Performance and pay at the largest US and Canadian pensions

09 / 17 / 2014
by Charles Skorina | Comments are closed

SCOTT EVANS:

ANOTHER TRY AT HERDING GOTHAM’S FIVE-HEADED FUND.

In July, Scott Evans reported for duty as Chief Investment Officer in New York City’s Bureau of Asset Management, where he’ll manage $160 billion in employee pension funds.

Traditionally the city’s CIO is replaced when the political wheel turns, which it did last fall.

Retiring Mayor Michael Bloomberg was succeeded by William De Blasio; and Comptroller John Liu, the independently-elected custodian of the city’s pension funds, was replaced by Scott Stringer.

Mr. Stringer beat back a last-minute primary challenge from disgraced former Governor Elliot Spitzer (known to New York Post readers as “Client No. 9 “), prevailing by 52- to-48.

We have to admit that we rooted for Mr. Spitzer, hoping that he would generate more colorful stories for us.  Alas, we are now stuck with the colorless and (so far) untainted Mr. Stringer.

Following the election, former CIO Lawrence Schloss resigned after four years on the job, moving to asset manager Angelo, Gordon & Co. as their new president. Mr. Evans’ appointment was announced a few months later.

The New York CIO job pays about $224 thousand, which is pretty good for a city employee, and pretty lousy for an equivalent position on Wall Street.

Mr. Evans earned an MBA from Kellogg/Northwestern in 1985 and went to work in New York as an equity analyst for TIAA-CREF.  For twenty-seven years he worked his way up through the ranks, finally serving as TIAA-CREF’s EVP and President of Asset Management before retiring in 2012.

Even between day jobs, Mr. Evans has kept busy.  He’s on the investment committee of Tufts University (his undergrad school), and on the board at W.T. Grant Foundation.  He’s also an advisor to the $300 billion Dutch mega-fund Algemeen Burgerlijk Pensioenfonds (ABP).

It’s a solid resume, but now Mr. Evans will have to deal with the bare-knuckle politics of New York City, which may prove to be somewhat different from managing annuities for college professors.

We could also point out that the underlying investments for TIAA-CREF’s retirement products and retail mutual funds are almost exclusively public equities and fixed income.  So, Mr. Evans’ hands-on experience with alternatives seems to be limited.

Although the CIO tries to manage the city’s five public pension funds as an aggregate, each fund has its own board, dominated by its respective union.  Technically, he can only “advise” the five boards, each of which can, and sometimes does, try to micro-manage investment decisions.

The comptroller (or his deputy, usually the CIO), sits on each board; but so does the Mayor (or his representative).  In an effort to increase his leverage over pension management, Mayor Bloomberg created a sort of mini-CIO, a “chief investment advisor.”

Ranji Nagaswami was hired as the mayor’s first CIA with considerable fanfare in 2010, but she left after two years for a job with Ray Dalio’s Bridgewater hedge fund.  She was succeeded by Janice Emery in 2012.

Last month Ms. Emery left the Mayor’s office to take a job as endowment CIO for the American University of Cairo (conveniently located on New York’s Fifth Avenue, rather than in Egypt).  It’s not clear whether Mayor De Blasio will replace her as his CIA, or with whom.

Four years ago Mayor Bloomberg and Comptroller Liu promised a joint effort to streamline the five-headed pension system.

The five boards with their 50 trustees were to be squashed into a single 12-member body that would set investment policy.  The CIO’s office would then have been separated from the comptroller’s office to insulate it from politics.  This setup was deliberately patterned after Canadian plans like Ontario Teachers’ Pension (see our piece about Gordon Fyfe and the Canadian pensions further below).

But, as a spokesman for Mayor Bloomberg said: “The plan was cut off at the knees by some of the unions.”

