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Investors included in the survey had on average expected returns of 8.1%, but said they only got returns of 5.3%.
However, some investors are planning to invest more in hedge funds, despite last year’s lackluster returns.
The survey said 39% of investors plan to increase allocations to hedge funds this year, including 22% who expect to increase the size of their allocations by $100 million or more.
Other key findings from the survey, from a Deutsche Bank press release:
Investors are looking for steady and predictable risk-adjusted returns – Investors risk/return expectations for traditional hedge fund products continues to come down in favor of steady and predictable performance: only 14% of respondents still target returns of more than 10% for the hedge fund portfolio, compared to 37% last year.
With this in mind, however, 40% of respondents now co-invest with hedge fund managers as a way to increase exposure to a manager’s best ideas and enhance returns. 72% of these investors plan to increase their allocation in 2015.
Investors see increasing opportunity in Asia – 30% of hedge fund respondents by AUM plan to increase investment in Asian managers over the next 12 months, up from 19% last year. Even more noteworthy is the growing percentage of investors who see opportunity in China, up to 25% from 11% by AUM, year-on-year. India is expected to be a key beneficiary of flows, with 26% of investors by AUM planning to increase exposure to the region, whereas only 4% said the same last year.
The GPIF on Friday reported a ¥6.6 trillion ($55 billion) investment profit in the December-ended quarter, a return of 5.2% compared with the previous quarter. The fund generated a return of 2.9% in the third quarter.
The value of the its assets under management reached ¥137 trillion, the highest since the fund was created in 2001.
GPIF officials don’t reveal the specifics of their investment activities, but figures released Friday showed the fund has likely sold about ¥6.5 trillion of Japanese government bonds during the quarter while buying roughly ¥2 trillion each of overseas and domestic equities, according to a Wall Street Journal analysis.
At the end of October, the GPIF announced major changes to its asset allocations, cutting its intended weighting to domestic bonds to 35% from 60%. It raised the allocation to foreign and domestic equities to 25% each, from 12% each, and to foreign bonds to 15% from 11%.
The fund is still only halfway toward achieving these targets.
The GPIF manages $1.1 trillion in pension assets and is the largest pension fund in the world.
Some private equity firms are considering offering new investment structures that would allow their largest clients to invest over a longer period of time, according to a New York Times report.
The new structure would extend the timeline of some investments to over 10 years, which could appeal to institutional clients looking for longer-term, lower-risk investments in the private equity arena.
Joseph Baratta, the head of private equity at the Blackstone Group, the biggest alternative investment firm, said at a conference in Berlin on Tuesday that the firm was speaking with large investors about a new investment structure that would aim for lower returns over a longer period of time.
Mr. Baratta, whose remarks were reported by The Wall Street Journal, said the investments would be made outside of Blackstone’s traditional funds, which impose time limits on the investing cycle. Invoking Warren E. Buffett’s Berkshire Hathaway, Mr. Baratta said he wanted to own companies for more than 10 years.
”I don’t know why Warren Buffett should be the only person who can have a 15-year, 14 percent sort of return horizon,” Mr. Baratta said, according to The Journal.
His remarks, at the SuperReturn International conference, were only the latest example of chatter about this sort of structure in private equity circles.
News reports last fall said that Blackstone and the Carlyle Group, the private equity giant based in Washington, were both considering making investments outside their existing funds. Such moves would let the firms buy companies they might otherwise pass on — big, established corporations that don’t need significant restructuring but could benefit from private ownership.
Blackstone, which has not yet deployed such a strategy, might gather a “coalition of the willing” investors to buy individual companies, Mr. Baratta said. This approach could be attractive to some of the world’s biggest investors, including sovereign wealth funds and big pension funds, which, though they want market-beating returns, also want to avoid taking too much risk.
House Speaker Greg Stumbo, a Democrat from Prestonsburg, said the risks of borrowing to fund teachers’ retirements are outweighed by not taking action.
“We contracted, we promised, they relied upon that and gave us years of their lives and service to the children of our state,” Stumbo said. “We owe them that debt. It’s going to be paid.”
If the $3.3 billion bond authorization is approved by the Senate and is signed by the governor, it would be the largest bond issue that Kentucky has ever passed.
Several Republican representatives argue that the borrowing that much money would overburden the state’s debt load.
