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De-worming the Big Apple

A few weeks ago I had a meeting with Ranji Nagaswami, chief investment advisor to New York City mayor, Michael Bloomberg. She’s the first mayoral chief investment adviser in NYC to oversee pensions and investments, an area that is usually the domain of the comptroller. She is an experienced and dynamic enthusiast with ideas galore on how to improve the city’s pension system. Which is a good thing. There’s a lot to be done.

New York City Employee Retirement Scheme (NYCRS), which will be profiled with an interview with its chief investment officer Larry Schloss on www.top1000funds.com in the coming weeks, is a governance mess, and there’s no surprise this has been impacting returns.

The $120-billion fund is made up of five separate funds for city employees. It has 58 trustees and five consultants for an asset allocation across the five funds that has about 90 per cent overlap. The boards still do beauty parades.

Short-termism is rife at the fund, driven by a structural element that sees the chief investment officer elected by the comptroller, a publicly elected official with a four-year term.

Furthermore, if you work at the fund you are required to live in one of the five boroughs of New York City, but the average investment employee salary is only $100,000.

(Apparently, according to a Bloomberg report, Nagaswami lives in Greenwich, Connecticut, so the city administration secured a waiver enabling her to work for the city. Her salary is $175,000).

 

Getting to the core

Wall Street is literally a stone’s throw from the 1 Centre St office of the City Comptroller’s Bureau of Asset Management, which manages the NYCRS investments, but geography is all they have in common.

Nagaswami, who before joining NYCRS spent more than 20 years at UBS Asset Management and Alliance Bernstein, was reluctant to speak with me on the record. Fortunately, and perhaps not so coincidentally, she has written a piece on the battle facing US public pension schemes in the spring issue of Rotman International Journal of Pension Management.

In this she outlines her observations and concerns, and many of the governance challenges have been acknowledged by mayor Bloomberg and the comptroller, John Liu, as well as some union members.

But widespread reform across investment strategy, decision-making, trustee governance and actuarial-assumption rates is needed to turn the fund around in the direction of best practice.

In the article Nagaswami outlines three clear challenges for NYCRS.

First, the investment-planning process should start with an understanding of the risks in the current portfolio as well as the short and long-term market and return environment. A new and multi-step investment road map should be designed to construct a long-term balanced policy portfolio. And the governance of the plans must be overhauled.

She wants to create a new starting point, redraw the investment road map, including a new attitude to the role of fixed income, and broadening the approach to policy portfolio construction, as well as getting the governance right.

Secondly, she says what is most needed in NYC is further professionalisation of investment staff and the board trustees to attract and retain the best talent at competitive market compensation rates while improving the board’s oversight.

She argues for consolidation of the existing five separate investment committees to improve efficiency and reduce unnecessary duplication.

And finally, she says, the fund needs de-politicisation to ensure that the structure is not influenced by the election cycle or shifting political agendas.

In the past few weeks Nagaswami, and the pension beneficiaries in NYC, have had a win that could jet her plan into action.

The city’s independent actuary has recommended a reduction of the actuarial rate from 8 to 7 per cent.

Perhaps Nagaswami, who also sits on the Yale University investment committee, is big and bold enough to generate change at the city.

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