A good New York Times article last month dissected the politics of the city’s pension system in some depth. See:

http://www.nytimes.com/2014/08/04/nyregion/new-york-city-pension-system-is-strained-by-costs-and-politics.html?hp&action=click&pgtype=Homepage&version=HpSum&module=first-column-region®ion=top-news&WT.nav=top-news&_r=2

NYC Pensions by the numbers:

Taken as a single fund, the NYC pension system now has a total AUM of about $160 billion.  That makes it the fourth-largest public pension fund in the U.S, and one of only six with assets over $100 billion.

Leaving aside their apparently intractable governance issues, how did the NYC system perform under former CIO Lawrence Schloss?  And what challenges face incoming CIO Scott Evans?

As the little table below says, the annualized return for the five fiscal years 2009-2013 was about 5.7 percent and the three-year return for 2011-2013 was 11.9 percent.

NYC annualized returns as of FY 2013

 
1-yr Rtn
3-yr Rtn
5-yr Rtn
New York City Retirement System
12.1%
11.9%
5.7%
NASRA Median
12.0%
11.0%
5.5%

NB1. NASRA = National Association of State Retirement Administrators median annualized investment return

On this basis, recent NYC performance is slightly above the median.

We can zoom in a little tighter on performance in Mr. Schloss’ tenure and compare it directly to NYC’s closest peers.

He took office in January 2010, so fiscal year 2011 is the first period he could influence at all. And, although he left last fall, he should properly get the credit (or blame) for the latest fiscal year ending June 30, 2014.

Here are results for that four-year window — 2011 to 2014 — for NYC and its closest peers:

Performance and Pay at the Largest U.S. Pension Funds:

Annualized Returns Fiscal Years 2011-2014

Rtn
Pension Fund

2014 AUM ($bn)

4-yr Rtn %
Chief Investment

Officer

Base
Bonus Other
Total Comp
1.
California CalSTRS
189.1
14.1
Ailman, C.
370,377
133,773
$504,150
2.
NY City

Retirement System

160.0
13.2
Schloss, L.
224,000
(none)
$224,000
3.
California CalPERS
300.0
13.1
Dear, J.
500,000
321,750
$821,750
4.
Florida SBA
149.1
12.9
Williams, A.
325,000
(none)
$325,000
5.
Texas TRS

(31Aug FY)

112.4
12.4
Harris, B.
480,000
374,000
$854,000
6.
New York State CRS (31Mar FY)
176.2
11.0
Fuller, V.
296,974
12,796
$309,770

NB1. All fiscal years end 30 June except as noted.  Annualized returns are not strictly comparable due to differing fiscal years.

NB2. All CIOs served fiscal years 2011-2014 except Ms. Fuller, who started 30 Aug 2012 and Mr. Schloss, who left 18 Oct 2013.

NYC had the second-highest 4-year return among their peers. They finished behind CalSTRS and a hair ahead of the much bigger CalPERS.

But Mr. Schloss had the lowest comp by far. Britt Harris’ bonus alone in 2013 was larger than the total comp paid in New York City, and Mr. Schloss was presiding over a larger fund with higher returns in this period.

Now, what did their allocations look like compared to their peers?

Over the four years 2010-2013 Mr. Schloss increased NYC’s allocation to alternatives by a little over 2 percent of AUM, carving it out of public markets and cash. And most of that net increase was in hedge funds, starting with essentially zero HF exposure in 2010.

But an 11.6 percent exposure to alts in 2013 still left NYC on the low end of the spectrum compared to the other mega-funds and to the average U.S. pension.

On this chart, allocation to alternatives increases from left to right across the six peer funds.

NYC and Peer Pensions Asset Allocations (%):

 
NYC 2010
NYC 2013
FL SBA 2013
NY State CRF 2013
Cal

STRS 2013

Cal

PERS 2013

TX TRS 2013
TW US Avg.

