Good Governance Leads to 14% Outperformance

(November 14, 2013) — Investing in companies with strong corporate governance principles will lead to a stronger rate of return, according to new evidence from research firms Inalytics and PIRC.

At a time when environment, social, and governance investing is becoming increasingly popular, PIRC and Inalytics’ report has claimed the return profile of these types of corporates outperforms the index by 13.9%.

The foundation for the analysis was PIRC’s scoring of companies’ governance profiles, which are based on a number of factors including the independence of their auditing process and their disclosure of executive pay. These different criteria are combined to rank companies as high, medium, or low risk.

Of the 423 Companies analysed, the firms which are ranked “high-risk” by PIRC underperformed the index by an average of 4.1% over a 23-month period, but those ranked “low-risk” outperformed the same index by 13.9%.

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The effect is most pronounced at the small cap end of the equities market: ‘low-risk’ firms outperformed the index by 15%, “medium-risk” by 8.15%, while “high-risk” companies underperformed by 0.4%.

“For small caps, governance may have a larger effect because the decisions and behaviour of management are more critical in smaller organisations,” said Rick DiMascio, CEO of Inalytics.

The phenomenon was far less evident when assessing large cap stocks however. “Low-risk” companies were found to have underperformed by 1.6% and “high-risk” companies underperformed 2.2%, but “medium-risk” companies outperformed 0.4%.

DiMascio confessed that the reasons for the reduced impact of governance were “as yet unclear”, adding: “Perhaps it is because governance’s effect is diluted for large companies who have many factors impacting their performance.”

Despite this variance Inalytics is confident the research will help pension funds understand the influence governance has on their investments. The research will be continued, using the Merseyside Pension Fund’s portfolio.

“The on-going research will compare the fund’s portfolios to see how performance is affected by governance ranking,” said DiMascio.

“Clients are using this information to assess the overall profile of their portfolios and gauge whether their managers own high or low risk companies from a governance perspective. We are confident that this research area will provide greater understanding of the impact of corporate governance in the future.”

For further information on the process and methodology, click here.

(November 13, 2013) — The Wyoming Retirement System (WRS) has appointed Sam Masoudi as its new CIO, replacing John Johnson who pleaded guilty to insider trading earlier this year.

Masoudi, formerly a managing director of Tulane University’s endowment, will begin running the $7 billion pension plan—which is responsible for approximately 65,000 participants—from December 3.

“With Sam’s diverse investment background, he will provide excellent leadership to the investment management team,” said Ruth Ryerson, executive director of WRS.

Masoudi has previously served as a portfolio manager and founder of investment fund Silver Peak Capital Management, director at private equity firm Veronis, Suhler & Associates, and assistant vice president at real estate investment banking group Kidder Peabody and PaineWebber.

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The new CIO will inherit a 78.6% funded defined benefit plan with total unfunded liabilities of $1.5 billion.

His predecessor Johnson pleaded guilty to illicit trading in March for activities in 2008—two years prior to joining WRS—and was dismissed from the pension fund within a week.

The Securities and Exchange Commission revealed Johnson had gained $136,000 from the illegal trades.

Prior to the financial scandal, Johnson told aiCIO in 2012 he was concerned with the impact market volatility would have on his fund: “The volatility being presented in the market due largely to sovereign debt issues pervading the investment environment is out of our control.”

To provide cushion against such unforeseeable instability, Johnson said he had turned to fixed income—at the expense of WRS’ equity portfolio.

Masoudi will also face recent changes in state policy requiring public employees to contribute more to their retirement.

Under the 2013 law, the employee contribution rate has increased from 7% to 7.5% in October. The employer contribution is also expected to rise in 2014, from 7.12% to 7.62%.

These changes will help put the pension fund back on track, according to Ryerson. “It doesn’t look as healthy as it did last year, but that’s due to the change in assumptions,” she said.

WRS reduced its actuarial-assumed return from 8% to 7.74%, due to increasing longevity.