SFERS Sees Positive Investment Returns | Chief Investment Officer

The San Francisco Employees’ Retirement System (SFERS) has managed to eke out a small positive investment return of 1.1% in the first seven months of the 2018-2019 fiscal year despite falling equity markets for much of the period, says Chief Investment Officer William Coaker Jr.

In a report to the board of the $24.7 billion pension system Wednesday, Coaker said that while the retirement plan’s equities portfolio saw a -5.1% return in the first seven months of the fiscal year that began on July 1, private equity saw a 11.02% return, while real assets produced 6.04%, and private credit returned 5.70%

The San Francisco pension system shoots for an expected average rate of return of 7.4% on an annualized basis, so given that, the 1.1% return in the first seven months of the fiscal year are paltry. The reality, however, is many institutional investors would relish that 1.1% return in a fiscal year that has seen intense volatility in equity markets.

A strong rise in stock prices in January offset the worst December in almost in 90 years, but even then, pensions plans aren’t doing well. For example, the second-largest retirement system in the US, the California State Teachers’ Retirement System (CalSTRS), reported that it is around a break-even point of as January 31 in the July-to-June fiscal year, meaning it has a zero-percentage point return. CalSTRS returned -3.2% in calendar year 2018, it recently reported.

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Coaker has been quick to point out at pension system meetings that a restructuring of San Francisco’s investment portfolio has helped the system’s investment results this fiscal year. Equities dropped to less than 35% of the portfolio as of Jan. 31, down from 48.3% in October 2016, lessening the results of stock market volatility.

Coaker said at the Feb. 13 meeting that the S&P 500 fell -9.03% in December as an increasingly “worrisome narrative from the US on trade with China” played out. In January, he said, the markets bounced back, and the S&P 500 returned 7.87%. Coaker noted that China made several conciliatory statements in January, including a commitment to buy a large volume of US goods.

“The S&P 500 experienced its worst December since the Great Depression, while January was the best start to a year in 30 years,” he said.

Coaker cited the strong performance in private equity specifically at Wednesday’s meeting, noting that the 11.02% return in the first seven months of the fiscal year in the asset class was “backed by a strong IPO market as well as strong revenue and profit growth among privately held companies.”

Part of Coaker’s strategy has been to expand the SFERS private equity program and as of Jan. 31, private equity made up 20% of the system’s portfolio, up from 13.4% in October 2016.

As Wednesday’s meeting, Coaker disclosed that the San Francisco system had made up to $100 million in venture capital investments in December 2018 and January 2019, which are classified as part of the private equity asset class.

His CIO report showed that the SFERS board meeting in closed session in December made an up to $25 million commitment in Eclipse Fund III, which is managed by Eclipse Ventures. At the board’s January meeting, it approved a commitment of up to $75 million in LAV BioSciences Fund V. The venture capital fund is managed by Lilly Asia Ventures.

The board also approved the following private market commitments meeting in closed session in December:

A commitment of up to $40 million in Kimmeridge Energy Net Profits Interest Fund V. It is classified as a natural resources fund within the SFERS real assets portfolio. According to its website, Kimmeridge puts its focus “purely on the development of low-cost unconventional oil and gas assets in the US upstream energy sector.”
A commitment of up to $100 million in Blackstone Real Estate Partners IX. The commitment is considered a real estate investment in the SFERS real estate portfolio. The fund is managed by the Blackstone Group.
A commitment of up to $75 million in Fortress Credit Opportunities Fund V. The fund is managed by Fortress Investment Group. The fund is classified as part of SFERS private credit portfolio.
A commitment of up to $50 million in Fortress Lending Fund I(A). The fund, managed by Fortress Investment Group, is considered a senior debt investment within the SFERS private credit portfolio.

San Francisco Employees’ Retirement System Becomes Major ESG Force

Tags: Returns, San Francisco, SFERS

The gusher of American shale production has failed to stop the rise in oil prices and Goldman Sachs predicts that more increases lie ahead, thanks to OPEC’s unexpected success at putting a lid on output.

“Core-OPEC producers are adopting a shock and awe strategy, and exceeding their cut commitment,” Goldman analysts wrote in a just-issued report.

The Organization of Petroleum Exporting Countries plus their allies like Russia have shown unaccustomed discipline at reducing production. In the past, lower-production pledges often fell victim to cheating, as some producers sold more oil than they promised.

This consortium has dropped production by 0.8 million barrels per day in January, compared to December, the Goldman report indicated. Result: With less oil is on the market, and more stockpiling occurring, the oil price grows more expensive.

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Inventories have expanded worldwide, even in the US, where bad weather in the Gulf of Mexico has limited offshore production. Plus, pipeline bottlenecks in the Permian shale basin have curbed domestic shipments. Added to that are the political troubles in Venezuela and Washington’s sanctions on that Latin American nation’s oil industry.

The current tumble in oil prices has been precipitous. From $85 per barrel last October for Brent crude, the international, non-US standard, the price slid to $50 last month. Only recently has it nudged up, rising almost 2% Wednesday to slightly over $63. Goldman predicted that the Brent price would hit $67.50 next quarter.

Meanwhile, West Texas Intermediate futures, the US standard, took a similar dive and recovered. WTI climbed 1.5% Wednesday to almost $54.

Oil price moves are two-edged, of course. Sometimes, what is good for oil producers is not good for consumers, and vice-versa. Aside from the threat to the economy that the trade war brings, John Lynch, chief investment strategist at LPL Financial

noted that a “potential sharp drop in oil prices poses another risk, though the potential energy cost savings for consumers and businesses would help offset the drag on energy sector profits.”

Goldman, though, was not optimistic that the higher prices would last. The firm said it was “cautious” about prices for this year’s second half, as production costs are dropping, which could translate into higher output.

Tags: oil prices, OPEC, S&P 500, shale oil ETFs, smart beta, Stocks