Category: Investments

Ohio State Teachers can’t invest its way to permanent COLAs, former chief actuary says

Mary Pat Campbell

Link: https://www.pionline.com/pension-funds/ohio-state-teachers-retirement-system-cannot-invest-its-way-permanent-cola-former

Excerpt:

The Ohio State Teachers’ Retirement System cannot invest its way to a permanent COLA, Brian Grinnell, former chief actuary of the $97.3 billion pension fund, told Pensions & Investments.

Grinnell left the pension fund in May after more than 10 years as its chief actuary. In a Sept. 27 interview, he said his responsibilities were primarily to help STRS staff and the board understand the risks the pension fund has faced and help develop a forward-looking plan to make decisions with long-term outcomes in mind.

In his interview, he said, “I was not comfortable with the direction the plan was headed, and I didn’t feel like my continued participation would be positive.”

….

The pension reform law, SB342, was one of five laws that addressed funding issues at all five of Ohio’s state retirement systems and was drafted as a result of severe stock market declines that came from the Great Recession in 2008 and 2009. Among all the state systems, STRS was the worst off in 2012 with a funding ratio of 57.6% as of June 30 of that year. Additionally, the amortization period for the retirement system’s unfunded pension liabilities under the STRS defined benefit plan had become infinite — meaning that it would never become fully funded.

Grinnell said STRS has had to contend with the challenge of being an extremely mature pension fund: Essentially, there is more money being sent out to retirees receiving benefits now relative to the future contributions the pension fund can expect from current and future teachers.

“Here’s where STRS is a little bit of an unusual situation because it is a fixed-rate plan,” Grinnell said, “so both the benefits and the contributions are essentially fixed by statute. So most plans, if they have a bad year in terms of investment performance, the contribution rate goes up the following year to fill that hole. That doesn’t happen at STRS.”

Grinnell said when a pension fund is both a mature plan and has that fixed-rate contribution and fixed benefits, it’s very difficult to recover from any kinds of market downturns. He noted that all five of Ohio’s state retirement systems have that fixed-rate structure.

“Most other public pensions do not have that kind of structure,” he said, “and I think that tends to work all right for an immature plan, a plan that’s growing and not paying out a lot of benefits relative to the contributions.”

Author(s): Rob Kozlowski 

Publication Date: 2 October 2024

Publication Site: Pensions & Investments

Private Credit Characteristics

Mary Pat Campbell

Link: https://content.naic.org/sites/default/files/capital-markets-market-buzz-private-credit-plr.pdf

Graphic:

Excerpt:

The terms private credit and private letter ratings (PLRs) have unintentionally elicited some confusion
about their respective meanings. While there is no standardized definition, and the term may be used
differently by market participants, private credit generally refers to debt, or debt-like, securities that are
not publicly issued or traded. On the other hand, PLRs refer to credit opinions that are assigned to
privately rated securities by credit rating providers and are only communicated to the issuer and a
specified group of investors.


To bring some clarity, at least with respect to how the NAIC views them, these terms can be characterized
in two dimensions: 1) distribution; and 2) transparency.

Publication Date: 30 July 2024

Publication Site: NAIC Capital Markets Bureau Market Buzz

The Housing Bubble Keeps Expanding, Case-Shiller Home Prices Hit New Record

Mary Pat Campbell

Link: https://mishtalk.com/economics/the-housing-bubble-keeps-expanding-case-shiller-home-prices-hit-new-record/

Graphic:

Excerpt:

Housing affordability continues to soar out of reach of most buyers. Not only are prices at a new record level, mortgage rates remain close to 7.0 percent.

Chart Notes

  • Case-Shiller measures repeat sales of the same price over time. It is the best measure of price, but it lags. Current data is as of May which reflects sales 1-3 months prior.
  • The CPI, OER, and Rent of Primary Residence are all from the BLS.
  • OER stands for Owners’ Equivalent Rent. It is the rent one would pay if someone was renting instead of paying a mortgage.

Author(s): Mike Shedlock (Mish)

Publication Date: 30 July 2024

Publication Site: MishTalk

U.S. Insurers’ Bank Loan Exposure Rises at a Decelerated Pace in 2023

Mary Pat Campbell

Link:

https://content.naic.org/sites/default/files/capital-markets-special-reports-bank-loans-ye2023_0.pdf

Graphic:

Executive Summary:

Bank loan investments increased to about $122 billion in book/adjusted carrying value (BACV)
at year-end 2023 from $117 billion at year-end 2022.

