Sovereign Wealth Fund Institute

This is an interview between Michael Maduell, President of the Sovereign Wealth Fund Institute and Vijoy Chattergy, CIO of the Employees’ Retirement System of the State of Hawai’i at the Institute Fund Summit 2013 Americas in Dana Point, California.

According to the press release, “The California Public Employees’ Retirement System (CalPERS) has selected Invesco Real Estate as a new manager for its Multifamily Real Estate Program. The partnership, named Institutional Core Multifamily Investors, will invest in multifamily properties, focused in the western US region.

“Invesco Real Estate’s extensive experience and proven track record in multifamily investing make them a great fit for this program,” said Joe Dear, CalPERS Chief Investment Officer. “We’re excited to work with them as we identify and acquire multifamily assets with both strong returns and the potential for future appreciation.”

The Institutional Core Multifamily Investors partnership is a multiyear program that will fund with an initial allocation of $250 million. The partnership will seek to build a stable income-oriented portfolio of institutional-quality core apartment assets focusing on select target markets in the West and Midwest U.S.

“We believe adding a measured allocation to high-quality apartment assets will enhance the overall risk and return profile for CalPERS investment portfolio,” said Ted Eliopoulos, Senior Investment Officer for CalPERS real estate program.

CalPERS currently holds approximately $2 billion in assets in its multifamily program, with a total of $24.5 billion in the Real Assets portfolio.”

Read more: CalPERS Press Release

This is an interview between Michael Maduell, President of the Sovereign Wealth Fund Institute and California State Treasurer Bill Lockyer at the Institute Fund Summit 2013 Americas in Dana Point, California.

As tougher government accounting standards take hold, underfunded public pensions are poised to pile on more investment risk in order to meet their lofty annual target return. State and local governments in the United States will modify how they compute and report the costs and obligations associated with pensions. Higher return targets enable public pensions to discount their pension liabilities. In comparison, many large public pensions tend to have greater annual return assumptions than sovereign wealth funds.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

France’s Caisse des Dépôts et Consignations (CDC) booked some losses for 2012. The state-owned group was negatively affected by write-downs on its holdings in France Telecom SA, Veolia Transdev and Dexia SA. The closing of Dexia had an impairment cost of €0.45 billion for 2012.

Group net income was at a loss of €458 million. In 2011, the net profit was €206 million.

In 2012, France’s Strategic Investment Fund (FSI) allocated €1.5 billion to hundreds of companies. The fund maintains a high level of domestic investments. The FSI contribution to net income was at a loss of around €1 billion in 2012 compared to a gain of €358 million in 2011. The loss was mainly attributed to the impairment of the fund’s investment in France Telecom SA.

For the first time in history, Dutch pension assets surpassed €1 trillion – reaching €1.01 trillion. According to the De Nederlandsche Bank, the average funding ratio of Dutch pension funds grew to 104% in February 2013. Since the end of December 2012 till February 2013, the average funding ratio improved by 2%. Changes in the interest rate term structure have reduced pension liabilities for Dutch pensions. In addition, global stock price increases greatly attributed to improved funding ratios.

According to United States Census data, U.S. public pension funds rose to the highest since a peak just prior to the global financial crisis. Public pension assets in 100 of the largest funds, including cash and securities, increased to US$ 2.84 trillion. This is a 1.7% increase from last quarter.

The highest amount recorded was the fourth quarter of 2007 totaling US$ 2.93 trillion. The rising tide of the stock market buoyed performance; however, in many circumstances, pension assets have not kept pace with pension liabilities.

According to the press release, “The California Public Employees’ Retirement System (CalPERS) is investing $500M with Edinburgh, Scotland-based Standard Life Investments as part of its Multi-Asset Class (MAC) Partners Program. Standard Life is the first of four external managers selected to partner with CalPERS in the MAC program.

“We’re excited to have Standard Life on board as our first partner,” said Joseph Dear, CalPERS Chief Investment Officer. “Standard Life’s approach presents us with an excellent opportunity to add value to our portfolio, and to our investment operations by bringing in an outside perspective as we work toward our long-term investment goals.”

