CalPERS Considers Getting Into Tobacco Again

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In 2001, CalPERS executed a ban on holding tobacco companies in its investment portfolio. It divested from all tobacco holdings, and the pension fund’s portfolio has remained tobacco-free ever since.

In the ensuing 15 years, however, CalPERS has lost out on $3 billion in investment gains as a result of the divestiture, according to a consultant report.

At an upcoming board meeting, trustees will consider whether to get back into tobacco.

More details from P&I:

Members of its investment committee on April 18 are expected to consider a plan that could allow the $291.2 billion system to reinvest in tobacco company stocks and other sectors that had been culled from its portfolio.

The potential reinvestment plan follows a report by CalPERS’ general consultant, Wilshire Associates, Santa Monica, Calif., that said excluding tobacco stocks has cost the retirement system as much as $3.037 billion in combined investment gains between 2001, when the stocks were first removed from the portfolio, and the end of 2014. Like retirement systems nationwide, CalPERS is under growing pressure to capture investment gains as low interest rates bite into returns and an aging population increases demands for benefits.

Reinvesting in tobacco stocks, however, could touch off a firestorm, particularly because Sacramento-based CalPERS also is a major provider of health-care benefits. That could open the retirement system to criticism it is attempting to enhance investment gains while supporting products that endanger its participants.

[…]

“In my mind, in our belief statement and in our California Constitution, our obligation as the investment office is to consider what is in the best fiduciary interests of our beneficiaries,” CalPERS Chief Investment Officer Theodore “Ted” Eliopoulos said.

Wilshire’s analysis of CalPERS’ various divestment initiatives can be seen here.

 

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Illinois Supreme Court Finds Chicago Pension Reforms Unconstitutional

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The Illinois Supreme Court on Thursday reversed a 2014 Chicago pension reform law that raised contributions for employees and cut benefits.

A portion of the court’s opinion, from the Chicago Sun-Times:

“These modifications to pension benefits unquestionably diminish the value of the retirement annuities the members . . . were promised when they joined the pension system. Accordingly, based on the plain language of the act, these annuity-reducing provisions contravene the pension protection clause’s absolute prohibition against diminishment of pension benefits and exceed the General Assembly’s authority,” the ruling states.

“A public employee’s membership in a pension system is an enforceable contractual relationship and the employee has a constitutionally-protected right to the benefits of that contractual relationship . . . Those constitutional protections attach at the time an individual begins employment and becomes a member of the public pension system. Thus, under its plain and unambiguous language, the clause prohibits the General Assembly from unilaterally reducing or eliminating the pension benefits.”

[…]

The deal that Emanuel painstakingly negotiated with scores of union leaders raised employee contributions by 29 percent — from 8.5 percent currently to 11 percent by 2019 — and ended compounded cost-of-living adjustments for retirees ineligible for Social Security that have been a driving force behind the city’s pension crisis.

The city’s lawyers thought the reforms would hold up in court because the benefit cuts were negotiated with unions.

 

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FEG’s Bean: Here’s Why Hedge Funds And Giant Public Pensions Aren’t A Good Match

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At the Fund Evaluation Group’s (FEG) annual investment forum on Tuesday, Head of Institutional Investments Nolan Bean questioned whether hedge funds were a good match for giant public pension funds.

Bean argued that the public nature (and corresponding transparency requirements) of giants like CalPERS isn’t attractive for many of the best hedge funds managers – which in turn makes it difficult for CalPERS to hire the best managers.

More of Bean’s comments, from ai-cio:

At FEG’s annual investment forum, Bean claimed that a $291 billon public fund like CalPERS has little chance of squeezing alpha from hedge funds. Plus, the number of managers necessary to justify a hedge fund allocation at a fund of CalPERS’ size can lead to a portfolio that’s over-correlated to equities, while disclosure requirements make it difficult to invest with the top managers.

“They’re subject to FOIA [Freedom of Information Act] requests,” Bean said. “Hedge funds don’t want to be subject to FOIA requests. The best hedge funds won’t take money from them.”

And having access to the best managers is especially important when it comes to hedge funds, which Bean argued have the highest performance dispersion of any other class of manager.

“The reward is greater when you get it right, but the pain is also greater when you get it wrong,” he said.

[…]

But just because CalPERS was right to dump its hedge funds doesn’t mean everyone should, he noted. With management fees dropping—the average is now 1.5%—investors are able to get a better deal than ever. For smaller, more private funds such as endowments and foundations, there is plenty to be gained, Bean said.

 

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CalPERS, Moody’s Settle Suit Over Allegedly Negligent Ratings for $130 Million

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Moody’s will pay CalPERS $130 million to resolve a lawsuit that accused the ratings agency of negligently slapping AAA ratings on toxic mortgage-backed securities.

