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.

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