Standard Life’s investment approach for the MAC fund is modeled on their Global Absolute Return Strategies (GARS) approach. GARS is based on the key beliefs that marginal investors have a short-term time horizon which leads to market inefficiencies, and that by taking a three-year market view, those inefficiencies can be taken advantage of to create positive investment outcomes.

“This innovative relationship, the first of its kind, presents a great opportunity for Standard Life Investments to work closely with the CalPERS investment team,” said Keith Skeoch, CEO of Standard Life Investments. “What is really exciting about the partnership is the knowledge exchange element of the program, and strong alignment of our interests with those of CalPERS and its participants. We look forward to a long and successful relationship.”

The MAC Program has two strategic objectives. First, the Program is intended to outperform the CalPERS total fund over a market cycle, using primarily public market assets, and doing so with lower volatility and less risk.

Secondly, the Program is expected to facilitate a transfer of meaningful information from the MAC Partners to CalPERS investment staff, to help develop scalable, sustainable, and efficient methods of increasing the likelihood of meeting long-term CalPERS investment return goals.”

Read more: CalPERS Press Release

According to the press release, “Ontario Teachers’ Pension Plan (Teachers’) today announced that it has completed the previously announced sale of its one-third interest in Express-Platte Pipeline System (Express-Platte Pipeline) to Spectra Energy Corp (Spectra Energy) for approximately $430 million.

Teachers’ partners in Express-Platte Pipeline, Borealis Infrastructure and Kinder Morgan Energy Partners, L.P., also sold their interests to Spectra Energy. Teachers’ acquired its interest in 2003 through its Infrastructure Group.

The Express-Platte Pipeline consists of two crude oil pipelines. The 1,717-mile (2,763-kilometre) integrated oil transportation network connects Canadian and U.S. producers to refineries in the Rocky Mountain and Midwest regions of the U.S.

Teachers’ Infrastructure Group manages an international portfolio of approximately $9 billion, including water and wastewater, electricity distribution, gas distribution, airports, power generation, high-speed rail and port facilities.”

Read more: Press Release

Allocating capital to emerging managers is time consuming, but the possibility to find new, innovative asset managers is forcing public investors to reassess their current allocation. In some instances, emerging managers are at the forefront of innovative investment vehicles, capitalizing on specific themes, industries or trends. In the last few years, energy funds enjoyed popularity from sovereign wealth funds and public pensions. For example, in early February 2012, the China Investment Corporation (CIC) invested in a minority stake in EIG Global Energy Partners.

Why emerging managers?
Emerging managers tend to be entrepreneurial. With a flat management structure, the absence of bureaucracy enables agility and quick response in regard to organizational and business decisions. In addition, compensation schemes at emerging managers tend to have superior alignment of personal, professional and economic interests.

Public investors must utilize industry contacts, conferences and other channels to access promising managers.

Not all public investors have been triumphant with emerging managers; it has been a learning experience. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The press release states, “OMERS, one of Canada’s largest pension plans, today announced its 2012 financial results. OMERS net assets grew to $60.8 billion, rising by $5.7 billion in 2012 and by over $17 billion since the 2008 global credit crisis. Now in its 50th year, OMERS is an active, diversified investor, pension innovator, and an engine of economic growth and employment in Ontario and Canada.

OMERS total Plan investment return of 10% was driven by strong performance in its private market portfolio and solid public market performance in line with expectations and current market conditions.

“OMERS had a strong year in 2012. The $5.7 billion increase in our net assets demonstrates the strength and robustness of OMERS business model with the capacity to generate growing investment cash yields and more than ample liquidity to withstand market shocks under stressed financial conditions,” said Michael Nobrega, OMERS President and CEO.

OMERS private market portfolio had a 13.8% investment return – with returns of 19.2% (OMERS Private Equity), 16.9% (Oxford Properties), 12.7% (Borealis Infrastructure) and negative 10.1% (OMERS Strategic Investments). OMERS Strategic Investments, which represents less than two and a half per cent of OMERS net investments, has its principal assets in Alberta’s oil and gas sector. The year-end valuation of these assets was negatively impacted as oil and gas prices fell to their lowest levels in five years.

