Most money managers sit by silently when a pension plan decides to fire them, but not the AFL-CIO Housing Investment Trust’s $6 billion-plus fixed income mutual fund.
The trust sent its chief operating officer to the San Francisco Employees Retirement System May board meeting to contest a recommendation by the retirement system’s investment staff that it be terminated.
It worked, at least for now. The board put on hold a decision on firing the mutual fund for 90 days after hearing from housing trust COO Ted Chandler.
At least a dozen union members, some San Francisco city workers, others in the construction trades, also came to the meeting and objected to the termination, shows a video stream of the May 8 meeting.
The San Francisco system’s Chief Investment Officer William Coaker Jr. and his investment staff had proposed terminating SFERS’s $50 million investment in the fixed income mutual fund run by the AFL-CIO Housing Investment Trust as part of a restructuring of the $25.4 billion pension system’s liquid credit portfolio.
Coaker said at the meeting that managers with the poorest returns had to be terminated first for the pension system to meet its 7.4% expected average annualized investment return. He named the housing trust as one of those poorly performing managers.
“This doesn’t meet our return requirements,” Coaker said, noting that the housing trust had investment returns of a little over 2% annualized in the last five years and a little under 3.5% annualized over the last 10.
Kurt Braitberg, SFERS managing director public markets, then spoke, called the firing of the housing trust “inevitable.”
It wasn’t to be.
Chandler then countered that the fixed income mutual fund had helped finance affordable housing in San Francisco and around the US, and created union construction jobs through debt financing.
“We been managing funds for the retirement system for 23 years,” Chandler told the board, stating that the housing investment trust’s assets were invested “overwhelmingly in fixed income securities that resulted in the building of multi-family housing.”
His point about creating affordable housing hit a nerve among retirement system board members in a city where the average one-bedroom apartment goes for above $3,000 a month and rents have become unaffordable for many. The union jobs angle also played well in heavily unionized San Francisco.
“This creates jobs for our union members,” Ahsha Safaí, a retirement board member who also sits on the San Francisco Board of Supervisors, said of the housing-oriented mutual fund.
The lobbying by the union-sponsored housing trust mutual fund started days before the meeting. Safaí and other board members said they had been lobbied by staff of the housing trust, who wanted to educate them, in advance of the meeting. They said they were told, and thought the arguments had merits, that the trust mutual fund has been placed in the wrong investment category by SFERS staff.
They said that if the portfolio was compared to the yield of US Treasuries, its performance would beat those of the Treasuries.
“It’s wrong to say this investment is not performing well,” said Safaí. He said a change of category would increase investment returns.
A review by Coaker and his investment staff presented at the May 8 meeting showed SFERS has been invested in the AFL-CIO strategy since September 1, 1996, and the strategy has underperformed its benchmark over the long-term.
“Since the inception of SFERS’ account through 2/28/2019, the strategy has posted net annualized returns of 5.09% compared to 5.11% for the Bloomberg Barclays US Aggregate Bond Index,” the review stated.
The analysis of the strategy said the AFL-CIO housing strategy was placed under review by SFERS staff in 2017 for performance reasons and remained under review.
A second liquid credit manager wasn’t as lucky. The retirement board on May 8 terminated its $114 million allocation to Prima Capital Advisors commercial real estate debt strategy.
Ironically, Prima Capital Advisors (and prior entities Schroder Mortgage Associates, LP and Conning Asset Management Co.) had strong returns for the San Francisco system. They were first hired on Sept 1, 1995, and through February 28 of this year, achieved annualized net returns of 6.96%, beating benchmarks.
“The Bloomberg Barclays US CMBS 2 benchmark saw a negative 3.53% return and the Bloomberg Barclays US Aggregate Bond Index saw a negative 2.32% return, during the same time period,” shows a May 8 SFERS staff memo.
The memo on Prima said the manager had good investment returns, but it needed to be terminated because it did not fit into the revised fixed income portfolio
Prima focuses on investing in commercial mortgage loans, commercial mortgage-backed securities, REIT bonds, and other real estate debt instruments, and had $4.2 billion in assets under management as of February 28, the staff memo said.
The termination of the $114 million Prima SFERS strategy and the attempted termination of the $50 million invested in the AFL-CIO Housing Investment Trust fund is part of Coaker’s efforts to reshape the liquid credit portfolio of the retirement system, show board documents
SFERS liquid credit portfolio made up 6.2% of overall plan assets as of February 28, down from 12.9% at the end of 2017, but a SFERS strategic plan calls for liquid credit to be reduced to 3% of the overall portfolio, the documents show.
SFERS had nine liquid credit managers in 2018 and a May 8 investment staff memo presented to the board said “reductions to liquid credit have been achieved through lower allocations to existing managers rather than through manager terminations.”
SFERS staff started to change that at the May 8 meeting, firing Prima and attempting to terminate the housing trust.
The SFERS staff memo said the 3% target for liquid credit is part of a plan to move assets to private credit, such as direct lending, mezzanine debt, distressed debt, and real estate debt. SFERS is aiming for a 10% allocation to private credit,
Coaker said private credit can produce returns of between 8% and 10%.
SFERS investment consultant NEPC has told SFERS staff that private credit is needed to counter low core bonds returns, considered part of liquid credit, which it estimates would pay only 2.75% over the next five years.
As of April 30, SFERS still had a significant way to go to build its private credit portfolio. The $638.2 million private credit portfolio made up just 2.5% of SFERS’s overall assets
“We believe the private credit markets represent a large and new investment opportunity,” a SFERS investment staff memo said back in May 2018. “In addition, we believe that investment managers who are skilled at sourcing opportunities and underwriting credit will earn meaningful returns.”
Through April 30, private credit has returned 5.61% in the first 10 months of the 2018-2019 fiscal year, show SFERS statistics.
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