CalPERS estimates it lost $1 billion on those bonds in 2008.

The pension fund announced the settlement on Wednesday.

More from the LA Times:

In [court] filings, CalPERS said the ratings agencies’ opinions of the bonds “proved to be wildly inaccurate and unreasonably high,” and that the methods the agencies used to rate the bonds “were seriously flawed in conception and incompetently applied.”

With today’s settlement, plus a $125-million deal reached with S&P last year, CalPERS’ total settlements related to the $1.3-billion bonds investment stand at $255 million.

“This resolves our lawsuit against Moody’s and restores money that belongs to our members and employers,” said Matthew Jacobs, CalPERS’ general counsel. “We are eager to put this money back to work to help ensure the long-term sustainability of the fund. ”

[…]

The Securities and Exchange Commission found in a 2008 report that the agencies had no set procedures for rating mortgage-backed bonds and other now-toxic assets, and that the firms didn’t disclose conflicts of interest.

Read the CalPERS press release here.

 

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Deutsche Bank Could Be Barred From Managing Pension Assets

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After a number of sanctions from regulators around the world, Deutsche Bank may soon lose the ability to manage assets for U.S. pension plans.

The Department of Labor, in light of the bank’s two recent fraud convictions, may revoke the bank’s qualified professional asset manager (GPAM) status.

More from Barron’s:

In a ruling that has gone mostly unreported outside of official filings, the department tentatively denied Deutsche Bank’s (ticker: DB) bid for an exemption from possible money-management restrictions. Because two units in other parts of the bank were convicted of felonies, the money management units have faced curbs on running U.S. pension money. At stake is Deutsche Bank’s official status as a qualified professional asset manager, or QPAM. The QPAM designation allows an asset manager to assume multiple roles in overseeing government-regulated Erisa pension plans, or those covered by the Employee Retirement Income Security Act of 1974. It’s unusual for Labor to deny an application for an exemption, even temporarily.

While most observers believe that it’s very unlikely the department would pull Deutsche’s QPAM status, it is expected to set tougher conditions on the bank. This could further complicate the bank’s efforts to reorganize its U.S. banking operation or, if it were so inclined, to sell its U.S. asset-management units. It’s also another headache for shareholders who have seen their stock lose 86% of its value since 2007, with little immediate chance of a turnaround.

Read the full story here.

 

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U.S. Supreme Court Declines Review of N.J. Pension Funding Suit

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The U.S. Supreme Court on Monday declined to hear a case, brought by New Jersey unions, arguing that Chris Christie broke a contractual obligation with workers when he slashed billions from scheduled state pension contributions in 2014 and 2015.

The New Jersey Supreme Court ruled last year that Christie could legally make partial contributions, even if it meant reneging on a 2011 law in which public workers agreed to benefit cuts in exchange for the promise of full, timely contributions from the state.

More from Reuters:

The U.S. Supreme Court on Monday rejected a bid by unions representing public employees including teachers and state troopers to force the state of New Jersey to pay the full share of its annual public pension contribution.

The court declined to hear the unions’ appeal, leaving in place a July 2015 ruling by the New Jersey Supreme Court that allowed Republican Governor Chris Christie’s administration to make only partial contributions into public pension funds.

Under bipartisan 2011 reforms, the state promised to step up contributions over seven years until reaching the full amount that actuaries say is necessary to keep it healthy.

In exchange, New Jersey teachers, state troopers and other government workers agreed to pay more. But in 2014, Christie slashed the state’s contribution for two years, citing a severe revenue shortfall and ultimately paying less than 30 percent of what was required under the reforms, according to the unions’ petition asking the U.S. Supreme Court to hear the case.

New Jersey’s 2011 law made state contributions a contractual obligation. Despite having championed the reforms and abided by them for two years, Christie then said the state’s fiscal emergency allowed him to cut contributions and that lawmakers cannot bind future legislatures to billions of dollars in spending.

New Jersey will likely make a partial contribution in 2017, as well; Christie, in his recent budget proposal, called for a $1.86 billion contribution, which represents 40 percent of the actuarially-required contribution.

 

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Ban on Direct Stock Investment Upheld At World’s Largest Pension

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Market conditions will soon force Japan’s Government Pension Investment Fund – the largest pension fund in the world – to draw down some of its bond investments and increase its allocation to equities, according to analysts.

But the GPIF will be investing in those stocks through external managers, after a board decided Tuesday to uphold the fund’s ban on direct investment.

From Japan News:

The ruling Liberal Democratic Party decided Tuesday not to remove a ban on direct stock investment by the manager of public pension funds amid concern over possible investment losses in the face of recent market volatility.

The decision was made at a meeting of the LDP’s project team on pension issues.

Direct stock investment by the Government Pension Investment Fund had been the focus of discussions on proposed structural reforms for the organization.