OMERS Capital Markets, which manages the public market portfolio including public equities, fixed income and debt investments, generated a 7.5% return.

Progress against Strategic Goals
In 2003 OMERS adopted its current strategic plan including an investment strategy designed to provide balance between public and private market assets and to generate long-term, stable cash flows while maintaining liquidity. The strategy has evolved to incorporate avenues for the growth of Plan assets and a “direct-drive” ownership model providing OMERS with greater control of its investments at a lower cost.

“As a pension plan we are focused on our ability to pay pensions to our members over the long term in spite of factors such as the increasing average age of Plan members, low interest rates and volatility in the public equity markets. Our strategy is continuing to evolve to provide us with a fortress-like balance sheet that enables the growth of our assets while maintaining the necessary liquidity to withstand market disruptions,” said Mr. Nobrega.

One of the key drivers of the strategic plan is OMERS asset mix. OMERS ended the year with 60% of its assets in the public markets and 40% in private market assets, compared with 82% public and 18% private before the new strategy was implemented nine years ago. Our long-term goal is to achieve a mix of approximately 53% public and 47% private market investments.

A second key driver is the strategic priority to directly own and actively manage investments rather than retaining external fund managers. OMERS ended the year with 88% of the portfolio now managed in-house, up from 74% five years ago. The long-term goal is to reach 95% of the portfolio managed internally.”

Read more: OMERS Press Release

The California State Teachers’ Retirement System (CalSTRS) returned 13.45% for the calendar year of 2012. The pension fund has a custom benchmark of 15.35%. As of December 31, 2012, 13.8% was allocated to private equity and 14% to real estate.

2012 Results – Return vs. Benchmark

• Fixed Income – 6.11% vs. 4.76%
• US Equity – 15.93% vs. 16.51%
• Non-US Equity – 17.24% vs. 16.89%
• Real Estate – 13.46% vs. 11%
• Private Equity – 14.62% vs. 33.75%

The press release states, “Denmarks largest pensionsfund ATP delivered satisfactory results in 2012. The return was DKK 58bn and the profit for the year DKK 10bn. This profit level means that ATP’s reserves now amount to DKK 84bn and the assets under management to DKK 624bn.

“As a pension fund, it’s crucial that we deliver stable returns year after year. I am pleased that in the middle of one of the worst economic slumps we are once more in a position to deliver a good result for 2012. With a return of DKK 58bn, ATP’s robust investment strategy has once more shown its worth,” says Acting CEO Henrik Gade Jepsen.

The majority of ATP’s return of DKK 45bn was achieved by hedging activities. The remaining part – DKK 13bn – comes from investment activities and in particular from listed domestic equities, private equities and credit investments. Overall, ATP’s return on investment was 10 per cent according to the Danish Financial Supervisory Authority’s method of accounting.

ATP’s net profit in 2012 was DKK 10bn. The profit has boosted ATP’s reserves, which at the end of 2012 amounted to DKK 84bn. ATP’s assets under management total DKK 624bn.

“With the return for 2012 we have once more delivered satisfactory results that ensure ATP can meet the guaranteed lifelong pensions. Furthermore, ATP still has the financial leeway to deliver stable returns in the years to come – for the benefit of the ATP members,” says Henrik Gade Jepsen.

In 2012, ATP paid out DKK 12bn in pension benefits and DKK 9bn in tax on pension-savings returns to the Danish government in 2012.”

Read more: ATP Press Release

Stichting Pensioenfonds UWV based in the Netherlands is growing its allocation to alternatives to 17%. This was from 9%. The implementation of the augmented allocation will be around three years. In addition, pension fund management costs are expected to increase from €14 million to €20 million.

The allocation increase in alternatives will decrease allocation to fixed income.

In 2003, the fund was created as a result of a merger between the pension funds of UWV, GAK Nederland BV and CADANS.

