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San Diego County Pension Trustee Decries Investment Strategy, CIO in Newspaper

Samantha Begovich, a trustee for the San Diego County Employees Retirement Association (SDCERA), has penned a column in an area newspaper decrying the fund’s outsourced CIO, Salient Partners, and its investment strategy.

The fund voted last year to move on from Salient Partners and hire an in-house CIO after critics called Salient’s investment strategy too risky. But the process has been slow, and Salient could retain asset management duties until November 2015.

The public nature of Begovich’s complaints is unprecedented for a trustee of a fund that, until late last year, didn’t allow its board members to talk to the media at all.

From the column, published in the San Diego Union-Tribune:

I have repeatedly asked that Salient be sent a 30-day termination letter. CalPERS and CalSTRS posted 19 percent returns for 2014. SDCERA? 9 percent. The fund will be short $700 million of its Salient moonshot this fiscal year. How did this happen?

[…]

Critics allege one-sided staging in support of Salient. In August, realists took the mic. Expert after expert said our fund was at-risk. They said it is conflicted and imprudent having one subcontractor direct all $10 billion. They erupted at the irrationality of this adviser investing 50 percent of our money in his product line. If speech bubbles were above the experts, they would’ve said, “Say what?”

Imagine dealing with someone both clergy and salesperson to you. A word picture: Your rabbi/priest/cleric says, “It would be wise and virtuous for you to invest $2 billion in Advanced Manufacturing in the CaliBaja Mega Region. I have no track record, but you should invest in my CaliBaja Advanced Manufacturing firm.” See the tension? Asked why we weren’t in rival funds with stellar track records, Salient’s Lee Partridge said: “I don’t want to talk about my competition.”

Kudos to University of California Chief Investment Officer Jagdeep Singh Baccher, manager of $91 billion, for not laughing when I asked: What do you think of our investment strategy wherein 25 percent of our portfolio puts total value at risk of loss? He paused in disbelief and sagely said: “Well, I think you have your answer, don’t you?”

The fund’s board voted 8-1 last November to move CIO duties in-house and thus cut ties with Salient Partners.

Photo by Gene Han via Flickr CC License

Fired CIO of San Diego Pension May Retain Role Until Nearly 2016

Trustees of the San Diego County Employees Retirement Association (SDCERA) voted in November to fire the firm acting as its outsourced CIO, Salient Partners, and hire an in-house official.

The pension fund could make that hire by March. But trustees learned this week that Salient Partners could retain its asset management duties until November 2015.

The reason for the delay: a consultant told the board that it would be best if Salient continued its duties while a new CIO adjusted to the job and developed and investment strategy.

From U-T San Diego:

Salient Partners, the embattled outside investment strategist for San Diego County’s pension fund, may continue managing much of the $10.3 billion fund through November.

The timeline, which was presented at a meeting Thursday by the pension system’s independent consultant, surprised some trustees who’ve been pressing to fire Salient since late summer.

[…]

“I also thought I understood, at the end of the year (2014), it was stated that we would be terminating the Salient contract after we hired the CIO,” said trustee and county supervisor Dianne Jacob, who moved in September to terminate the contract and begin a transition. The board rejected the motion.

[The fund’s consultant] Scott Whalen advised the board to let Salient continue managing its portions of the portfolio until a new CIO was in place and trustees had settled on a new strategy.

He said the board could fire the firm and shift the investments into index funds, but that would amount to two major portfolio transitions in a brief period.

The SDCERA board voted 8-1 in November to move CIO duties in-house and thus cut ties with Salient Partners.

San Diego Pension to Begin Recruiting New CIO In 2015, But Board Worried Internal Clashes Could Scare Candidates Away

The board of the San Diego County Employees Retirement Association (SDCERA) heard plans to begin recruiting a new chief investment officer in 2015 – including job postings and coming up with a pool of candidates.

Previously, it had only been decided that the fund would move on from current-CIO Salient Partners, and a general salary range for the new job was decided upon.

But board members wondered aloud at Thursday’s meeting whether the internal drama at the fund would scare good candidates away.

From ai-cio.com:

Mary Hobson of recruitment firm EFL Associates told the board on Thursday that job postings would go up early in the new year. She said she aims to present a pool of candidates to the board for consideration by February 6.

Already, according to Hobson, between eight and ten people have contacted her expressing interest in the position.

However, board members themselves indicated that recruitment efforts could be hamstrung by their highly public and ongoing infighting.

Vice Chairman David Meyers, who has consistently supported the deal with Salient Partners, asked that transcripts of yesterday’s meeting and one in September be combined and given to serious candidates for the job.

“The hypocrisy of this board should be shared with any new CIO that comes forward,” Meyers said. “Talk about running scared.”

The salary for the new position remains capped by lawmakers at $209,000 per year, although Hobson intends to recruit candidates that could fall outside that range.

“I want to leave us wiggle room to talk to people who may need more than that, to see if you can try and push that through,” she said. The job posting will stipulate “a competitive salary,” and said, intentionally leaving compensation details “pretty vague.”

Following individual discussions with the board members, Hobson strengthened the posting to say SDCERA “encouraged diversity” from interested parties, and she would work to present them with minority and women candidates.

The CIO would oversee $10.5 billion in assets.

Photo by Nathan Stephens via Flickr CC License

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 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 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