Contention persisted at the San Diego County Employees Retirement Association (SDCERA) this week as it prepared to transition from an outsourced-CIO (OCIO) to internal management.
SDCERA’s nine trustees worked with its OCIO Salient Partners and consultant Wurts & Associates Thursday to redefine its investment beliefs and policy with the search for an in-house CIO underway.
“It’s been difficult for the organization over the last six months. We’re changing directions because we got spooked.” —Trustee David MooreAccording to the pension plan’s CEO Brian White, recruitment firm EFL Associates has already received more than 80 applications for the job, with 12 currently under consideration by the board.
However, prior to hiring an internal CIO, Wurts’ Scott Whalen emphasized that establishing “a set of statements and beliefs to abide by is absolutely critical to the success of the fund’s long-term investments.”
The board, however, was unable to agree on various policy decisions during the meeting including the fund’s risk tolerance, implementation, and how to measure its performance against peers. But certain trustees were pessimistic about the fund’s ability to implement newfangled strategies.
Referencing SDCERA’s experiment with Salient and risk parity, trustee David Moore argued it had already been “a bumpy road” for the fund and that it is “absolutely inadvisable” to try new and nontraditional strategies.
“It’s been difficult for the organization over the last six months,” Moore said. “No event has occurred over this period of time with the [risk parity] program that has forced us to change our mind. And yet, for whatever reason, we’re changing directions because we got spooked.”
Backing the pension plan’s OCIO, Moore continued that the problem was with “the people running [the pension] and the expectations of said people.”
Other board members, however, did not hesitate to express their dissatisfaction and disagreements with Salient’s performance and investment direction.
While the OCIO’s report showed SDCERA returned 8.79% in 2014—outperforming many of the fund’s peers that had averaged a 4.75% return—some trustees maintained that Salient had failed to properly position allocations for falling interest rates.
Trustee Dianne Jacobs also argued that it was easy to compare SDCERA’s performance to that of the S&P 500, which had done remarkably well last year.
However, Salient’s CIO Lee Partridge responded that the board’s decision in September to reduce the volatility target for the risk parity strategy—from 15% to 6%—had contributed to lower returns.
“Reducing volatility also decreases the probability that you’ll hit the 7.75% expected return,” Partridge said. “You have to decide whether you’re running an absolute return fund or an asset-liability program.”
According to Salient’s calculations, the pension plan would have made an additional $105.2 million in Q4 had the volatility target stayed at 15%.
In an official notice about the CIO position, the $10.1 billion fund announced it was looking for “a primary participant in shaping the future structure of the investment program and division.”
In addition, the ideal candidate would have more than 10 years of experience managing at least $3 billion to $5 billion across asset classes. SDCERA said it would prefer an applicant with an advanced degree, a CFA and/or CAIA certification, and experience at a public pension plan.
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