Asset owners, money managers, company board directors and academics took the stage at the Council of Institutional Investors’ Fall Conference in San Diego to discuss everything from the opportunities and challenges faced by public pension funds to governance dynamics at public companies and the declining number of public companies and IPOs.
Driving the discussion on a Sept. 14 panel of public pension fund chief investment officers were asset sizes, fees and diversification. Robert Jacksha, CIO at the New Mexico Educational Retirement Board, Santa Fe, said he believes there are advantages and disadvantages to holding a large amount of investible assets.
With private assets, a lot of the valuations “are certainly not what they used to be,” Mr. Jacksha said. It’s tougher to find attractive investments, “but I think you still can, in some of the niche strategies,” he said. With only $12 billion in total assets, the New Mexico Educational Retirement Board is able to invest in some smaller niche strategies, like a $200 million mitigation banking fund that has been “a pretty attractive investment for us.” he said without elaborating. The pension fund has $50 million invested in the strategy.
Areas where CalPERS’ size is an advantage have been in global public equity and fixed income (95% of the fixed-income portfolio is managed internally), and also in core commercial real estate, where the pension fund has been able to establish separate account relationships, said Theodore Eliopoulos, CIO at the $333.3 billion California Public Employees’ Retirement System, Sacramento. On the flip side, areas where scale has been a challenge — both in terms of market access and business model — have been in opportunistic real estate and private equity.
“When we’re operating at the scale that we’re at … it’s very challenging to structure your portfolio, maintain your portfolio and hire enough external managers with those skill sets,” Mr. Eliopoulos said.
With private equity, Mr. Eliopoulos said the retirement system has been looking at perhaps establishing partnerships akin to its real estate separate accounts, creating outside vehicles to pursue more direct investments along with enhancing the core of its private equity program through investments with its best existing general partners.
Regarding fees, John Skjervem, director of the investment division at the Oregon State Treasury, Tigard, said it’s understandable fees get so much attention from trustees.
Unlike investment staff, trustees haven’t been working on transactions for a long period of time, he said. The quantitative elements of the transaction are the most salient elements in trustees’ minds, while the investment staff’s perspective is much more qualitative, he said.
New Mexico’s Mr. Jacksha said: “We always look at the qualitative aspects … as being more important than the absolute level of fees. What really is important is your net outcome. Yes, fees contribute to that by being part of the calculation, but they are not the overriding calculation.”
While CalPERS has been able to secure lower fees for certain investments, Mr. Eliopoulos said the pension fund has focused on pushing for standardized fee reporting and fee transparency, particularly in private equity, which he believes will help the fee debate. “I think the sheer level of fees is something the market will set,” he said.
Asked how he keeps CalPERS’ portfolio diversified, Mr. Eliopoulos pointed to the pension fund’s core commercial real estate portfolio as an example of a diversifying asset class it has been trying to build up. CalPERS also created an opportunistic credit team, which has been looking at opportunities in both real estate and corporate credit, Mr. Eliopoulos said.
New Mexico’s Mr. Jacksha said the retirement board for his fund recently created a category called “diversifying assets” that could potentially include strategies such as aircraft leasing and reinsurance. He said he expects a couple allocations before the end of the year.
Mr. Skjervem said Oregon has made “a deliberate effort to go back to basics.”
In this low-volatility environment, “almost 10 years of highly accommodative monetary policy (and) robust performance in financial markets, it’s easy to get out of your swim lanes. It’s easy for your fixed-income group to start looking at sexier stuff. It’s easy for your fixed-income team to get seduced by ‘go-anywhere fixed-income strategies’ all in the promise of higher returns,” Mr. Skjervem said.
On a Sept. 13 panel on the governance dynamics at emerging companies and established public companies, board directors identified financial fluency, a willingness to ask questions and not being afraid to go against the grain, as critical traits of all public company directors.
“Financial acumen is the key element that anyone who wants to be on a board has to have,” said Richard S. Hill, chairman at Marvell Technology Group Ltd. and Xperi Corp., and a director at Arrow Electronics Inc., Autodesk Inc. and Cabot Microelectronics Corp. “If (the board is) not fluent financially, they really don’t represent the shareholders effectively.”
Mr. Hill added that companies face different governance challenges based on their size.
“The smaller the company is, the less resources it has to really bring in the horsepower to be a public company,” Mr. Hill said. At megacap companies, another dynamic is that it becomes harder to find directors who will stand up to a CEO who has stature and be willing to replace him or her if they are not performing, he said.
Young pre-IPO companies “really require active involvement of the board in a way that public companies don’t necessarily require,” added Daniel Cooperman, director at Molina Healthcare Inc., Zoox Inc. and Nanoscale Components Inc., speaking on the same panel as Mr. Hill. “Specifically, board members really do need to be actively involved in helping the management in identifying consultants, individuals with expertise that can fill particular roles in the company.” Another important function of a young company board is helping management construct a strategic plan, Mr. Cooperman said.
One mechanism that young pre-IPO companies should adopt is looking for conflicts of interest and determining what to do if a conflict arises, Mr. Cooperman added.
On a separate panel, market experts discussed what has been driving the shrinking number of public companies and initial public offerings in the U.S.
David A. Brown, senior managing director and head of equity capital markets at EY, pointed to the availability of private capital as a contributor to the decline in IPOs, and delistings and merger and acquisition activity as contributors to the decline in public companies.
Mr. Brown also said he did not believe regulations in the U.S. are affecting the number of IPOs too significantly.
“If the U.S. regulations were the issue, companies would avoid them, go list somewhere else and access the capital that way,” Mr. Brown said.