Despite the 4.6% growth, bank loansremained at 1.4% of U.S. insurers’ total cash and invested
assets at year-end 2023—the same as year-end 2022.

Approximately 70% of U.S. insurers’ bank loan investments were acquired, and 85% were held
by life companies.

In particular, large life companies, or those with more than $10 billion in assets under
management, accounted for 82% of U.S. insurers’ bank loan exposure, up from nearly 80% in
2022.

The top 25 insurance companies accounted for 75% of U.S. insurers’ total bank loan
investments at year-end 2023; the top 10 accounted for about 60%.

Improvement in credit quality for U.S. insurer-bank loans continued, evidenced by a fourpercentage-point increase in those carrying NAIC 1 and NAIC 2 designations and a
corresponding four-percentage-point decrease in bank loans carrying NAIC 3 and NAIC 4
designations.

Author(s): Jennifer Johnson

Publication Date: 16 July 2024

Publication Site: NAIC Capital Markets Special Report

Pension Funds Are Pulling Hundreds of Billions From Stocks

Mary Pat Campbell

Link: https://www.wsj.com/finance/investing/pension-funds-stocks-bonds-679b8536?st=v0qwhq895irsqxn&reflink=desktopwebshare_permalink

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Excerpt:

Stock portfolios at large pension funds had a blockbuster run. Now, managers are cashing out.

Corporate pension funds are shifting money into bonds. State and local government funds are swapping stocks for alternative investments. The nation’s largest public pension, the California Public Employees’ Retirement System, is planning to move close to $25 billion out of equities and into private equity and private debt.

Like investors of all kinds, the funds are slowly adapting to a world of yield, where they can get sizable returns on risk-free assets. That is rippling throughout markets, as investors assess how much risk they want to take on. Moving out of stocks could mean surrendering some potential gains. Hold too much, for too long, and prices might fall.

Author(s): Heather Gillers, Charley Grant

Publication Date: 18 Apr 2024

Publication Site: WSJ

Dallas officials question lingering private investments in police and fire pension fund portfolio

Mary Pat Campbell

Link: https://www.keranews.org/news/2024-02-09/dallas-officials-question-lingering-private-investments-in-police-and-fire-pension-fund-portfolio

Excerpt:

The Dallas Police and Fire Pension System — which as been severely underfunded for years — still has about 25% of its assets tied up in private investments.

That’s according to pension system official’s briefing during Thursday’s Ad Hoc Committee on Pensions meeting.

Those include investments in an energy fund, natural resources — and assets in real estate. The private investments were deemed “legacy” assets that the pension system still maintains.

It was risky private investments that landed the system in the situation it’s in now — with over a billion dollars in unfunded liabilities.

“Currently we’ve gotten that down to 26%,” Dallas Police and Fire Pension System Chief Investment Officer Ryan Wagner said during the meeting.

Author(s): Nathan Collins

Publication Date: 9 Feb 2024

Publication Site: KERA News

Bizarre Valedictory Interview by CalSTRS Investment Chief, Chris Ailman, Asks Private Equity to Be Nice and Share with Workers

Mary Pat Campbell

Link: https://www.nakedcapitalism.com/2024/02/bizarre-valedictory-interview-by-calstrs-investment-chief-chris-ailman-asks-private-equity-to-be-nice-and-share-with-workers.html

Graphic:

Excerpt:

The Financial Times made its interview with departing CalSTRS’ Chief Investment Officer Chris Ailman its lead story yesterday: Private equity should share more wealth with workers, says US pension giant. The Financial Times was too polite to say so, but Ailman could lay claim to being the best large public pension fund chief investment officer. CalSTRS, which manages the pensions of California teachers, is in the same general size league as its Sacramento sister CalPERS, and regularly outperforms CalPERS by a meaningful margin.

….

It’s hard to know where to begin with this. Limited partners like CalSTRS, who are, in Wall Street parlance, the money, have not even been able to get basic disclosures from the general partners like how much in total the private equity firms hoover out in fees and expenses, despite many years of pleading. Mind you, it’s a requirement for a fiduciary to evaluate the costs and risks of any investment, yet these investors have accepted this abuse.