2013

NASRA

Median

2013

Public equity
58.1
57.8
56.5
51.7
53.0
53.8
49.7
57.0
50.0
Fixed income
30.6
29.5
25.5
22.2
17.0
15.7
14.3
23.0
25.0
Alts/Other
9.5
11.6
17.2
21.1
27.0
30.5
36.0
20.0
22.0
Cash/ST
1.8
1.1
0.8
5.0
3.0
0.0
0.0
0.0
3.0
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0

 

 

 

 

 

 

 

 

(TW = Towers Watson, from their 2014 Global Pension Assets Study)

Although the alts allocation increased significantly on Mr. Schloss’ watch, it was still lowest by far among the six peers, and well below the national mean and median, which include funds of all sizes. If NYC’s allocations to alternatives were lower, then obviously exposure to traditional public-market assets had to be higher, and we see that that was the case.

NYC, then, had the most traditional-looking portfolio in this group. If we think of this as a long march toward the endowment model, then NYC is bringing up the rear.

But, as we saw above, that more-traditional allocation has worked well for NYC, at least in this recent period when stocks were booming.

Mr. Schloss got his MBA from Wharton and spent 22 years managing alternative assets at Donaldson, Lufkin & Jenrette. When DLJ was acquired by Credit Suisse First Boston he became global head of CSFB Private Equity with $32 billion AUM. In 2004 he left Credit Suisse to found his own private equity firm, Diamond Castle Holdings.

Given his background in private equity, we wondered if anything interesting happened in that bucket during his tour with the city pension fund.

Total dollar commitments to PE were up about 70 percent over four years 2010-2013, from $10 billion to $17 billion, but actual investments were up only about 40 percent, from $6.1 billion to $8.1 billion, just keeping pace with the growth of the whole portfolio and a rising stock market. The difference is an accumulation of “dry powder” which the GPs will invest on their own schedule.

NYC’s PE investments were spread over 182 partnerships run by 109 different managers as of 2013. Neither of those numbers seems to have changed much over five years.

Among the largest public pensions, NYC’s allocation to private equity has been on the low side. Their actual allocation in 2013 was 6.3 percent. That number barely budged over four years, although the dollars invested rose more than 40 percent along with total AUM: from $6.1 to $8.7 billion.

The slightly larger CalSTRS, for instance, had about twice as much PE: 13.2 percent in 2013, and Texas TRS had 12.3 percent. A few other major pensions, including Washington SIB, Oregon PERS and Pennsylvania PSERS allocated over 20 percent to private equity in 2013.

While these numbers are right (we think!), when we talked to Mr. Schloss we learned that there was a lot more going on than they convey, especially in private equity.

A CONVERSATION WITH LARRY SCHLOSS.

Skorina:

Larry, you’re a private equity guy and when you came aboard in 2010 you said you would be trimming the deadwood in the City pensions, working to put larger commitments into fewer GPs. But the gross numbers don’t seem to have changed much. Are we missing something?

Schloss:

Yes, you are. There was a lot of good stuff going on under the hood that hasn’t shown up in those reported numbers yet. But it will!

As to private equity, we sold a billion dollars of underperforming PE into the secondary markets and handed that cash to better managers. We also increased commitments to top-quartile managers and let commitments to losers drop out at the end of their funding cycles. All that increased commitment won’t show up as actual investment allocation until the GPs call for it, which can take several years.

Skorina:

So, the plan was to move up into higher-quality, hopefully higher-return GPs, even if the allocation doesn’t look very different?

Schloss:

Exactly. Private equity operates on a five- to ten-year cycle. In my four years on the job I started turning that ship, but it takes a while to see the results.

Skorina:

How about the other buckets?

Schloss:

There were lots of changes there, too.

For instance, we had some outside fund-of-fund managers running our emerging-markets equity who weren’t getting it done. We brought that it in-house. And we pruned underperforming public-market managers generally. We probably terminated 40 to 50 equity and fixed-income managers.

Skorina:

So, on the whole, you’re pleased with what you accomplished?

