Former SBCERA CIO Barrett: 'Outsource Everything, or Nothing at All'

Eastman Kodak's Timothy Barrett, the former executive director and chief investment officer at the San Bernardino County Employees' Retirement Association, speaks with aiCIO about the conflicts that public pension funds face when they decide to outsource investment expertise.

(April 28, 2011) — The decision to outsource has been a hot topic of debate among public pension plans in recent months, stirring questions about conflicts of interest, confusion about roles, and concerns over cost.

Eastman Kodak’s Director of Pension Investments Worldwide Timothy Barrett, who worked previously at the San Bernardino County Employees’ Retirement Association (SBCERA) for nearly 15 years, a majority of which was as the fund’s executive director and chief investment officer, tells aiCIO that the decision to outsource should be an all or nothing approach. “The decision to outsource should be a decision to fully outsource, or not at all. Any attempt to develop a hybrid approach to outsourcing where the primary decision maker is outsourced and internal employees are left behind to implement creates conflict,” he says. “That conflict will ultimately result in failure without a top-tier manager constantly overseeing the process. The internal staff have no incentive to assist in the success of the external advisor as they view themselves as competition to the external advisor.”

Recent examples of this tension that arises from outsourcing is prevalent at public pensions, such as the San Diego County Employees Retirement Association (SDCERA) and the Ventura County Employees’ Retirement Association (VCERA), highlighting the difficulties and questions that arise when public pensions in the US, strapped for cash and faced with limited resources, choose to rely on external investment expertise.

In February, following the departure of the chief investment officer of VCERA in California, consultant firm EnnisKnupp bid to provide outsourced CIO services, yet the fund denied the proposal due to costs and perceived conflicts of interest. Hewitt EnnisKnupp had bid on the position following the recent departure of Ventura County Retirement Board’s chief investment officer, Tim Thonis. “The Ventura board voted ‘no’ because the price was too high, and they perceived a conflict,” Ventura Chairman Tracy Towner, a senior district attorney investigator, told aiCIO earlier this year. “There seems to be an internal conflict that board members aren’t comfortable with when outsourcing to a consultant firm.”

Last month, internal emails obtained under the California Public Records Act showed that having both an internal chief investment officer and a contracted portfolio strategist at the the nearly $8 billion SDCERA raised questions about their independent roles and how they should cooperate. “If I’m not, or the CIO isn’t, managing the investments on a daily basis, then who is?” wrote SDCERA’s acting CIO Lisa Needle in an email to Brian White, the fund’s chief executive officer. “Must be the Portfolio Strategist, since it cannot be anyone else on staff.”

About three months after Needle indicated her questions about blurred roles and responsibilities at the fund — which stemmed from SDCERA’s decision to outsource to Salient Partners’ CIO Lee Partridge — Needle resigned to work at Albourne Partners Ltd, a London-based alternative-investment consultancy.

Many chief investment officers at public pension funds around the US largely agree that departures of talented investment staff, such as Needle, may become more commonplace as they seek to flee the political pressures and financial constraints of public pensions in favor of higher-paying jobs in the private sector with more stability and less board volatility.

“For me, Kodak offered an opportunity to manage pension funds globally with various defined benefit and defined contribution plans around the world,” Barrett explains, referring to his departure from SBCERA in October 2010. “It was simply an opportunity I could not turn down.”

Barrett continues to explain that the outsourcing industry is coming full circle. “Years ago, trust banks managed the assets of pension funds. Once the prudent man rule came into effect, plans began investing in assets other than bonds, eventually hiring staff and consultants, to arrive where we are today,” he says, noting that the trend is turning back to outsourcing to large money management firms or consulting firms in today’s environment.

“I see this trend continuing on the public fund side as it is difficult to retain talent as the political environment refuses, in many cases, to compensate talented investment staff,” he notes. The increasing complexity of portfolios — with derivative overlays, portable alpha and private investment — have heightened this drive to outsource, as funds require more and more sophisticated support.

While compensation is less of an issue on the corporate side, the problem of rising complexity exists at many corporate funds as well. Barrett continues: “It is still difficult to source adequate sized staffs to manage complex portfolios. The corporate side is also more burdened with regulatory requirements and focused on liabilities due to said regulation. Hence, many corporate funds that achieve full funding will consider outsourcing their fund to a consultant with a plan toward deceasing the liabilities (i.e. derisking the plan).”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742