DOL Rule Generates More Fiduciary Buzz Among Institutions

A best practice includes creating an appropriate investment policy.

Although a standard of care is already in place for institutions, via the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the coverage of the DOL fiduciary rule and related plan sponsor lawsuits in recent years have brought “renewed awareness” within the industry to improve fiduciary processes, according to Billy Lanter, fiduciary investment adviser at Lexington, Ky.-based Unified Trust Co.

“No institution wants to be a headline, as it relates to litigation, so the rule of a fiduciary is a much hotter topic today among foundations and endowments,” he says.

Institutional clients can uphold the UPMIFA standard of care and build donor trust by removing conflicts of interest, improving fund and asset quality, reducing fees and assessing concentration risk, he adds.

Of course, doing so is a process rather than an overnight fix. “Fiduciary education must be an ongoing commitment to the institutional culture, especially with board and staff turnover,” Lanter says.

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A few best practices include creating an appropriate investment policy statement (IPS) that states the organization’s goals; regularly reviewing and benchmarking all investment fees; and establishing a definition of imprudent assets along with a process to dispose of them.

One of the most common mistakes institutions make in this regard, according to Lanter, is using multiple money managers without an effective or documented process to review investment management decisions.

“Delegating investment management decisions is fairly common, but when using multiple managers, the fiduciary duty of the organization is to ensure that each manager’s strategy is in concert with one another and consistent with the Investment Policy Statement,” he says. “This can be a rigorous process and institutions often don’t have a documented process to monitor this holistic type of review because they are simply unaware of this responsibility and how to manage it.”

He also suggests improving processes for selecting and evaluating an investment manager. It’s not just about fees and performance, but also about whether the manager can adhere to fiduciary best practices and implement and review the IPS.

And in the end, it all comes back to donor trust. “As anyone who has spent time soliciting donations will tell you, trust is at the core of any major gift,” Lanter says. “As a donor, how do I know my gift will be managed in a prudent manner, used to further the mission of the organization and is exposed to reasonable fees?”

By Corie Hengst 

CalPERS Shift to De-Risk Portfolio Post-Election Cost $900 Million in Potential Returns

Nation’s largest pension fund reduced its exposure to global equities from 51% to 46%.

The California Public Employees’ Retirement System (CalPERS) shifted away from equities in September, a move that cost the nation’s largest pension fund $900 million in potential returns as US stocks soared to new highs after the Novembr 8 election.

Ted Eliopoulos, chief investment officer of the $311 billion pension fund, said CalPERS changed its asset mix amid worries about valuations and potential volatility. CalPERS reduced its exposure to global equities to 46% of its portfolio, down from 51% previously.

During this week’s board meeting in Sacramento, Eliopoulos described the rebalancing as “a tactical decision to take some risk off the portfolio for an interim period of time.”

“Certainly, when the stock market rallies for a few months and you’ve taken some exposure to equities off the table, you’ll suffer some loss of return for that time period,” Eliopoulos said. “But what we have to remember is that there are other markets, and they tend to cycle in.”

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CalPERS moved to a less aggressive allocation last year, following two years of lower-than-expected returns. In addition to reducing exposure to global equities, CalPERS also cut its private equity mix to 8% of the portfolio, down from 10%.

CalPERS boosted its “liquidity” asset class, made up of short-term securities with maturities of less than 10 years, from 1% to 4% of the portfolio. And CalPERS increased its “inflation” category, which includes commodities and bonds linked to inflation, from 6% to 9%.

CalPERS board member Theresa Taylor urged Eliopoulos not to be too cautious in the pension plan’s asset mix.

But Richard Costigan, chairman of CalPERS’ finance and administration committee, said there’s no point in second-guessing the timing of the shift away from equities.

“We are trying to derisk because our beneficiaries are aging,” Costigan told Eliopoulos. “You’re under enormous pressure from the board to derisk the portfolio.”

CalPERS has been reining in its expected returns, and the fund is gradually lowering its discount rate from 7.5% last year to 7% by 2020. The pension fund will spend this year studying its asset mix and will determine next year what discount rate to use after 2020.

Meanwhile, CalPERS weighed in on the contentious Dakota Access Pipeline that would carry crude oil from North Dakota to Illinois. CalPERS joined 100 other investors asking major banks backing the 1,168-mile Dakota Access Pipeline to address the concerns of the Standing Rock Sioux Tribe.

The investors, which include four New York City pension funds, Boston Common Asset Management and Storebrand Asset Management, called on the banks “to protect the banks’ reputation, consumer base, and avoid legal liabilities.”

“Banks with financial ties to the Dakota Access Pipeline may be implicated in these controversies and may face long-term brand and reputational damage resulting from consumer boycotts and possible legal liability,” the investors said in a statement. “We call on the banks to address or support the tribe’s request for a reroute and utilize their influence as a project lender to reach a peaceful solution that is acceptable to all parties, including the tribe.”

By Jeff Ostrowski

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