[…]

The Japan Business Federation and the Japanese Trade Union Confederation opposed lifting the ban, arguing that such a move could lead to direct control of private companies by the state-affiliated institution.

On the other hand, the GPIF and stock market participants called for the removal of the ban, citing advantages such as a reduction in the GPIF’s payment of commission fees for stock investment.

GPIF’s CIO last month said he was “sick of” outsourcing most of the fund’s investments, especially equity management.

GPIF oversees a portfolio of $1.2 trillion.

 

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CalPERS Completes Near-Historic Real Estate Deal For NYC Office Tower

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CalPERS on Tuesday said it had completed one of the largest real estate deals in its history: the $1.9 billion purchase of a 50-story Manhattan office tower.

CalPERS did not confirm the price tag; but if the $1.9 billion figure is correct, it would also rank among the largest real estate deals in New York City history.

Details from the Sacramento Bee:

The deal closed Jan. 27, said spokesman John Cline of AXA Financial, the financial services conglomerate that sold the building.

[…]

AXA and CalPERS wouldn’t comment on the price.

Despite the hefty price tag, the purchase is in line with the more conservative investment strategy adopted in recent years by the California Public Employees’ Retirement System.

In particular, the pension fund has overhauled its real estate portfolio after losing billions in the real estate crash in 2008. The pension fund is undertaking fewer speculative deals from the ground up and plowing most of its money into commercial properties that are open for business and mostly if not completely leased up. The New York building is reportedly 98 percent leased.

“The acquisition follows our real estate strategic plan to invest in core, income generating properties,” said CalPERS spokesman Joe DeAnda in an email. The pension fund made the purchase with one of its outside real estate partners, CommonWealth Partners of Los Angeles.

The deal amounts to 7 percent of CalPERS’ real estate portfolio.

CalPERS manages a portfolio of approximately $275 billion.

 

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Canada’s Biggest Pension Funds Walking Away From Some Infrastructure Deals in “Overheated” Market

Credit: Reuters
Credit: Reuters

Canada’s big pension funds pioneered the process of directly investing in infrastructure; as the above chart shows, the country’s largest funds are some of the biggest infrastructure investors in the world.

But those pension funds are starting to pump the brakes on big infrastructure deals in what one official calls an “overheated” market, according to a Reuters report.

More from Reuters:

Canada’s biggest pension funds say they are walking away from more and more global infrastructure deals, citing concerns that intense competition for assets has driven valuations too far.

Some investors, particularly in private equity circles, complain that the Canadian funds – dubbed “maple revolutionaries” because of the strategy of direct equity investments they pioneered in the 1990s – have a tendency to overpay.

Senior executives at the leading Canadian funds defend the merits of past infrastructure deals, but say they are worried prices no longer reflect the illiquidity of the assets, which cannot be sold quickly like stocks or bonds.

“The market is overheated. We have stepped out of the bidding for a lot of assets over the last two or three years,” a senior executive at one of Canada’s biggest public pension funds, who declined to be named, told Reuters.

[…]

Canadian executives said their funds should avoid being drawn into bidding wars as part of competing consortia.

“You’ve got to try and avoid auctions because they can get crazy. If you’re just walking around with an open cheque book in these markets you’re going to pay too much,” said another executive with one of Canada’s three largest pension funds, who declined to be named because of the sensitivity of the issue.

The whole article is worth reading, and is filled with insights from anonymous pension officials, investment bankers and private equity insiders.

CalSTRS Board Votes to Exit U.S. Coal Holdings

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The CalSTRS board on Wednesday voted to divest from U.S. thermal coal holdings that account for about $40 million of its portfolio.

The vote comes after a state law, passed last year, required the pension fund to drop its coal holdings – as long as the fund didn’t violate its fiduciary duty in doing so.

More from Reuters:

Coal companies make up only about $40 million of the fund’s $186 billion portfolio, but lawmakers in Sacramento targeted those investments on the basis that burning coal significantly contributes to global climate change.

The four companies impacted by the decision are Cloud Peak Energy, Hallador Energy Company, Peabody Energy Corporation, and Westmoreland Coal Company, Calstrs said.

The U.S. coal industry is suffering from a glut of cheap natural gas, coal’s primary competitor for power generation, and oil. Weak demand helped push coal producer Arch Coal Inc into bankruptcy last month.

The law included language saying that the Calstrs and the California Public Employees’ Retirement System (Calpers) did not have to divest from coal if doing so would violate its “fiduciary duty” to members.

“We determined that given the financial state of the industry, the movement of the regulatory landscape and coal’s impact on the environment, its presence reflects a loss of value,” said Sharon Hendricks, chair of the investment committee.

The board will now consider whether to take similar action on its non-U.S. coal holdings.

 

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