NJ Gov Vetoes Bill, Says It Could Jeopardize State Pension

Phil Murphy rejects proposed legislation as too broad and challenging to implement.

New Jersey Gov. Phil Murphy has vetoed a bill that would have imposed certain conditions on the investments of its retirement system and required due diligence in the selection of external managers.

The bill had been overwhelmingly approved by the state legislature as the New Jersey Senate passed it 26-12 with two senators not voting, while the state assembly passed it 67-6 with seven representatives not voting.

In his veto letter to the New Jersey state senate, Murphy said he rejected the bill because it was too broad and, as a result, “could jeopardize the overall health” of the state’s retirement systems.

“This bill creates broad proscriptions on the state’s investment practices that would be challenging for the Division [of Investment] to implement,” said Murphy. “The bill’s sweeping prohibition against any investments that could pose a ‘reputational risk’ to the state’s retirement systems, for example, could be interpreted to apply to a wide range of direct and indirect investments, and may be used to call into question investments that are objectively appropriate.”

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Murphy also said that he had been advised by the state’s treasury that the bill could undermine certain investment strategies that have been used to reduce fees and increase returns. As an example, he said the state’s Division of Investment has managed many of the state pension funds’ real estate investments through separate accounts rather than a commingled investment vehicle. He said the use of a separate account is expected to save the division approximately $39 million in fees over the life of the $300 million commitment.

“This bill could significantly reduce the division’s ability to take advantage of the savings opportunities available through this and similar investment structures,” wrote Murphy.

According to the text of the bill, the proposed legislation would have imposed conditions on domestic equity investments in the private real estate, private equity, and private infrastructure asset classes in which the Division of Investment has more than a 50% interest. The bill also imposed requirements related to the protection of public sector jobs and the selection of external managers.

The bill required external managers to be evaluated for their record of compliance with the policies, including any responsible contractor policies of public pension plans for which they served or have served as external managers. They would also have been required to disclose any instances of non-compliance with such policies, and to certify that they and their portfolio companies are not out of compliance with any such policies at the time of any proposed investment by the division.

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New York City is Worried About China, and the Fed

Deputy CIO fleshes out key concerns at meeting of five city pension plans.

The US-China trade war and monetary policy are two of the primary things keeping the five pension funds of New York City up at night.

Fourth-quarter market swings, the unpredictability of the Fed, and President Trump’s ongoing gripes with China were highlighted as current concerns by Michael Haddad, the deputy chief investment officer of the New York City Bureau of Asset Management at Wednesday’s common meeting. This monthly meeting is where the heads of each of the city pension plans (teachers, employees, and board of education systems, and the police and firefighter pension funds) meet—not to be confused with the New York Common Retirement Fund, the state’s massive pension organization.

Traditionally known for being a rally month, December was rougher than expected for investors. Haddad said one of the catalysts was Apple’s November pre-earnings report, where the company disclosed it would expect fewer iPhone sales in 2019. The diminished projections spooked the markets, which realized what the trade war could do to the US’s tech industry. “It triggered a market view that the combination of China’s slowing and the trade tariffs were going to be damaging to US businesses going forward, and it kind spilled into all things China in that whole fourth-quarter environment,” he said.

The Russell 3000, MSCI World (excluding US), and MSCI Emerging Market indexes were down 14.3%, 13.3%, and 7.5%, respectively, in 2018’s fourth quarter. Although Haddad discussed the slowing of global growth, mentioning issues in Europe such as the yellow jacket protests in France and Italy’s technical recession, he remained fixated on China.

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“On one hand you have China as a whole trying to de-lever. On the other hand, you have them trying to keep growth from going too far below their target with some monetary stimulus,” he said. “But China is slowing.”

This, of course, led to the Fed, and eventually Washington D.C., which he said remained “a circus of sorts.”

Federal Reserve Chairman Jerome Powell’s decision to raise interest rates 25 basis points on December 19 was expected, and the change of heart to downgrade the number of hike expectations from three to two was nice, but the move still caused alarm for investors as the market dropped yet again.  With its actions, Haddad opined that the Fed had “ignored what was going on in financial markets,” contributing to the extreme volatility felt that month.

As for Washington, D.C., the chief said the midterm elections “actually really bothered markets in the fourth quarter,” where the House flipped from Republican to Democrat.

“From a market perspective, that just means the end of the Republican agenda, if you will, in a market-friendly way, specifically, additional deregulation,” he said. “I think the markets realized there’s going to be less deregulation going forward with the Democrats in check.”

He said that the US’s policies with China are going “more in a positive way” in the fourth quarter because of the G20 summit in Argentina, “where it seemed that Trump and[China President] Xi [Jinping] reached some sort of a d’état.” However, Haddad said the uncertainty remained when layered “on top of the Apple announcement.

“A lot of these things happened in late December, where everything in the market was extraordinarily illiquid,” Haddad said. “A lot of it reversed itself in January…but some of it had to do with illiquidity.”

For now, the deputy CIO sees no clarity as to whether or not Trump and President Xi are going to meet, which is expected. He said Chinese currency has rallied almost 3% from its fall lows. He added that there’s been stability in China’s A-shares since the fall.  China’s A-shares are shares that are denominated in local currency.

He also said equity volatility will be higher than in the past. “When you think about downside risk to consensus earnings…it speaks to me that there’s limited upside from here, and it’s not an asset class that I think is going to return anywhere near what we’ve seen in the past several years.”

Returning to the Fed, Haddad said that due to the changes in monetary policy the treasury duration could suffer as the Fed could “flip again” on its decisions, as it said in last week’s meeting that it would look to inflation as the impetus to raise rates.

“I would argue not that the word ‘patient’ in the FOMC statement is meaningful and it’s somewhere in a three- to six-month time period,” he said, adding that he’s also worried about wider credit spreads. “Leverage in investment grade [bonds] has gone up and it doesn’t take much of a catalyst to spill over… which then spills over into an entire capital structure.”

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