Oregon State Treasurer Ted Wheeler

The government of Alberta did a similar thing by creating Alberta Investment Management Corporation (AIMCo), so did British Columbia, British Columbia Investment Management Corporation (bcIMC). AIMCo and other Canadian public pension have developed large in-house teams in various asset classes such as real estate, private equity, and external equity management, saving money on management fees.

It would enable the proposed entity more flexibility, the power to enter strategic partnerships, change pay structures to attract more in-house capabilities, and save money on external manager fees.

Other interesting notes in the legislation include the governor of Oregon appointing four voting members to the board which can be removed by the governor with or without cause. The members must be qualified by training and experience in the areas of finance or investments.

The US$ 252 billion California Public Employees’ Retirement System (CalPERS) had a positive performance in 2012 of 13.26%. The 2012 annual return was slightly below the 14.43% benchmark return. 2012 private equity returns attributed to the lower return.

CalPERS has an annual target rate return of 7.5% to meets its obligations; it was lowered in February 2012 from 7.75%.

In 2007, CalPERS at its apex was valued at US$ 260 billion and dropped as low as US$ 160 billion in March 2009.

Some 2012 Asset Class Returns

• Global Equities – 17.18%
• Private Equity – 12.24%
• Fixed Income – 7.64%
• Real Estate – 12.79%

Peru’s Administradoras de Fondos de Pensiones (AFPs) are private pension fund managers. In 1991, the Peruvian Treasury was faced with financial difficulties. Essentially the state-run pension system had insufficient funds to meet its pension obligations. Peru’s AFP market was created in the summer of 1993 to co-exist with the government-owned pension system.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

According to the press release, “Simon Property Group, Inc. (Simon) and Institutional Mall Investors (IMI), the co-investment venture owned by an affiliate of Miller Capital Advisory, Inc. and The California Public Employees’ Retirement System (CalPERS), today announced that they have formed a joint venture to own and operate The Shops at Mission Viejo in the Los Angeles suburb of Mission Viejo, California, and Woodfield Mall in the Chicago suburb of Schaumburg, Illinois. Simon and IMI will each own 50% of Woodfield. Simon will own 51% of Mission Viejo and IMI will own the remaining 49%. Simon is providing management and leasing services to the joint venture.

Prior to formation of the joint venture, Simon owned 100% of The Shops at Mission Viejo and IMI owned 100% of Woodfield Mall. The Shops at Mission Viejo is a 1.2 million square foot center anchored by Nordstrom and Macy’s. Woodfield Mall is a 2.2 million square foot center anchored by Nordstrom, Macy’s, Lord & Taylor, JCPenney and Sears.

The Shops at Mission Viejo is currently unencumbered, however, the joint venture expects to place a mortgage on the property in the next two weeks. Woodfield Mall is encumbered by a $425 million mortgage loan which matures in March of 2024 and bears interest at 4.5%.

“As a result of this transaction, we have added the iconic Woodfield Mall to our portfolio,” said David Simon, Chairman and CEO of Simon Property Group. “This premier mall is located in one of the country’s largest markets and we welcome the opportunity to enhance its productivity and value through our leasing and management efforts.”

Andrew Miller, President and CEO of Miller Capital Advisory said, ‘We are pleased to expand our strategic relationship with Simon – other malls owned jointly include The Galleria® in Houston, Texas; The Fashion Centre at Pentagon City in Arlington, Virginia; and The Westchester in White Plains, New York. The transaction also increases our presence in the important California market with the addition of The Shops at Mission Viejo to our collection of high quality retail properties.’”

Read more: Simon Property Group Press Release

North Carolina Retirement Systems (NCRS) based in Raleigh is a public pension system leading the charge with a group of institutional investors in regards to Facebook’s initial public offering (IPO). The plaintiffs include Facebook investors who state they lost money and accuse the defendants in the case of selectively disclosing unappealing information about its business forecasts to Wall Street analysts who then shared it with privileged clients. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The US$ 55 billion Virginia Retirement System (VRS) currently has a US$ 4.8 billion allocation towards real estate including infrastructure.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]