An extensive education and relationship building experience has resulted in the board of the $14 billion Indiana PERS fully outsourcing investment decision making to the executive staff. Amanda White spoke to executive director Terren Magid about the benefits of autonomous, and quick, investment decisions, particularly in relation to alternatives.
The Indiana state legislature is in session and for the second year in a row, a merger between the Indiana PERS and the Teachers Retirement Fund to provide one administration platform and single investment strategy is on the agenda.
But Terren Magid, executive director of Indiana PERS, the larger of the two funds, believes such a merger wouldn’t make a huge difference from his fund point of view.
“[Indiana] PERS already has six different separate trusts so from our point of view merging with Teachers would be like adding another,” he says. “The advantage would be we’d have more funds under management to do different things.”
He says while the types of investments would be unlikely to change very much the larger pool would allow more weight with fee negotiation, the ability to select better managers and pay more attention to alternatives managers.
A move into alternatives has been high on the agenda in recent years, and in the year from June 2008 to June 2009 the fund increased the allocation to alternatives from 7.3 per cent to 16.5 per cent. Magid says the long-term asset allocation is to have an allocation of 30 per cent to alternatives, 30 per cent fixed income and 40 per cent equities, but it has been a slow start.
Most of the executive staff began at the fund in 2005 and Magid says at that time there was hardly any attention paid to alternatives.
The fund gained approval to invest in equities in 1997, and during the most recent boom correlation with equities markets became an issue for the fund.
“Equities was high because markets were rising higher than we could rebalance. We recognised during the boom that we were overweight and an internal study we conducted found that we were 93 per cent correlated to the equities market,” he says.
During this time alternatives became a focus for the 12 executive staff, but Magid says it was a hard time to convince the board to invest in alternatives
“It was hard to educate the board in a year especially when equities were going so well,” he says.
In the summer of 2006 the fund moved 10 per cent of its fixed income allocation to alternatives, and that quickly became 15 per cent with a burgeoning investment in private equity.
The fund is required by policy to deliver a new asset allocation every two to three years and in 2008 decided to make significant changes.
“In August 2008 prior to the great recession being clear, we said we’d move to a new asset allocation. The board approved 40 per cent equities, 30 per cent fixed income, and 30 per cent alternatives. We are still overweight equities but we gave ourselves an 18-month window to get to the asset allocation, and we were judicious we wanted to wait for the right selling prices.”
The fund is pretty close to that long-term asset allocation, although slightly overweight fixed income.
Within its alternatives it has allocations to real assets, absolute return funds (10 per cent) which are currently in hedge fund-of-funds but with a directive to slowly move to direct investing; and a 10 per cent allocation to private equity which has a target of 50:50 global and domestic but is currently overweight domestic.
One of the more innovative attributes of the fund is a decision-making process derived from its focus on alternatives.
“The inability of the fund to act quickly in the secondary private equity market was a big consideration. Now, within constraints, the investment decision-making has been handed to the executive.”
The board has delegated full investment responsibilities to the executive such that they can make decisions regarding all public equities and fixed income investments and within alternatives, act autonomously on investment decisions less than $100 million.
“The internal team still reports back to the board on any changes to the manager line up, and anything unique we are considering,”Magid says.
“I would encourage anyone in my position to develop education and communication with the board to enable a decision making structure like this. The board recognises their job is for policy setting and ours is to manage investments. The relationship is so important, but it doesn’t come straight away.”
Magid says the most tangible benefit of the autonomy has been in the private equities secondaries market, particularly during the time of the liquidity crunch, and it now has 47 separate private equity managers.
“We could access those funds that we couldn’t before, partly because we could make decisions quickly. The board only meets six times a year, so to wait for board approval it could be a two to four month process before a decision was made,” Magid says.
“This is not only beneficial from a time point of view but also from a fiduciary point of view. At the board meetings the board was spending 15 to 20 minutes on a deal that we asked them to approve, now our staff are spending 100-200 person hours on a deal. You have to ask what’s more prudent?”
The Indiana PERS board of trustees is made up of six members, five are appointed by the governor and the sixth is the director of the state’s budget agency or their designee. One must be a member of the Indiana PERS plan with at least 10 years credible service, and no more than three of the trustees may be of the same political party.
“The board’s responsibility is to set policy and put the checks and balances in place,” Magid says.
The other huge turnaround under Magid’s watch for the fund in past years has been with regard to customer service.
Back in 2004 the fund recorded a dismal seven out of 100 by CEM Benchmarking in its ability to process new retirements.
From 2002-2004 the fund also paid 50 per cent of its benefits incorrectly, and in 2005 when Magid and most of the staff came in, an audit found that the average time paying the first benefit to retirees was six to 12 months after retirement.
The root of the problem was aÂ poorly implemented benefit system that was installed in 2002, and in 2007 Magid and his team decided that couldn’t be fixed and that installing in a new one under the fund’s ‘modernisation project’ was a preferable option.
This proved to be a good decision, as in 2008 the fund scored 82 out of 100 as measured by CEM, with 98 per cent of new retirements processed on a timely basis.
The fund’s consultants include Mercer, Aksia, ORG Real Property, and Strategic Investment Solutions.
Asset classÂ Â Â Â Â Â June 2009Â Â Â Â Â Â Â June2008
EquitiesÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 50.5Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 67.3
Fixed incomeÂ Â Â Â Â Â Â Â 31.9Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 24.6
AlternativesÂ Â Â Â Â Â Â Â Â Â 16.5Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 7.3
ReallocationÂ Â Â Â Â Â Â Â Â 1.1Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 0.8