Schloss:

Absolutely. In the last quarter of 2009, just before I arrived, we were in the 3rd quartile in the TUCS universe. Right after I left, in the first quarter of 2014, we had moved up to the 1st quartile. I’m very proud of that.

Of course, there are issues with continuity. The political cycle in New York is what it is. In a four-year term you spend the first year figuring out the system; and in the last year you’re a lame duck. So you really have two years to get anything done. I think I made the most of the time I had, and I enjoyed the experience.

Skorina:

Thanks for taking the time, Larry. And best of luck at Angelo Gordon.

Schloss:

You’re very welcome, Charles; I enjoyed catching up with you.

GORDON FYFE:

BRITISH COLUMBIA’S NEW CIO MAY FACE A PAY CUT.

Up on the Pacific coast of Canada, the founding CEO/CIO of British Columbia’s public pension fund has retired after 25 years on the job. Doug Pearce is being succeeded by Gordon Fyfe at the $100 billion BC Investment Management Corporation.

Mr. Fyfe was plucked from the top spot at another big Canadian fund, Public Sector Pension Investments Board (PSP) in Montreal, which manages $76 billion for federal employees including the Canadian military and the Mounties.

The hiring negotiation must have been interesting given that Mr. Fyfe was making at least three times as much in Montreal as the man he is replacing in BC.

We took a quick look at pay and performance at the big Canadian funds last year and noted then that Mr. Pearce was the lowest-paid CIO among his peers. We’ve updated those statistics to 2013 in a table below.

Pay-wise, BC is the outlier, and compensation at PSP is more typical. Relatively high executive comp is one of the defining features of the so-called Canadian model, setting them apart from their U.S. pension counterparts.

Compensation is always the biggest single factor in recruiting a top-tier senior executive; anyone who suggests otherwise has never tried to hire one. People in that bracket know what they’re worth.

But comp is not the only factor, and not always the decisive one. Moving an exec (or his/her spouse) somewhere they would rather live can also be a major motivator.

Mr. Fyfe was born and raised in the city of Victoria, BC (where BCIMC happens to be located) and graduated from the University of British Columbia. He has family there, too, including two sons who currently attend high school and college. Now, at age 56, it appears that he wants to finish up his career back in his home town.

In 2013 Mr. Pearce had a base of about $500K and total comp of $1.6 million, including bonuses. In the same year Mr. Fyfe also had a $500K base, but much bigger bonuses brought his total comp up to $5.3 million. (All these figures are in Canadian dollars unless otherwise noted.)

Bonuses at both funds are based (in large part) on a four-year rolling average of investment returns versus benchmarks. The 4-year returns of the two funds as of 2013 were: 10.6 for BCIMC and 12.2 for PSP. PSP did significantly better in that period, but most of the $3.3 million comp difference is explained by their more generous incentive formula.

Leo Kolivakis opines on Canadian pensions and investment management from Montreal at his very useful Pension Pulse blog, and he had this to say about Mr. Fyfe’s move:

British Columbia is a peculiar place when it comes to compensating its public servants. Doug Pearce, the former CEO/ CIO of bcIMC received a lot of negative press for his compensation but the truth is he and Michael Sabia at the Caisse are among the lowest paid CEOs at Canada’s large public pension funds (they both made roughly $1 million in total comp last year, which is nothing to scoff at). I am sure Gordon will be paid more than Doug Pearce and he’ll try to change compensation while at bcIMC but that is a battle he will lose (in many ways, B.C. is more socialist than Quebec!).

BCIMC won’t have to disclose Mr. Fyfe’s comp until next year’s annual report. We suspect that they will try to split the difference, finding a formula that gives him at least $2 million annually. That would put him closer to the median for leaders of similar funds without scandalizing the locals. We shall see.