House Minority Leader Rep. Hoover, a Republican from Jamestown, compared the measure to using borrowed money to go to a casino.
“It will seem like a good idea in retrospect but if you lose, paying back the debt is going to be a big big problem,” Hoover said.
KTRS officials say that the state can assume a 7.5 assumed rate of return on investments in its portfolio and would only have to pay 2 to 4 percent interest in the bond market if the bill passes this session.
However, Stumbo admits, an economic downturn would make the bond a risky proposal because the rate of return could plummet.
“Could that happen? Yeah it could happen. Happened once before. But I don’t think it’s going to happen,” Stumbo said.
KTRS is 53 percent funded, although that number will tick lower under new GASB accounting rules.
“Ky With HP Background” by Original uploader was HiB2Bornot2B at en.wikipedia – Transferred from en.wikipedia; transfer was stated to be made by User:Vini 175.. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Ky_With_HP_Background.png#mediaviewer/File:Ky_With_HP_Background.png
Many pension funds are looking for a new type of relationship with their asset managers. In interviews conducted as part of our research, pension funds stressed how important it was to find asset managers who can understand their objectives and investment philosophy. The ability to align interests around shared goals is also key to success in these relationships. More than half of pension funds (52 per cent) find it difficult to ensure their asset managers’ interests are tightly aligned with their own. By contrast, asset managers that can build solutions around their clients’ objectives can gain an edge in a highly competitive market.
Transparency is also a key differentiator. In today’s highly regulated environment, pension funds need granular information on the issues that drive risk and performance across their investments. This is a huge challenge in the multi-asset world: almost three out of five pension funds surveyed (58 per cent) say it is a challenge to gain a complete picture of risk-adjusted performance. Asset managers that develop the analytical tools and reporting capabilities to address this need will again have a huge advantage.
In recent years, many pension funds have decided to insource some of their asset management. This was one of the strongest findings in State Street’s survey of pension funds: 81 per cent said they intended to manage more of their assets in-house.
Insourcing doesn’t remove the need for external asset management, but it does create a new dynamic in the relationship between pension funds and their service providers. They are less willing to pay a premium for straightforward investment strategies that they can easily support in-house. What they value, however, is asset managers that are able to deliver strong and reliable returns through a tailor-made investment solution.
It’s about time the media and non-profit organizations start scrutinizing executive pay at public pension funds. I’ve been covering the good, the bad and downright ugly on executive compensation at Canada’s large public pension funds since the inception of this blog back in June 2008.
If compensation is tied to performance and benchmarks, doesn’t the public have a right to know whether or not the benchmarks used to evaluate this performance accurately reflect the risks taken by the investment manager(s)?
The dirtiest secret in the pension fund world is that benchmarks used to reference the performance of private investments and hedge fund activities in public pension funds are grossly underestimating the risks taken by the managers to achieve their returns. Moreover, most of the “alpha” from these investment activities is just “beta” of the underlying asset class. Why are pension executives being compensated for what is essentially beta?!?!?
There is a disconnect between public market benchmarks and private market benchmarks. Most pension funds use well known public market benchmarks like the S&P 500 to evaluate the performance of their internal and external managers. Public market benchmarks are well known and for the most part, they accurately reflect the risks that investment managers are taking (the worst example was the ABCP fallout at the Caisse which the media keeps covering up).
But there are no standard private market benchmarks; these investments are illiquid and valued on a quarterly basis with lags. This leads to some serious issues. In particular, if the underlying benchmark does not reflect the risk of private market investments, a pension fund can wipe out its entire risk budget if real estate or private equity gets hit hard in any given year, which is not hard to fathom in the current environment.
I followed up that first blog comment with my second comment on alternative investments and bogus benchmarks where I used the returns and benchmarks of real estate investments at a few of Canada’s large public pension funds to demonstrate how some were gaming their benchmarks to claim “significant outperformance and value-added” in order to justify their multimillion compensation packages even as their funds lost billions during the crisis.
In April 2009, I went to Parliament Hill where I was invited to speak at the Standing Committee on Finance on matters relating to pensions (after that hearing, I was even confronted by Claude Lamoureux, the former CEO at Ontario Teachers largely credited for starting this trend to pay top dollars to senior pension fund managers, which then spread elsewhere). There, I discussed abuses on benchmarks and how pension fund managers routinely game private market benchmarks to create “value-added” in their overall results to justify some seriously hefty payouts for their senior executives.
