Kentucky Retirement Systems Returns 1.2% for Fiscal 2020

The Kentucky Retirement Systems (KRS)’ investments returned 1.15% for fiscal year 2020, more than double its benchmark’s return of 0.5%, but less than one-third of the median 3.59% return for peer pension plans as reported by Wilshire Associates. The returns raised the value of KRS’ total assets to $18.2 billion, $12.7 billion of which is in its pension funds, with the remaining $5.5 billion in its insurance funds.

KRS said a strong portfolio performance during the second quarter, when the markets rebounded from the March sell-off, helped it outperform its benchmark. However, it attributed its underperformance compared with its peers to having to invest more conservatively than better funded plans, due to its lower funded status.

The various pension funds under KRS reported returns ranging from 0.2% for the KERS-Hazardous insurance plan to 2.36% for the Kentucky Employees Retirement System (KERS) Non-Hazardous pension plan. Of KRS’ 10 pension and insurance funds, only the KERS-Hazardous insurance plan failed to surpass its respective benchmark returns during the fiscal-year period, underperforming by just 0.04 percentage points.

“All of our 10 portfolios continue to be managed conservatively with a unique approach to how the asset classes are grouped for asset allocation purposes,” David Eager, KRS’ executive director, said in a statement.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Collectively, KRS’ pension funds reported three- and five-year annualized returns of 5.14% and 5.58%, respectively, beating their benchmarks’ returns of 4.75% and 5.38%, respectively. KRS’ 10-year annualized return of 7.37% fell short of its benchmark’s return of 7.55%, and over 20 years, the collective funds slightly outperformed the benchmark by 5.22% to 5.18%.

The asset allocation of KRS is 20.83% in fixed income, 19.71% in US public equities, 19.48% in non-US public equities, 16.35% in high yield/specialty credit, 14.57% in diversifying strategies, and 9.07% in private equity.

The core fixed-income portfolio returned 5.3%, which was the best performing asset class during the fiscal year, but was well off the 8.7% earned by its benchmark. KRS said that while most individual mandates performed well in absolute and relative terms, it attributed the underperformance to weakness in the US corporates one-to three-years mandate.

KRS’ US equity investments returned 4.7% for fiscal 2020, below the 6.5% return of the Russell 3000. The system said that while it doesn’t believe stock selection was an issue, the small cap portfolio underperformed its benchmark.

The non-US equity portfolio lost 2.03% for the fiscal year, but outperformed its benchmark, which lost 4.74%. The system said the outperformance was spurred by two of the four active MSCI ACWI Ex-US mandates, both of which have a growth bias, and both of which outperformed by 15%.

The KRS Specialty Credit allocation lost 1.4%, while its benchmark lost 1%. The underperformance was attributed in part to security selection from a couple individual mandates and from the leveraged loan portion of the portfolio.

The diversifying strategy group lost 2.85% during the year, but there was no benchmark information available in the system’s financial report. And KRS’ private equity investments returned 0.29% for the year, matching its benchmark’s performance.

Related Stories:

Kentucky High Court Dismisses Suit over KRS’ ‘Risky’ Investments

Exclusive: Kentucky Retirement’s Executive Director Says Proposed Board Split Will Increase Taxpayer Burden

Kentucky Governor Signs Measure to Revamp Local Pension Boards

Tags: David Eager, Kentucky Retirement Systems, Kentucky Teachers Retirement System (KTRS), KERS, KRS, Pension, Wilshire Associates

A state ethics investigation will examine whether former California Public Employees’ Retirement System (CalPERS) CIO Ben Meng violated conflict of interest laws when he oversaw investments in private equity funds at the same time that he was personally invested in firms that ran the funds.

The announcement of the formal investigation Monday by California’s Fair Political Practices Commission follows the commission receiving two complaints earlier this month that Meng violated ethics rules.

The commission’s announcement of a formal investigation is a significant step because it means commission staff found the complaint had enough merit to at least launch an investigation.

“Complaints are taken under review to determine merit, whether or not to open an investigation, “ said commission spokesman Jay Wierenga. “If not, a complaint is dismissed. If there’s merit (which is to say there is information to indicate a POTENTIAL violation) then an investigation begins.”

For more stories like this, sign up for the CIO Alert newsletter. 

Meng could face penalties of $5,000 per violation if he is found to have breached ethics regulations.

Meng resigned as the chief investment officer of the nation’s largest pension fund on Aug. 5, just 18 months after he took the top spot.

As required by state law, Meng disclosed that he owned shares of the Blackstone Group shortly after taking office in January 2019. The review is examining the pension system’s $1 billion investment in a Blackstone fund in April 2019 and why Meng did not recuse himself from the investment decision.

Meng resigned a day after the first of two anonymous complaints was filed with state ethics officials.

Meng has told CalPERS officials that failing to recuse himself from the Blackstone investment decision was an oversight on his part, not an intentional act.

On Monday, CalPERS Chief Executive Officer Marcie Frost was questioned by the CalPERS board for four hours in a closed session on what she knew about Meng’s financial disclosures.

In response to the issues surrounding Meng’s financial disclosure forms, CalPERS is expected to issue new rules regarding the filing of the disclosure forms by pension system employees, including the more than 400 staffers in the investment office.

“We are committed to strong compliance protocols,” Frost said in a statement Monday night. “At next month’s meeting, we will bring to the board specific policy options for their considerations. We will always do everything we can to be transparent and accountable in our mission to deliver retirement security to California’s public employees.”

Meng has cited health issues as the reason for his resignation and has refused requests for an interview. CalPERS has appointed its deputy chief investment officer, Dan Bienvenue, as the interim CIO while it searches for a replacement for Meng.

During a brief public session Monday before going into closed session, CalPERS Board President Henry Jones refused a request by California State Controller Betty Yee, a member of the CalPERS board, to speak about Meng.

Following his resignation, Yee had criticized Meng for a lapse in judgment and his lack of adherence to conflict of interest policies. She called for an emergency board meeting to discuss the situation and the addition of safeguards to prevent future incidents.

On Monday, she asked Jones when CalPERS would discuss her request for the emergency meeting in public.

“I just wanted to know at what point we’re going to have a hearing on those topics because it doesn’t seem like those will be covered in closed session today,” she said.

Jones cut her off, saying the meeting request could be discussed in closed session.

Another board member, Margaret Brown, also attempted to bring up the Meng matter in the public session, saying that members of the public wanted to comment during the streamed meeting.

She was told by CalPERS Attorney Matt Jacobs that could not happen because the board was going into closed session.

Brown told CIO that she was disappointed that members of the public could not voice their opinions.

“They should have had an opportunity to speak,” she said.

The $400 billion CalPERS fund is only 71% funded and, like other US pension funds, is struggling to meet its 7% expected rate of return. The pension fund earned 4.7% in the fiscal year ending June 30, above its 4.3% benchmark, but still 2.3 percentage points away from the expected rate of return.

The leaders of dozens of municipalities in California whose employees are covered by the fund have faced increasingly larger pension payments over the years.

Before starting at Sacramento-based CalPERS, Meng worked from 2015 to 2018 as deputy CIO of China’s State Administration of Foreign Exchange. Meng, an American citizen who was born in China, was one of the top officials in charge of managing China’s $3 trillion in foreign currency reserves.

Meng had previously worked at CalPERS before 2015, starting as an investment officer and rising to the pension’s chief of asset allocation. He had also worked at several investment firms.

Before his departure, Meng was pushing the pension plan to invest in private credit, insisting that direct lending could help the organization meet its expected annual rate of rate in the future in a difficult economic environment.