(March 17, 2010) – The San Diego County Employees’ Retirement Association (SDCERA) Board members will meet tomorrow to vote on whether to proceed or further discuss the outsourcing of its investment staff via a no-bid contract to Integrity Capital.
Currently, the $7 billion pension system outsources its chief investment officer (CIO) position to Integrity and its leader, Lee Partridge, formerly deputy CIO of the Texas Teachers’ Retirement System. Partridge is currently responsible for all the regular duties of a CIO except for the oversight of the pension fund’s internal investment staff. However, in a March 4 meeting, the Board heard a proposal to move SDCERA’s investment team – consisting of eight or nine people – to Integrity.
Citing precedents, such as the well-known Harvard Management Company, and benefits, such as the ability to better retain talent and lower costs, the presentation given at the March 4 meeting outlined the process in which the fund would move toward a “dedicated advisor model.” According to a video of the meeting, there would be no bidding for the outsourcing of the investment team because alternatives would not offer a “customized investment strategy,” and because other firms “do it at a higher cost, and would not absorb any of [the fund’s] current staff.”
According to the presentation, savings to SDCERA would range from $1 million to $25 million (depending on the investment strategy adopted), due mostly to a reduction in external management fees in liquid markets sectors, such as equities. Under the proposed fee structure, Integrity Capital would initially receive a management fee of 15 basis points; they would also retain the ability to receive a modest performance fee, but, like with many hedge funds, the downside would lie with SDCERA alone. According to the proposal, Integrity would attempt to gather assets from other investors, in which case the management fee paid by SDCERA would decline.
Some Board members expressed concern with the plan. David Myers, appointed to the Board by for a term ending in December, questioned whether the employees would retain their current benefits and job security. Due to SDCERA policy, Myers refused to comment for this article.
Numerous other members of the Board, when contacted by ai5000, refused to comment. “As the item is currently scheduled for discussion/action at our Board Meeting this week, I will not be commenting on my viewpoints until that meeting,” wrote Board Chairman Doug Rose in an email to ai5000. Other members refused to discuss the matter on the record.
Also on the agenda at the March 18 meeting is a shift in asset allocation, including a move to leverage the fixed-income portion of the pension fund’s portfolio. The result would be a portfolio invested to 135%, with a 40% allocation, achieved through leverage, to United States Treasury notes. This model – often referred to as “risk parity” – has recently been employed at others pension funds, most notably the Wisconsin Investment Board and the California Public Employees’ Retirement System, more commonly known as CalPERS. While critics worry that levered portfolios would see steeper declines in the case of a market crash, supporters claim Treasuries are stable and generally uncorrelated to other sectors such as equities.
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