retirement System is expected to reject Chief Investment Officer William Coaker’s plan for a 15% allocation to hedge funds at a meeting in the next several weeks and instead limit hedge funds to no more than 5% of the portfolio, sources say.

The board had been scheduled to vote on the hedge fund allocation at a special meeting scheduled for Wednesday.

Board President Victor Makras said in an interview that a new special meeting will be held in the next few weeks. He said he will schedule the meeting as soon as he can poll members for a suitable date.

He said the Nov. 5 meeting was canceled because several board members were traveling out of the country.

The board is also expected, as part of the hedge fund vote, to bar or severely limit the use of leverage by hedge fund managers, a common tactic used by such mangers to increase returns.

Mr. Coaker’s plan would shift assets from fixed income and equities to create the new hedge fund allocation.

If the “15 percent” plan passes, the following allocation changes would occur elsewhere in the fund’s portfolio, according to SFGate:

U.S. and foreign stocks would drop to 35 percent from 47 percent of assets. Bonds and other fixed-income would fall to 15 percent from 25 percent. Real estate would rise to 17 percent from 12 percent. Private equity would rise to 18 percent from 16 percent. And hedge funds would go to 15 percent from zero.

The San Francisco Employees’ Retirement System currently does not invest in hedge funds. It manages $20 billion in assets.

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

Trustees Express Fears About San Diego Fund’s Risky Strategy

The San Diego County Employees Retirement Association (SDCERA) made headlines this summer with its decision to embrace a high-risk investment strategy including extensive use of leverage and derivatives.

But members of the fund’s board expressed concern at a meeting Thursday over potential losses the fund could experience if the risky strategy goes awry. Reported by UT San Diego:

At a contentious meeting Thursday, the pension fund’s board directed managers to fence in potential losses without reducing expected investment returns.

Under a revised investment strategy that took effect July 1, managers can use derivatives to put $20 billion or more at risk in financial markets, using the fund’s $10 billion in assets as collateral.

“Frankly, it scares the heck out of me,” said Dianne Jacob, a county supervisor and appointed member of the pension board, said Thursday.

The fund’s chief investment strategist, Lee Partridge of Salient Partners, said the probability of total losses was exceedingly low. The view was echoed by the fund’s chief executive and a consultant charged with risk management oversight.

Board members approved the new strategy in April, by a unanimous vote that included Jacob.

“The draft IPS does not include appropriate limits and board approval processes in the areas of asset allocation, leverage and portfolio risk monitoring,” said county Treasurer and board member Dan McAllister, in a letter given Thursday to the fund’s chief executive, Brian White.

The point was driven home by Samantha Begovich, a county prosecutor who joined the board in July.

Holding up a dollar bill, then adding a second dollar bill, Begovich asked directly whether the fund could lose its entire balance — and still owe $10 billion.

Fund officials maintained that the probability of a total loss of assets as a result of the strategy was close to zero.

Photo by dktrpepr via Flickr CC