Mr. Kolivakis has had a complicated personal history with Mr. Fyfe, for whom he worked at PSP. We won’t recount the whole tale, but you can read it here:

http://pensionpulse.blogspot.com/2014/06/gordon-fyfe-leaves-psp-to-head-bcimc.html

Despite their ups and downs, he offers a generally positive assessment of Mr. Fyfe as a manager (but note the parenthetical qualifications!):

…Folks at bcIMC are extremely lucky Gordon is their new leader. Despite his giant (and fragile) ego, Gordon Fyfe is an exceptional leader who instills confidence and will fight hard for his employees. And unlike others, he’s very approachable and down to earth, which is part of his affable character (just don’t share too much with him).

In its press release BCIMC said that, in light of their recent opening of their first foreign office in London, it was looking for a new leader with experience in global deals. The fund now has about $12 billion invested in infrastructure, real estate, and public and private equity in the UK and Europe. Mr. Fyfe had European postings earlier in his career, including a stint in London with JP Morgan.

Doug Pearce deserves some applause as he quits the stage. He helped midwife the creation of BCIMC twenty-five years ago, moving over from his job with the BC treasury to head up the new enterprise. As a Crown Corporation with an independent board BCIMC got out from under excessive political interference and has done very well for its 39 institutional clients, growing from $15 to $103 billion AUM.

He and his board have hewed to a patient, conservative, but flexible policy which emphasizes thematic investment. They have, for instance, completely avoided hedge funds and succeeded with “real economy” bets including BC real estate. With more than 60 percent of its assets managed internally it has also kept its costs low, another admirable feature of the Canadian model.

Here’s a quick update on pay and performance at the major Canadian public funds:

The Big Seven Canadian Public Funds

Caisse = Caisse de dépôt et placement du Québec (Montreal, QC)

CPPIB = Canada Pension Plan Investment Board (Toronto, ON)

OTP = Ontario Teachers’ Pension Plan (Toronto, ON)

BCIMC = British Columbia Investment Management Co (Victoria, BC)

PSPIB = Public Sector Pension Investment Board (Montreal, QC)

AIMCO = Alberta Investment Management Corporation (Edmonton, AB)

OMERS = Ontario Municipal Employees’ Retirement System (Toronto, ON)

Performance and Pay at the Big Seven Canadian Public Funds

Fund
Fiscal Yr End
AUM ($bn)
1-yr Rtn  %
10-yr Rtn   %
Chief Investment

Officer/Chief Executive Officer

Base Comp (000)
Bonus Other (000)
Total Comp
Caisse
31Dec
200.1
13.1
6.5
Lescure, Roland
$475
$1,964
$2,439,000
CPP
31Mar
183.3
10.1
7.4
Wiseman, Mark
$490
$2,270
$2,760,000
OTP
30Jun
138.9
10.9
8.9
Petroff, Neil
$452
$4,008
$4,460,000
BCIMC
31Mar
102.8
9.5
8.2
Pearce, Doug
$513
$1,067
$1,580,000
PSP
31Mar
76.1
10.7
8.9
Fyfe, Gordon
$500
$4,800
$5,300,000
AIMCO
31Dec
74.7
12.5
NA
De Bever, Leo
$500
$2,500
$3,000,000
OMERS
31Dec
65.1
6.5
7.6
Latimer, Michael
$500
$2,480
$2,980,000

NB1: Lescure, Petroff, Pearce, and Latimer all have “chief investment officer” title.

Wiseman, Fyfe, and De Bever all have “chief executive officer” title but they are effectively CIOs since there is no designated CIO and all subordinate execs are responsible for specific sub-portfolios.

NB2: Total comp includes deferred and non-cash items.

NB3: Returns are not strictly comparable because of differing fiscal years.

NB4: Source: annual reports

As we see, Mr. Pearce’s BCIMC had the second-highest 10-year return among the Big Seven (OTP and PSP are tied for first place), but he had by far the lowest total comp.

We should also note that another big changeover is coming up north. And, no, we don’t mean the Americanization of Tim Hortons (or is it the Canadianization of Burger King?).