This brings me to the list above (click on image at the top). Where is Gordon Fyfe, the man who you can all indirectly credit for this blog? He should be right up there at the top of this list. He left PSP for bcIMC this past summer right on time to evade getting grilled on why PSP skirted foreign taxes, embarrassing the federal government.
In fact, over the ten years at the helm of PSP Investments, a federal Crown corporation that is in charge of managing the pensions of people on the federal government’s payroll, Gordon Fyfe and his senior executives literally made off like bandits, especially in the last few years. This is why I poked fun at them when I covered PSP’s FY 2014 results but was dead serious when I wrote this:
As you can see, PSP’s senior executives all saw a reduction in total compensation (new rules were put in place to curb excessive comp) but they still made off like bandits, collecting millions in total compensation. Once again, Mr. Fyfe made the most, $4.2 million in FY 2014 and a whopping total of close to $13 million over the last three fiscal years.
This type of excessive compensation for public pension fund managers beating their bogus private market benchmarks over a four-year rolling return period really makes my blood boil. Where is the Treasury Board and Auditor General of Canada when it comes to curbing such blatant abuses? (As explained here, the Auditor General of Canada rubber stamps financial audits but has failed to do an in-depth performance audit of PSP).
And don’t think that PSP’s employees are all getting paid big bucks. The lion’s share of the short-term incentive plan (STIP) and long-term incentive plan (LTIP) was paid out to five senior executives but other employees did participate.
Nothing is more contentious than CEO pay at public sector organizations. The Vancouver Sun just published an article listing the top salaries of public sector executives where it states:
Topping this year’s salary ranking is former bcIMC CEO Doug Pearce, with total remuneration of $1.5 million in 2013, the most recent year for which data is available. That’s a 24-per-cent jump from his pay the year before of $1.2 million.
It could be the last No. 1 ranking for Pearce, who has topped The Sun’s salary ranking several times: he retired in the summer of 2014 and was replaced by Gordon Fyfe.
Wait till the socialist press in British Columbia see Fyfe’s remuneration, that will really rattle them!
It’s worth noting however even in Canada, compensation of senior public pension fund managers varies considerably. On one end of the spectrum, you have Jim Leech and Gordon Fyfe, and on the other end you have Leo de Bever, Michael Sabia and Doug Pearce, Fyfe’s predecessor at bcIMC (Ron Mock currently lies in the middle but his compensation will rise significantly to reflect his new role).
Mark Wiseman and André Bourbonnais, PSP’s new CEO, actually fall in the upper average of this wide spectrum but there’s no doubt, they also enjoyed hefty payouts in FY 2014 (notice however, Wiseman and Bourbonnais made the same amount, which shows you their compensation system is much flatter than the one at PSP’s).
Still, teachers, police officers, firemen, civil servants, soldiers, nurses, all making extremely modest incomes and suffering from budget cuts and austerity, will look at these hefty payouts and rightfully wonder why are senior public pension fund managers managing their retirement being compensated like some of Canada’s top private sector CEOs and making more than their private sector counterparts working at mutual funds and banks?
And therein lies the sticking point. The senior executives at Ontario Teachers, CPPIB, PSP, bcIMC, AIMCo, OMERS, Caisse are all managing assets of public sector workers that have no choice on who manages their assets. These public sector employees are all captive clients of these large pensions. I’m not sure about the nurses and healthcare workers at HOOPP but that is a private pension plan (never understood why it is private and not public but the compensation of HOOPP’s senior executives is in line with that at other large Canadian pension funds, albeit not as high even if along with Teachers, it’s arguably the best pension plan in Canada).
Of course, all this negative press on payouts at public pension funds can also be a huge distraction and potentially disastrous. Importantly, Canada’s large public pension funds are among the best in the world precisely because unlike the United States and elsewhere, they got the governance and compensation right, operating at arms-length from the government and paying people properly to deliver outstanding results in public and private markets.
And let’s be clear on something, the brutal truth on defined-contribution plans is they simply can’t compete with Canada’s large defined-benefit pensions and will never be able to match their results because they’re not investing across public and private markets, they don’t have the scale to significantly lower costs and don’t enjoy a very long investment horizon. Also, Canada’s large pensions invest directly in public and private assets and many of them also invest and co-invest with the very best private equity, real estate funds and hedge funds.