Limited partners don’t get P&Ls of portfolio companies. They don’t get independent valuations even though that is considered to be essential for every other type of investment. So it’s ludicrous to think that general partners will share money with one of the very weakest parties in the picture, mere workers, when they won’t give information to the limited partners.

Someone new to this topic might wonder why limited partners don’t say “no”. The reason is they perceive private equity to be necessary for them to earn enough to reduce their level of underfunding, which in the public pension fund world is typically pretty bad. To make up for the shortfalls, pension funds like CalPERS and CalSTRS have also been increasing the amount they charge to cities, counties, and other local government entities. These pension costs are taking up larger and larger proportions of these budgets, creating concern and anger.

Author(s): Yves Smith

Publication Date: 16 Feb 2024

Publication Site: naked capitalism

Just 2% of Philadelphia’s pension fund could boost the local economy

Mary Pat Campbell

Link:https://www.inquirer.com/opinion/commentary/philadelphia-pension-fund-investments-20240214.html?utm_source=email&utm_campaign=edit_social_share_email_traffic&utm_medium=email&utm_content=&utm_term=&int_promo=

Excerpt:

The primary responsibility of the $8.4 billion Philadelphia pension fund is to assure the continuing financial security promised to city workers upon retirement. The welfare of city employees, along with all Philadelphians, depends on the economic and social well-being of the city itself. Therefore, the Philadelphia Public Banking Coalition has proposed that the city pension fund invest $168 million, 2% of its portfolio, in local economically targeted investments to fund projects that benefit Philadelphians.

These investments would address policy goals while achieving returns as high or higher than many of the fund’s current asset classes. Currently, the 2023 pension fund investment policy describes risky investments in options, futures, forwards, and swap agreements. And there’s a precedent for public policy considerations, for example, in limitations on investments in Russian companies, private prisons, and arms manufacturers. The current portfolio exhibits a strong real estate focus but without preference for Philadelphia projects.

Below are just a few of the possible opportunities for targeted investments that would strengthen the health of Philadelphia’s economy.

Author(s): Stan Shapiro and Peter Winslow, For The Inquirer

Publication Date: 14 Feb 2024

Publication Site: The Philadelphia Inquirer

‘Too few’ public pension funds address climate in proxy voting — report

Mary Pat Campbell

Link: https://www.pionline.com/esg/too-few-public-pension-funds-address-climate-proxy-voting-report?utm_source=PIDailyWrap&utm_medium=email&utm_campaign=20240123

Excerpt:

“Too few” public pension funds are addressing climate-related financial risk when it comes to proxy voting, according to a report released Jan. 23 by nonprofit organizations Sierra Club, Stand.earth and Stop the Money Pipeline.

The report, “The Hidden Risk in State Pensions: Analyzing State Pensions’ Responses to the Climate Crisis in Proxy Voting,” looked at 24 public pension funds with a collective $2 trillion in assets, including the $241.7 billion New York City Retirement Systems and state pension funds in California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Mexico, Oregon, Rhode Island, Vermont, Washington and Wisconsin.

The pension funds were graded on their proxy-voting guidelines, proxy-voting records, and data transparency.

On proxy-voting guidelines, no pension system received an A grade, but three of the five New York City pension funds covering city employees, the Board of Education and teachers, earned a B for addressing systemic risk and climate resolutions. Half of the 24 pension funds studied earned an F.

….

“The findings of this analysis are clear: Far too few state pensions are taking adequate steps to address climate-related financial risks and protect their members’ hard-earned savings, raising serious concerns about their execution of fiduciary duty,” the report’s executive summary said.

….

Amy Gray, associate director of climate finance for Stand.earth, said it is disappointing to see many funds not using proxy-voting strategies to address the financial risks of climate change. “This report is a stark reminder that pension funds can — and must — do so much more to wield their massive investor power,” Gray said in the news release.

