The cult of transparency has a price

You have to feel sorry for the investment professionals at large public sector pension funds around the world. They must pay a big price for the transparency of their funds.

Take the $14 billion French Fund known as ERAFP (Etablissement de la Retraite Additionnelle de la Fonction Publique), which has just announced a restructure of its externally managed European equities portfolio.

A tender for four sets of mandates was first announced in June last year, with details published on the fund’s many-paged website ever since. As it turned out, the big winner was BNP Paribas Asset Management which picked up a $64 million small- and mid-cap indexed equity mandate as well as half of a $710 million active mandate alongside AXA Investment Managers.

Because ERAFP is a professionally run fund, transition managers are employed when mandates change hands. They use a variety of means to try to disguise what they’re doing from the rest of the market, although this must be very difficult.

Because the fund has a strong Socially Responsible Investing bias, the number of both managers and stocks which are likely to be involved in transitions totalling $1.9 billion is not particularly large. Possibly the main defence that the fund has had against widespread front-running – where speculators move ahead of expected new flows (either out or in) – was that it took so long to make its decisions.

Perhaps in recognition of that, this time at least, ERAFP has also appointed a number of “standby managers”, who will be awarded one of the mandates in the event that any of the new incumbents are deemed to have failed to perform. This can be done without another public tender.

But possibly a bigger problem for public funds due to their politically correct and widely popular transparency is short-termism.

Funds are applauded by the media and commentators for frequent and detailed reporting of all aspects of their management, including investment performance. If that is not enough, then governments may impose frequent reporting standards.

The $13 billion New Zealand Superannuation Fund, for instance, has to report its investment performance monthly and is scrutinised by press and Opposition politicians in down months.

Of all the various types of fiduciaries in the world, the public funds, which tend to be the largest, are the most able to take advantage of illiquidity premia to make long-term bets. Monthly reporting discourages this in the same way that quarterly reporting discourages long-term investments by publicly listed companies.

The sovereign wealth funds which are a party to the Santiago Principles of conduct – which represents most of the really big ones – have professed their willingness to move to greater transparency. The privately run Sovereign Wealth Funds Institute in the US has an index which ranks about 50 SWFs on various transparency criteria.

But the value in this for the funds’ constituents – the government and its electorate – is rarely questioned. This does not mean that transparency is not a good thing. It may be. But there are also times when it may not be.