In other words, it’s not easy comparing public pension fund payouts to their private sector counterparts because the skills required to manage private investments are different than those required to manage public investments.
I’ll share something else with you. I remember having a conversation with Mark Wiseman when I last visited CPPIB and he told me flat out that he knows he’s being compensated extremely well. He also told me even though he will never be able to attract top talent away from private equity funds, CPPIB’s large pool of capital (due to captive clients), long investment horizon and competitive compensation is why he’s able to attract top talent from places like Goldman Sachs.
In fact, Bourbonnais’s successor at CPPIB, Mark Jenkins, is a Goldman alumni but let’s be clear, most people are still dying to work at Goldman where compensation is significantly higher than at any other place.
But we need to be very careful when discussing compensation at Canada’s large pensions. The shift toward private assets which everyone is doing — mostly because they want to shift away from volatile public markets and unlock hidden value in private investments using their long investment horizon, and partly because they can game their private market benchmarks more easily — requires a different skill set and you have to pay up for that skill set in order to deliver outstanding long-term results.
Also, as I noted above, Canadian pensions invest a significant portion of their assets internally. This last point was underscored in an email Jim Keohane, CEO of HOOPP, sent me regarding the FT article above where he notes (added emphasis is mine):
You have to be careful with this type of simple comparison of Canadian pension plans with their US, European and Australian counterparts. It is a bit like comparing apples to oranges because the Canadian pension funds operate very different business models. The large Canadian funds use in house management teams to manage the vast majority of their assets, whereas most of these foreign funds mentioned outsource all or a significant portion of their assets to third party money managers. They are paying significantly larger amounts to these third party managers to run their money as compared to the amounts that Canadian pension funds pay their internal staff. As a result, their total implementation costs are significantly higher than Canadian funds. The right metric to compare is total implementation costs, and on this metric, Canadian funds are among the most efficient in the world.
We have very low implementation costs, with investment costs of approximately 20bps and total operating costs including the admin side between 30 and 35bps. We hire top investment managers to run our money and need to pay market competitive compensation to attract and retain them. I would agree that our long term nature and captive capital make us an attractive place to work so we don’t have to be the highest payer to attract talent, but we need to be in the ballpark. Running our money internally is significantly cheaper than the outsourcing alternative. It also allows you to pursue strategies that would be very difficult to pursue via an outsourcing solution, and it enables much more effective risk management.
One of the main reasons why Canadian pension plans have been successful is the independent governance structures that have been put in place. This enables funds like HOOPP to be run like a business in the best interest of the plan members. It is in the members best interest to implement the plan at the lowest possible cost. The cheapest way for us to run the fund is using an in-house staff paying them competitive compensation rather than outsource which would be much more costly. To put this in perspective, a few years ago we had 15% of our fund outsourced to third party money managers, and that 15% cost more to run than the other 85%!
Many of the international funds used for comparison in the article have poor governance structures fraught with political interference *which makes it politically unpalatable to write large cheques to in-house managers, so instead they write much larger cheques to outside managers because it gets masked as paying for a service. This is not in plan members best interests.
I agree with all the points Jim Keohane raises in regard to the pitfalls of making international comparisons.
But does this mean we shouldn’t scrutinize compensation at Canada’s large public pensions? Absolutely not. A few weeks ago when I discussed whether pensions are systemically important with Jim, I said we don’t need to regulate them with some omnipotent regulator but we definitely need to continuously improve pension governance:
… I brought up the point that in the past, Canadian public pensions have made unwise investment decisions, and some of them could have exacerbated the financial crisis. The ABCP crisis had a somewhat happy ending but only because the Bank of Canada got involved and forced players to negotiate a deal, averting a systemic crisis. And we still don’t know everything that led to this crisis because the media in Quebec and elsewhere are covering it up.
I also told him we need to introduce uniform comprehensive performance, operational and risk audits at all of Canada’s major pensions and these audits need to be conducted by independent and qualified third parties that are properly staffed to conduct them. I blasted the Auditor General of Canada for its flimsy audit of PSP Investments, but the truth is we need better, more comprehensive audits across the board and the findings should be made public.
