A Separate Account by Any Other Name | Chief Investment Officer

Fee negotiations are hard. Term negotiations are hard. Separate account naming decisions should not be. If the California Public Employees’ Retirement System (CalPERS) records are any indication, they are much more creative—but they can also be just as problematic.

“The Asian funds-of-hedge-funds program, launched in 2005/2006, was called ‘Blue Diamond,’” one CalPERS insider recently told me, reminiscing over how the Californian giant had named its first hedge fund separate accounts. I had been digging through the fund’s financial statements in reaction to its momentous (to some) decision to abandon its Absolute Return Strategies portfolio, and was attempting to determine which hedge funds would be the biggest losers. The names I found buried within their 2013 “CIO Performance Report” were slightly odd. Ermitage Highbury? PAAMCO 1848? OZ Eureka? I had never heard of them.

There was a reason: They were all, as the insider pointed out, bespoke names with quirky references. “‘Blue Diamond’ is a play on the CalPERS logo, which is a blue triangle but has a starbust-y thing that could be seen as light going through a diamond,” he explained. (Another California public fund CIO claimed that his fund “spent literally two hours arguing over what to name a separate account. It’s funny—but that’s two hours we’ll never get back.”)

“European funds-of-hedge-funds, launched in 2006, were called ‘Highbury,’” he continued. “Somebody on the CalPERS team was a huge Arsenal fan. Emerging manager funds-of-hedge-funds, launched 2006/2007, were labeled ‘1848.’ That was the year gold was discovered in California.” Finally, “Eureka”: “Customized, direct hedge funds or funds-of-one, launched 2009, were ‘Eureka.’ That’s the California state motto.” In Greek, it means “I’ve found it.” It is also the name of the coastal city into which men and resources rushed to support California’s literal gold diggers.

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Being gold rush references, “Eureka” and “1848” are double-edged swords for the politically sensitive pension plan—was it CalPERS, or hedge funds, that reaped California’s gold?

Sweden’s second pension buffer fund, AP2, is to cut 20 coal and oil companies from its portfolio in a bid to reduce “financial risk” linked to climate change.

The SEK 264.7 billion ($36.7 billion, €28.8 billion) fund is cutting 12 coal companies and eight oil and gas production firms, with a total market value of SEK 840 million, or roughly 0.3% of the portfolio.

“Our starting point for this analysis has been to determine the financial risks associated with the energy sector,” said Eva Halvarsson, CEO of AP2. “By not investing in a number of companies, we are reducing our exposure to risk constituted by fossil fuel based energy. This decision will help to protect the fund’s long-term return on investment.”

In a statement released today, AP2 said its team had reviewed all holdings in fossil fuel companies and assessed the financial risk posed to each one by climate change.

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The fund said the coal companies it would sell “face considerable climate-related financial risk, due to the negative environmental and health impacts of coal”. AP2 also cited competition from gas and renewable energy sources as affecting demand for coal.

AP2 also identified “serious climate-related financial risks” for a number of oil producers, particularly involving “high-cost projects” such as extracting oil from oil sands. AP2 said it believed it was “highly likely that these projects may either be stranded or unprofitable”.

The Swedish fund is the latest institutional investor to reduce or completely scrap their investments in fossil fuel producers. Stanford University’s $18.7 billion endowment said in May that it would sell out of fossil fuel-related companies, while the $860 million Rockefeller Brothers fund in September announced its intention to divest from coal and oil. A group of US charities representing $1.8 billion in assets also took similar steps at the start of this year.

Yale University’s $20.8 billion endowment has forged a different path, encouraging its asset managers to “anticipate possible future regulatory actions in response to the externalities produced by the combustion of fossil fuels”—more in line with AP2’s analysis-led approach.

AP2’s CIO Hans Fahlin is #83 in the year’s Power 100 list.