Insuring against tail risk is too costly and a drag on long-term performance, with AQR Capital Management research revealing investors should instead make changes to their portfolio construction and risk management policies to better protect against unexpectedly large losses. (more…)
The $89.9 billion New York State Teachers Retirement System (NYSTRS) has achieved its best result for 25 years, returning 23.2 per cent for the year to June 30, 2011, with the strong performance driven mainly by its equity portfolio.
NYSTRS, which claims to be one of the few fully-funded public pension funds in the country, reported that its stellar year increased the value of its assets by a further $13 billion.
The latest financial-year result is nearly double the fund’s return of 12.1 per cent in the previous financial year.
NYSTRS’ five-year return is 4.2 per cent a year, and over 25 years it has returned 9 per cent a year, 100 basis points more than its long-term actuarially-assumed rate of return of 8 per cent.
The president of the fund, Michael Kraus, a 20-year veteran of the board, says the fund’s strong position was due in part to the continued contributions from both members and employers.
“Public pension funding is a shared responsibility and we would not be where we are without consistent, uninterrupted employer and member contributions,” he said in his annual message to members.
“In New York we are fortunate to have a funding framework that values contributions on time and in the full amount. States that have taken ‘pension holidays’ or made reduced contributions are now dealing with the devastating effects of these decisions in the form of under-funded plans.”
Over the past two years the fund has pared back its losses from the global financial crisis, when it lost 20.5 per cent in 2009 and 6.3 per cent in 2008.
Its public equities portfolio was the engine room of performance, and represents more than 58.5 per cent of the fund, or $53.4 billion.
Domestic equities are predominantly internally run, with 95 per cent of its holdings in what its investment team describes as “several low-risk strategies targeting broad US market exposure”.
The remaining 5 per cent is allocated to external managers seeking above-benchmark returns.
Its domestic equities portfolio generated a return of 31.7 per cent, versus the S&P 1500 index return of 31.6 per cent.
“The portfolio benefited from excess returns to growth and value strategies internally managed by system staff,” the fund’s investment team told members in its annual report.
“The system’s external managers also contributed excess returns, partly from exposure to small and mid-capitalisation stocks.”
The fund has a target to reduce its domestic equity holdings from their current level of 45.3 per cent of the portfolio to 42 per cent.
Over the course of the year the fund raised more than $4 billion from domestic equities, reallocating the cash either to international equities to fund new external managers, or to short-term fixed income investments.
It plans to lift its international equity holdings, which are mostly in developed markets, from 13.2 per cent to 15 per cent of the portfolio.
In 2009 the fund decided to restructure its international equities portfolio, with 25 per cent to be actively managed and measured against an MSCI ACWI Ex-US benchmark.
It also has plans to increase its exposures to domestic fixed income from 13.9 per cent to 18 per cent; and to mortgages, which combine both conventional and federal housing administration mortgages, from 6.1 per cent to 8 per cent.
Other strong performing assets for the fund included its real estate investments.
The fund’s REITs returned 33.6 per cent for the domestic portfolio and 31.2 per cent for the ex-US portfolio.
Its directly-owned real estate assets, and a combination of opportunistic funds and value-added real estate funds, achieved 23.7 per cent and 31.9 per cent respectively.
The fund has a 7 per cent target allocation to private equity and as of June 30 had 8.2 per cent of its portfolio invested in this asset class.
NYSTRS’ private equity portfolio outperformed its benchmark on a five and 10-year basis with a performance of 9.6 per cent and 10.5 per cent above a comparable benchmark performance of 7.9 per cent and 7.7 per cent.
But over a shorter time frame the fund under-performed its benchmarks for private equity.
The one-year performance of 23.8 per cent lagged its benchmark performance of 35.7 per cent and the three-year average return of 2.6 per cent lagged the benchmark performance of 8.3 per cent.
“This is primarily attributable to greater volatility in public markets outpacing the revaluation in the private equity portfolio,” the investment team told its members.
Since the fund began its private equity program in 1984 it has generated an internal rate of return of 11.8 per cent.
For the 2010 calendar year the fund also looked to exercise its rights as shareholder voting on 16,607 proposals, representing 1963 meetings for the companies NYSTRS owns in its equity portfolio.
It voted with management proposals in 87 per cent of cases, voting against 12 per cent of the time and abstaining in 1 per cent of votes.
It rejected almost half of the 555 shareholder proposals it voted on.
“System policies generally support management if the position is reasonable, is not detrimental to the long-term economic prospects of the company and does not tend to diminish the rights of shareholders,” the fund said in its annual report.
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OMERS has will capitalise on its ability to invest for the long-term and use the newly-launched venture capital arm to invest directly in the entire life cycle of a project.
OMERS Ventures, which will be the avenue for the fund to invest directly in venture rather than through funds, is predicated on funding through the entire life cycle, from the angel round to ultimate liquidity.
In a speech to the Toronto Board of Trade, chief executive of OMERS Ventures, John Ruffolo, says venture capital investors in Canada should make more long-term commitments to avoid start-ups heading to the US for funding.
He says that will be the core of OMERS’ strategy, with investments ranging from $500,000 to $30 million, and remaining invested for at least 15 years before seeking an exit.
OMERS Ventures forms part of OMERS Strategic Investments, which has a mission to drive “corporate initiatives that will position OMERS as a global player, incubate investment platforms that do not logically fit under the mandates of OMERS existing investment entities and further differentiate OMERS from conventional pension funds by burnishing its reputation as a pension-based investment enterprise unlike any other in the world”.
Overall, the $53 billion fund has a strategic plan to have about 47 per cent of assets invested in private markets. The figure is currently about 40 per cent.
OMERS Ventures will focus on investments in technology, media, telecommunications, clean technology and life sciences in Canada and the US, and has made its first investment in a company called WaveAccounting.
Ruffolo says WaveAccounting is an example of the type of further investments the fund would like to make. In nine months it has seen rapid growth, taking advantage of social media trends, and it is now used in 190 countries.
The Canadian venture industry has slowed in the past couple of years, and in his speech to the Toronto Board of Trade, Ruffolo presented a plan to get the “money flowing again”, which included abandoning the notion of a quick exit.
Private engagement has more influence on company behaviour and performance a new study of CalPERS’ corporate governance reveals.
Analysis by Wilshire Associates has found that because privately engaged companies are more receptive to reform and move more quickly to better governance standards, the turnaround in their stock performance is quicker.
It found that the turnaround in stock performance for publicly-engaged companies is not apparent until close to two years from engagement.
Wilshire measures the performance results of all companies publically and privately engaged from 1999 to 2009.
The study found that in the past 11 years, privately-engaged companies significantly outperformed the companies named on the public focus list for one, three and five years after CalPERS made the initial contact.
The performance of all companies engaged through the focus list program produced a cumulative return of 11.59 per cent above their benchmark after three years, and 4.77 per cent after five years.
Until 2009, the $223 billion Californian fund employed a combination of public and private engagement that included 59 companies on a public focus list and 110 which were engaged privately.
In 2009 there were 14 new companies privately engaged and none were named to the public focus list. In late 2010 the fund decided to abolish the focus list and exclusively engage companies privately.
The investment committee meeting in November was the first time it had received a corporate governance program report incorporating the focus list program analysis, proxy voting quarterly report results, and updates on principles for responsible investing, financial market reform and policy.
Meanwhile CalPERS has indicated that improving its ranking for Principle 1 of the UNPRI – which states: “We will incorporate ESG issues into investment analysis and decision-making processes” – will be a measureable outcome of the total fund ESG integration initiative of 2012.