Hedge Funds In, Equities Out at San Francisco Pension Plan

A major asset allocation reboot has reduced equities and increased the system’s absolute return or hedge fund allocations as well as put more money in private equity, real assets, and private credit strategies.

San Francisco Employees’ Retirement System CIO William Coaker Jr. says his 2-year-old plan to restructure the system’s $24.5 billion portfolio away from public equities while increasing allocations to hedge funds and private markets is mostly complete.

Coaker detailed the changes at the system’s board meeting on Nov. 14, noting that public equities are now 35.9% of the overall portfolio, down from 48.3% in Oct. 2016 when the board approved asset allocation changes. He said the public equities reduction is 75% complete. The San Francisco plan’s  target allocation to public equities is 31%.

The CIO said $1.5 billion has been moved out of the public equities portfolio since March of this year to increase funding to private equity, private credit, and the system’s absolute return or hedge fund portfolio. The public equity portfolio stood at $8.8 billion as of Oct. 31.

“All those portfolios have done well,” Coaker said of the non-equity allocations. He said in contrast, public equities “got tanked here” since the system begin moving large dollars out of equities, noting October was a particularly bad month.

“The timing of this turned out to be very good,”  he said. “The bottom line is we have lost a lot less because we have a lot less exposure to public equity than we did even nine months ago.”

Pension system data show that the system’s investment returns for public equities plunged to a negative 7.6% in October and is down by negative 3.3% since January.

Coaker said private equity, real assets, and private credit edged out small gains in October while preliminary numbers for the absolute return strategy showed a negative 1.25% return.

Overall, for the 2018 calendar year, private equity saw a 16.16% return, private credit 9.29%, and absolute return 0.80%, he said.

The bigger asset class increase is the pension system’s absolute return or hedge fund portfolio, which increased from 1.2% to 13.1% of the portfolio since the Oct. 2016 asset allocation changes. It now stands at $3.2 billion.

Coaker defended the portfolio at the Nov. 14 meeting, saying returns had averaged 6% since the pension system invested in its first hedge fund in 2016 and “strongly outperformed bonds while also reducing the volatility of potential for a large loss for our portfolio as a whole.”

That absolute return or hedge fund portfolio had been controversial. Coaker first proposed it after taking office in January 2014, saying a 15% allocation was needed to mitigate the effects of another potential major market downturn, like the one during the financial crisis. Several retirement system board members questioned the plan, saying that the hedge fund investments were too risky. Meanwhile, dozens of San Francisco workers and retirees showed up at board meetings repeatedly to speak out against the hedge fund allocation.

The 2017 defeat of longtime board member Herb Meiberger, who was a staunch opponent of hedge funds and, along with Coaker, was working behind the scenes to get the union representing San Francisco police officers to support the portfolio, helped turn the tide in terms of a 15% allocation to hedge funds.

Initially, board members would only approve a 5% allocation to hedge funds.

The CIO eventually got his way to the 15% as part of the asset allocation changes.

The pension system’s private equity asset class also has gotten a boost in allocations in the last two years.

Coaker told the board that the increase to private equity is done, with the asset class now making up 18.6% of the overall portfolio, up from 13.4% when the board approved his plan in late 2016. Private equity made up $4.5 billion of the portfolio as of Oct. 31.

The San Francisco retirement plan has one of the highest percentage allocations to private equity among US pension plans. CalPERS, for example, the largest US public retirement plan with $361.1 billion in overall assets, has less than 8% of its overall portfolio devoted to private equity.

Coaker called the 16.16% private equity returns achieved so far in 2018 by the San Francisco system, “extraordinary,” and cited the strong year for initial public offerings (IPOs) as helping fuel returns.

Another key asset class for the San Francisco plan, real assets, which includes real estate, increased its allocation from 12% to 15.4% since the asset allocation changes in late 2016, Coaker said. The real assets portfolio is $3.7 billion.

One asset area that has not grown as fast for the pension plan is private credit. The CIO said private credit had only risen from 1.6% to 2.2% since the asset allocation changes, from $427 million to $636 million.

Coaker’s plan had called for 10% of the portfolio to be private credit, but the CIO said it will take four to five more years to build the portfolio to that allocation level.



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