SDCERA | Pension360

Disagreements Get Personal At San Diego Pension Board Meeting; One Trustee: “I Am Very Concerned For My Safety”

Until now, the major points of contention among trustees of San Diego County’s pension fund have been matters of investment policy.

[Pension360 has covered some of the drama surrounding the fund’s outsourced CIO and its investment strategy.]

But things are getting personal among the fund’s board members. An email exchange obtained by U-T San Diego reveals the extent of the personal issues, particularly between trustees David Myers and Samantha Begovich:

The ongoing divide about investment strategies on the county pension board has spilled over into personal allegations of sexual harassment and racial discrimination, with threats of a potential lawsuit between board members and one trustee saying she fears for her personal safety.

[…]

According to the emails, Begovich told pension system CEO Brian White earlier this month that Myers has harassed and ridiculed her in public and private, and she is afraid he may lose his composure and commit violence against her.

“I am very concerned for my safety now,” Begovich wrote to White on the evening of Feb. 4, the night before a pension board meeting. “I wonder if we can have him not bring his gun to meetings.”

White responded 21 minutes later, telling Begovich he did not understand her statement about fearing for her safety at meetings of the San Diego County Employees Retirement Association.

“Are you saying that you are concerned that Dave Myers might shoot you?” replied White, who shared her private correspondence with the entire board without seeking Begovich’s approval. “I cannot give that any credence. I once again ask if you would like me to arrange a change in your seat with another board member.”

Begovich wrote back in five minutes: “Yes. That is what I am concerned about given his behavior to date and your unilateral decision to release a privileged document with my private conclusions relayed to you.”

More of the surreal email exchange can be read here.

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

San Diego County Pension May Ramp Up Real Estate Investment As it Looks to Reach Target Allocation

To reach its target real estate allocation, the San Diego County Employees Retirement Association (SDCERA) could invest $500 million in real estate over the next two years, according to an Investments & Pensions Europe report.

The fund’s target real estate allocation is 10 percent.

More details from IPE Real Estate:

According to board meeting documents, San Diego is considering placing this capital with existing and new real estate managers.

The pension fund, advised by consultant The Townsend Group, is considering hiring a manager for a new separate account.

It is also considering investing in commingled funds to gain access to niche investment strategies, as well as real estate investment trusts (REITs).

The fund has previously placed capital with CBRE Global Investors, Blackstone, Cornerstone Real Estate Advisers, JP Morgan Asset Management, Pramerica Real Estate Investors and Deutsche Asset & Wealth Management.

San Diego will look to rebalance its portfolio, moving from an even split between core and non-core investments to a 70-30 weighting, a move that will be aided by some of its existing opportunity fund investments coming to an end.

The expected return for the new portfolio weighting is around 7.5%, with a standard deviation of 10.8%, according to Townsend.

SDCERA manages approximately $10 billion in pension assets.

Photo by c_ambler 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

San Diego Pension Changes Media Policy; Trustees Now Free to Make Public Comments

The San Diego County Employees Retirement Association (SDCERA) has amended its media policy to allow its trustees to talk to media outlets. Previously, all media requests were re-directed to the fund’s CEO, Brian White.

Trustees called the policy “too controlling” and equated it to “communist Russia”.

Reported by the San Diego Union-Tribune:

County pension trustees are now free to talk to reporters, bloggers and anyone else without running afoul of their media policy.

The San Diego County Employees Retirement Association policy previously prohibited board members from commenting to the media, instructing them to direct all media requests to the CEO or his spokesman.

The board voted 7-1 to remove the prohibition.

Trustee Samantha Begovich said the old policy violated her First Amendment right.

“That’s communist Russia right there,” she said. “I see no basis for that.”

She said one problem with CEO Brian White as the sole arbiter of agency comments is that he’s too quick to defend investment consultant Salient Partners of Texas.

“We are not the PR arm of Salient,” Begovich said.

[…]

Supervisor Dianne Jacob, who represents the county Board of Supervisors on the pension board, suggested at one point that having a media policy was unnecessary.

“It’s understood that the board president or the CEO would speak on behalf of the board or the board position,” she said. “But in no way should it preclude a board member from expressing their opinion.”

County Treasurer Dan McAllister cast the only vote against the change, saying he wanted to rescind the policy entirely.

“It’s too controlling,” he said. “It’s too overlording.”

One trustee, David Myers, thought the previous policy was “fine”, although he ended up voting to amend it. From the San Diego UT:

Trustee David Myers said the policy was correct to direct board members to refer media requests to the CEO or board chair.

“The policy is fine the way it is, despite the conspiracy hysteria by one trustee to what the policy is,” Myers said, although he then went along with the board majority in supporting the change.

SDCERA manages $10.5 billion in assets.

Photo by Gene Han 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.

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