Under the Dome

As questions are raised, Cowell backs pension investment flexibility

A Senate committee approved legislation Thursday to further loosening investing rules for the state pension fund at the request of Treasurer Janet Cowell, just as the fund's former investment head has been writing some stinging criticism about states that have ramped up their alternatives investments, Scott Mooneyham at the Insider reports.

Andy Silton, who served as chief investment officer during a portion of the terms of former State Treasurer Richard Moore, has gone as far as to question the moves into private equity and hedge funds during his time on the job here. "Unfortunately, we went ahead and implemented a program of investing in hedge funds and private equity. While our program didn’t do any harm, it didn’t help anyone but the money managers," Silton wrote recently. His comments have come on his blog, called Meditation on Money Management, and on other social media. Silton, in email exchanges, did not immediately agree to be interviewed for this piece. His blog comments regarding investing in hedge funds and other non-traditional investments have come largely in response to a chorus of criticism about huge shifts into those investments by pension funds in South Carolina and Rhode Island.

Despite that criticism, as well as a planned pullback in alternatives by the California retirement system, State Treasurer Janet Cowell is again urging state lawmakers to provide more flexibility to put a higher percentage of the state's $78 billion pension fund into several categories of alternatives. The bill was approved Thursday up by the Senate Committee on Pensions and Retirement and Aging. It would allow Cowell to increase the state's portion of pension fund investments in real estate and alternatives -- including hedge funds, commodities, asset-back securities and other credit-related investments, and venture capital and private equity -- to 40 percent.

Combined, those categories can total 36 percent currently. The bill would also allow any one category to make up as much as 15 percent of pension fund investments. The move would mean less money might be invested in bonds and publicly traded stocks.

A statement from Cowell's office said the department is pursuing the bill because it needs more flexibility in light of an expected rise in interest rates, which would mean lower returns for bonds. The statement also said the pension fund has a "higher than desirable allocation" of publicly traded stocks. Cowell's office adds that the change will prevent the pension fund from having to sell off well-performing investments to stay under current category limits. "We will try to get as much flexibility as we can," Cowell was quoted as saying by Pensions & Investments magazine at the Milken Institute Global Conference in Beverly Hill, Calif., earlier this week.

If approved, the bill would mark the third time that Cowell's office has asked for and received approval to put additional pension dollars into alternatives. Sen. Ralph Hise, R-Mitchell, the bill's sponsor, also cited the inflexibility of current category limits. He added that he was attempting to "mitigate the risk." Asked if legislators should examine whether the state's earlier moves into alternative have led to appreciable gains, he responded, "If I didn't think this was in the best interest of the state, I wouldn't sponsor the bill."

Silton, in his blog comments, comes to a different conclusion about alternatives investing. "Alternative investment managers are continuing to exploit the last great marketing opportunity: public pension plans," he begins one blog post. In another posting, he writes, "Alternatives aren't the answer to a pension’s woes." At other times, he writes that alternatives can play "a positive role," but not with any large scale investing. Besides high fees, he says alternatives carry hidden costs that are not immediately apparent to pensioners, including carried interest and trading costs. He also points out that a driving force urging that defined-benefit plans -- like that enjoyed by North Carolina pensioners -- be replaced with defined-contribution plans are the very alternative money managers being given pension money to invest.

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