By David G.
Barry
During his career, Rodney June has seen situations where public pension
plans could have generated sizable returns – if they could have moved faster.
With that in mind, the chief investment officer of the $22 billion Los Angeles
City Employment Retirement System (LACERS), proposed a policy change that
would have given his investment team the ability to deploy up to 5% of the fund,
or roughly $1 billion, in “unique or time-sensitive strategies” without board
approval.
But with
several LACERS’ board members expressing concerns about both the potential size
of the program and the absence of board oversight, June and his staff will work
to revise the policy.
LACERS’ proposal is notable in that many institutional investors would welcome having
the ability – especially in the current environment – to move quickly to take
advantage of potential opportunities.
Some plans, such as the New Jersey Division of Investment, have
increased their cash allocations, in part, to take advantage of market
opportunities that may arise in the coming months. But having the ability to do
it quickly is something that every CIO would welcome.
“We’re looking for opportunities where time is of the essence,” June told the
LACERS’ board.
He said he wants his staff to be able to approve investments where “every day
that is prolonged” is the difference between getting a “satisfactory return” vs.
another investment in the market.
June, who has been CIO of LACERS for the past 10 years, laid out his initial thoughts on
the policy in an interview with Markets Group in May.
In a memo to
the LACERS board, the plan’s investment team said the Unique Investment
Opportunities Policy (UIOP) was developed to provide LACERS staff flexibility
and authority to take advantage of potential “unique and time-sensitive
strategies” that are expected to enhance risk-adjusted returns.
UIOP would be utilized to make investments that typically arise during periods
of market stress, dislocations, or changing market dynamics, and have the potential
to generate returns in excess of those expected from traditional investments
within the portfolio.
The two key “defining characteristics” of an UIOP investment are a “short
window of time to capitalize on the opportunity and a short-term investment
horizon.” In essence, an opportunity that could not be capitalized on if it
were subject to the traditional – and often lengthy – request for proposal
process.
Under the proposal, staff, with concurrence from an investment consultant and
LACERS’ general manager, would be able to approve individual investments of up
to 0.5% of the plan, or $100 million.
June said the average size of such investments would likely be around $50
million.
LACERS currently has a similar approval process for its private equity program.
In speaking to the board about the proposal, June pointed to the past efforts
of LACERS and one of his former employers, the Employees State Retirement
System of the State of Hawaii, to invest in the governments’ TALF and TARP programs
and how moving faster would have generated greater returns. In the case of the
new LACERS’ proposal, he saw it likely being used to invest in private market
strategies – specifically hedge funds – that might be able to take advantage of
specific market opportunities. But it could also be deployed in public market
opportunities as well.
The program would be deployed through external managers – managers who already
are investing on behalf of LACERS. The plan’s staff said that it would look to
use firms from its emerging manager program as well.
LACERS’ investment committee voted in early July to bring the policy to the
full board. Several members of the board, though, suggested putting in place
“guardrails” for the program, i.e., a means for an ad-hoc committee to at least
review the transactions. There also was concern about a “pilot program” having
the potential to deploy $1 billion.
June said he would work with his staff to alter the policy and would return
with an updated version for approval at a later date.