 

Leo De Bever, widely recognized as one of the best in the business, announced in April that he’ll be leaving AIMCO. He joined as their first CEO when they became a separate corporation in 2008.

Although he’s now 66, he didn’t sound very retiring when he spoke to the press. Instead, he reproached his fellow pension investors for “resting on their laurels,” and offered some suggestions about what they should be doing. Dr. De Bever is a PhD economist who, among other jobs, spent ten years as a senior investment strategist at OTP in Toronto pushing a not-always-enthused board into infrastructure investments, which have since become a mainstay for the Canadian funds.

AIMCO admits there is only a relatively small pool of potential candidates who could fill the job, but they’ve undertaken a “robust” global search which will remain open as long as necessary.

We like that adjective and may adopt it. It’s redolent of our favorite high-octane brew at our favorite coffee shop.

Please note that our own searches from now on will not only be thorough and cost-effective (as always!), but also robust!

 

JONATHAN HOOK:

WHAT WENT WRONG AT OHIO STATE UNIVERSITY?

Back in May we reported that Jonathan K. Hook had departed his post as CIO of the Ohio State University endowment and was heading for Baltimore to become the first CIO of the Weinberg Foundation.

There have been two notable Hook-based developments since then. First, he recruited his number-two manager from OSU to join him at Weinberg. Second, he unburdened himself on the record about his real reasons for leaving Columbus.

OSU appointed David Gilmore interim CIO in April, but apparently a call from Mr. Hook came almost immediately and he has now joined his old boss at the Weinberg Foundation as of August 4. He will again be Mr. Hook’s second-in-command with the title of Director of Investments.

Mr. Gilmore had been one of Mr. Hook’s first hires at OSU back in 2009 as he was populating the new investment office. He has an MBA from University of Memphis and had been a partner at Memphis-based fund-of-hedge funds manager Gerber/Taylor Capital Associates before joining OSU.

That move is semi-interesting, but we were much more struck by Mr. Hook’s recent blunt remarks about his frustrations at OSU. He was evidently not a happy CIO.

On May 1, Mr. Hook gave an interview to The Lantern, OSU’s campus newspaper, in which he said that he had signed on to create an investment office pursuing “best practices,” but felt the U. had not held up their end:

“So my decision was if the school was not going to finish the job I’d make the decision to go elsewhere.”

He was more specific about culture and governance issues in an interview with our friend Tim Sturrock at Fundfire.

Mr. Hook felt he’d been given assurances that OSU would spin off an investment company like those at other major public schools such as UTIMCO at University of Texas, but it didn’t happen. He was also unhappy about limited access to his board:

“The school decided not to do many of the things it had promised when I first got there.”

He felt that lack of a separate investment management company left the school vulnerable to Freedom of Information Act requests that may have scared off desirable private equity and hedge fund managers:

“There were some managers who wouldn’t even talk to us because of those governance issues … They did not want to have [limited partners] who were subject to [FOIA requests].”

He also told Fundfire that he usually got to meet with his board only about once a year.

As we reported in Skorina Letter 57, OSU’s five-year return as of June 2013 was about 2.9 percent, ranking them 13th out of 15 major public-university endowments we checked for that period. The $5.1 billion portfolio included an allocation of about 14.1 percent to private capital.

See: http://www.charlesskorina.com/nl57-performance-and-pay-at-our-great-public-universities/

We think Mr. Hook’s most recent annual compensation was about $1.1 million, including $627K base and $483K bonus.

In addition to his problems getting access to publicity-shy general partners, just starting a new private-equity program from scratch couldn’t have been easy. We don’t have access to OSU’s returns by asset class, but it’s likely that he had to contend with the notorious private-equity J-curve effect.  His successors may benefit from those investments as they become cash-flow positive in future years, but they probably didn’t help much during his own tenure.

Things may work out better for Mr. Hook in Baltimore. It’s likely that he got a pay-package at least comparable to what he made at OSU, he got the wing-man he wanted, and he may have a better working relationship with his new board.