Another thing I mentioned was maybe we don’t need any central securities regulator. All we need is for the Bank of Canada to have a lot more transparency on all investment activities at all of Canada’s public and private pensions. The Bank of Canada already has information on public investments but it needs more input, especially on less liquid public and private investments.
This is where I stand. I think it’s up to Canada’s large public (and private) pension funds to really make a serious effort in explaining their benchmarks, the risks they take, the value-added and how it determines their compensation in the clearest, most transparent terms but I also think we need independent overview of their investment and operational activities above and beyond what their financial auditors and public auditors currently provide us.
Importantly, there’s a huge gap that needs to be filled to significantly improve the governance at Canada’s large pensions, even if they are widely recognized as having world-class governance.
Finally, I remind all of you that it takes a lot of time and effort to share these insights. I’ve paid a heavy price for being so outspoken but I’m proud of my contributions and rest assured, while we can debate compensation at Canada’s large pensions, there’s no denying I’m THE most underpaid, under-appreciated senior pension analyst in the world!
The average hedge fund has returned 5.1 percent annually over the last 10 years, according to HFR, a hedge fund data firm.
The investment vehicle has even been outperformed by many “balanced” mutual funds. But the flow of clients to hedge funds isn’t slowing down, which begs the question: how do hedge funds keep winning clients when performance is so paltry?
How to explain the paradox of a superhot investment vehicle producing ice-cold returns for clients more smitten than ever?
Part of the reason for the lackluster returns: Hedge funds don’t have the same incentive to hit home runs they once did. They can charge management fees of close to 2% of assets. As the industry swells, many managers can get rich just keeping their funds afloat. A decent performance and no huge loss will do just fine.
The head of one of the world’s largest funds recently told me his challenge is to get his traders to embrace more risk, not less. Hedge-fund traders are more conservative because it’s in their self-interest to be more conservative.
There are similar ways to explain why hedge-fund clients aren’t up in arms. Some see an expensive market and want to be in a vehicle that should do better in a downturn.
But others simply want to keep their jobs. Recommending low-cost balanced mutual funds can be hard to justify if one has a well-paid job at a big pension fund or endowment. Properly allocating money to hedge funds is seen as a bigger challenge. Investing in brand-name hedge funds instead of big stocks once might have put an institutional investor’s career on thin ice. Today, avoiding popular hedge funds to wager on the market is seen as a risky career move.
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.
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.
With some instability in the global economy, Treasurer Deborah Goldberg suggested the fund might lower its expectation.
“People are trying to work their way down to 7.5, and I felt we should start looking at 7 and 3 quarters,” Goldberg told members of the Pension Reserves Investment Management (PRIM) board’s investment committee on Tuesday.
A majority of the Pension Reserves Investment Trust (PRIT) fund is invested in equity, or ownership interests such as stocks that carry significant risks compared to other investments, such as fixed income.
As of the end of November, PRIT had 43 percent of its assets allocated in global equity and another 11 percent in private equity, tying the fund to economic growth.
In calendar year 2014 PRIT had an 8.2 percent return and in fiscal year 2014 the fund had a 17.6 percent return, both of which beat investing benchmarks, according to PRIM.
PRIM last lowered its assumed ROR two years ago. At that time, it stood at 8.25 percent.
Where Ms Stausboll is most passionate about the power of Calpers to make a difference is in the social and environmental sphere. A vegetarian on moral grounds since her university days, she began her career as a lawyer fighting for equal pay for female workers. On her way to the top she has moved back and forth between Calpers and Californian government, working as deputy to the state treasurer, Phil Angelides, at the turn of the century, when he was pushing for US public pension funds to use their power as shareholders to encourage greener business practices.
Today, Calpers is urging corporations to assess the risks that climate change pose to their businesses; it will be putting motions to shareholder meetings demanding as much. The idea is these shareholder resolutions will be a not-so-subtle nudge to executives to push for more environmentally friendly practices, not just at oil and gas companies but in the insurance sector, in agriculture and across corporate America.
“Our portfolio has to be sustainable for decades and generations, and . . . to make the portfolio sustainable, the companies we invest in have to be sustainable,” she says.
The interview also covers CalPERS’ push for corporate board diversity, the fund’s corruption scandal and its quest to reduce investment expenses.