Author(s): Hazel Bradford

Publication Date: 23 Jan 2024

Publication Site: P&I

The Hidden Risk in State Pensions: Analyzing State Pensions’ Responses to the Climate Crisis in Proxy Voting

Mary Pat Campbell

Link: https://stand.earth/resources/the-hidden-risk-in-state-pensions-analyzing-state-pensions-responses-to-the-climate-crisis-in-proxy-voting/

Report PDF: https://stand.earth/wp-content/uploads/2024/01/The-Hidden-Risk-in-State-Pensions-Report.pdf

Graphic:

Excerpt:

A first-of-its-kind report, the Hidden Risk analyzes the proxy voting records and proxy voting guidelines of the 19 public pensions that are in states where a state financial officer has indicated it is a priority issue both to advocate for more sustainable, just, and inclusive firms and markets , and to protect against climate risk.

Ahead of the 2024 shareholder season, a first-of-its-kind report “The Hidden Risk in State Pensions: Analyzing State Pensions’ Responses to the Climate Crisis in Proxy Voting,” from Stand.earth, Sierra Club and Stop the Money Pipeline, analyzes proxy voting records, proxy guidelines, and voting transparency of 24 public pension funds in the USA collectively representing over $2 trillion in assets under management (AUM).

These pensions are based in states where a state financial officer is a member of For the Long Term, a network that advocates for more sustainable, just, and inclusive firms and markets and strives to protect markets against climate risk.

The pensions analyzed include the pension systems of New York City and the states of California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Mexico, Oregon, Rhode Island, Vermont, Washington, and Wisconsin.

Author(s):

Stand.earth
Sierra Club
Stop The Money Pipeline

Publication Date: 23 Jan 2024

Publication Site: Stand.earth

Climate risk vs. interest-rate risk

Mary Pat Campbell

Link: https://www.bloomberg.com/opinion/articles/2024-01-18/coinbase-trades-beanie-babies

Excerpt:

An important meta-story that you could tell about financial markets over the past few years would be that, for a long time, interest rates were roughly zero, which means that discount rates were low: A dollar in the distant future was worth about as much as a dollar today. Therefore, investors ascribed a lot of value to very long-term stuff, and were not particularly concerned about short-term profitability. Low discount rates made speculative distant-future profits worth more and steady current profits worth less.

And then interest rates went up rapidly starting in 2022, and everyone’s priorities shifted. A dollar today is now worth a lot more than a dollar in 10 years. People prioritize profits today over speculation in the future.

This is a popular story to tell about the boom in, for instance, tech startups, or crypto: “Startups are a low-interest-rate phenomenon.” In 2020, people had a lot of money and a lot of patience, so they were willing to invest in speculative possibly-world-changing ideas that would take a long time to pay out. (Or to fund startups that lost money on every transaction in the long-term pursuit of market share.) In 2022, the Fed raised rates, people’s preferences changed, and the startup and crypto bubbles popped. 

I suppose, though, that you could tell a similar story about environmental investing? Climate change is, plausibly, a very large and very long-term threat to a lot of businesses. If you just go around doing everything normally this year, probably rising oceans won’t wash away your factories this year. But maybe they will in 2040. Maybe you should invest today in making your factories ocean-proof, or in cutting carbon emissions so the oceans don’t rise: That will cost you some money today, but will save you some money in 2040. Is it worth it? Well, depends on the discount rate. If rates are low, you will care more about 2040. If rates are high, you will care more about saving money today.

We have talked a few times about the argument that some kinds of environmental investing — the kind where you avoid investing in “dirty” companies, to starve them of capital and reduce the amount of dirty stuff they do — can be counterproductive, because it has the effect of raising those companies’ discount rates and thus making them even more short-term-focused. And being short-term-focused probably leads to more carbon emissions. (If you make it harder for coal companies to raise capital, maybe nobody will start a coal company, but existing coal companies will dig up more coal faster.)

But that argument applies more broadly. If you raise every company’s discount rate (because interest rates go up), then every company should be more short-term-focused. Every company should care a bit less about global temperatures in 2040, and a bit more about maximizing profits now. Maybe ESG was itself a low-interest-rates phenomenon.

Anyway here’s a Financial Times story about BlackRock Inc.:

BlackRock will stress “financial resilience” in its talks with companies this year as the $10tn asset manager puts less emphasis on climate concerns amid a political backlash to environmental, social and governance investing.

With artificial intelligence and high interest rates rattling companies globally, BlackRock wants to know how they are managing these risks to ensure they deliver long-term financial returns, the asset manager said on Thursday as it detailed its engagement priorities for 2024.

BlackRock reviews these priorities annually as it talks with thousands of companies before their annual meetings on issues ranging from how much their executives are paid to how effective their board directors are.

“The macroeconomic and geopolitical backdrop companies are operating in has changed. This new economic regime is shaped by powerful structural forces that we believe may drive divergent performance across economies, sectors and companies,” BlackRock said in its annual report on its engagement priorities. “We are particularly interested in learning from investee companies about how they are adapting to strengthen their financial resilience.”

There is a lot going on here, and it is reasonable to wonder— as the FT does — whether BlackRock’s shift from environmental concerns to high interest rates is about the political and marketing backlash to ESG. But you could take it on its own terms! In 2020, interest rates were zero, and BlackRock’s focus was on the long term. What was the biggest long-term risk to its portfolio? Arguably, climate change. So it went around talking to companies about climate change. In 2024, interest rates are high, and the short term matters more, so BlackRock is going around talking to companies about interest-rate risk.

I don’t know how AI fits into this model. For most of my life, “ooh artificial intelligence will change everything” has been a pretty long-term — like, science-fiction long-term — thing to think about. But I suppose now “how will you integrate large-language-model chatbots into your workflows” is an immediate question.

Author(s): Matt Levine

Publication Date: 18 Jan 2024

Publication Site: Bloomberg

ESG Crime

Mary Pat Campbell

Link:https://www.bloomberg.com/opinion/articles/2024-01-17/making-esg-a-crime

Excerpt:

Oh sure whatever:

Republican lawmakers in New Hampshire are seeking to make using ESG criteria in state funds a crime in the latest attack on the beleaguered investing strategy.

Representatives led by Mike Belcher introduced a bill that would prohibit the state’s treasury, pension fund and executive branch from using investments that consider environmental, social and governance factors. “Knowingly” violating the law would be a felony punishable by not less than one year and no more than 20 years imprisonment, according to the proposal.

Pensions & Investments reports:

“Executive branch agencies that are permitted to invest funds shall review their investments and pursue any necessary steps to ensure that no funds or state-controlled investments are invested with firms that invest New Hampshire funds in accounts with any regard whatsoever based on environmental, social, and governance criteria,” the bill said.

The New Hampshire Retirement System “shall adhere to their fiduciary obligation and not invest with any firm that will invest state retirement system funds in investment funds that consider environmental, social, and governance criteria, as the investment goal should be to obtain the highest return on investment for New Hampshire’s taxpayers and retirees,” the bill said.

Investors aren’t allowed to consider governance! Imagine if this was the law; imagine if it was a felony for an investment manager to consider governance “with any regard whatsoever.”

….

I’m sorry, this is so stupid. “ESG” is essentially about considering certain risks to a company’s financial results: You might want to avoid investing in a company if its factories are going to be washed away by rising oceans, or if its main product is going to be regulated out of existence, or if its position on controversial social issues will cost it sales, or if its CEO controls the board and spends too much corporate money on wasteful personal projects. Obviously ESG in practice is also other, more controversial things:

  1. If you care about the environment, social issues, etc., you might want to invest in companies that you think are environmentally or socially good, whether or not they are good financial investments.
  2. You might incorrectly convince yourself that the stuff you think is environmentally or socially good is also good for the bottom line: You might have a wishful estimate of how quickly the world will transition away from fossil fuels, to justify your desire not to invest in oil companies. You might tell yourself “this company’s stance on social issues will cost it lots of customers” when really the customers don’t care, but you do.

But if you make it a crime for investors to consider certain financial risks then you get too much of those risks.

In particular, I suspect, you get too much governance risk. If every investor tomorrow said “okay we don’t care about the environment,” most companies probably wouldn’t ramp up their pollution: Their executives probably don’t want to pollute unnecessarily, polluting probably wouldn’t help the bottom line, and many companies just sit at computers developing software and couldn’t pollute much if they wanted to. But if every investor tomorrow said “okay we don’t care about governance,” then, I mean, “governance” is just a way of saying “somebody makes sure that the CEO is doing a good job and doesn’t pay herself too much.” If the investors don’t care about that, then a lot of CEOs will be happy to give themselves raises and spend more time on the corporate jet to their vacation homes.

Author(s): Matt Levine

Publication Date: 17 Jan 2024

Publication Site: Bloomberg