The Wilshire Trust Universe Comparison Service reported that the institutional assets it tracks earned median returns of 1.00% for the third quarter, which brought its one-year return as of September 30 down to 4.58%.

The returns are off from before, when the assets returned 3.21% for the second quarter, and 6.47% for the 12 months to June 28.

“The significant decline in interest rates boosted performance of bonds and other interest rate sensitive assets, including defensive equities during third quarter,” Jason Schwarz, president of Wilshire Analytics and Wilshire Funds Management, said in a statement. “Despite strong year-to-date performance, the selloff in global equities during fourth quarter 2018 is weighing on the trailing one-year performance for most institutional plans.”

US equities, which are represented by the Wilshire 5000 Total Market Index, increased 1.23% for the quarter and 2.95% for the 12 months to September 30. International equities, represented by the MSCI AC World ex US, fell 1.80% for the quarter and 1.23% for the year.

US bonds, which are represented by the Wilshire Bond Index, increased 2.86% for the third quarter, and 11.77% for the year. Multi-asset, represented by the Wilshire Risk Parity—10% Target Volatility Index, rose 4.46% for the quarter and 18.75% for the year.

Median ranges for the quarter across plan types ranged from 0.45% for large foundations and endowments with assets above $500 million, to 2.17% for large corporate plans with assets above $1 billion.  Public plans with assets above $5 billion earned 1.19% for the quarter.

Median ranges for the previous 12 months spanned from 3.86% for large foundations and endowments with assets above $500 million to 8.54% for large corporate plans with assets above $1 billion. Mega public plans, which have assets above $5 billion, had a one-year return of 5.49%.

All plan types, except large public plans, underperformed a portfolio comprised of 60% stocks and 40% bonds, which rose 1.88% during the third quarter. And for the year-ending September 30, all plan types, except large corporate plans, underperformed the 60/40 portfolio, which rose 6.48% during that time. Large plans outperformed small across all types for the year, except foundations and endowments.

Plans with assets greater than $1 billion had median returns of 1.17% and 5.49%

for the quarter and year ending Sept. 30, respectively. Plans with assets less than $1 billion returned 0.90% and 4.36%, respectively.

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The New York State Common Retirement Fund signaled that it may change its investment strategy from equities to bonds.

Anastasia Titarchuk, chief investment officer of the $216 billion fund, made the announcement on Monday at the Reuters Global Investment Outlook 2020 Summit in New York. The fund commissioned an asset allocation study that, if approved, will call for a decrease of several percentage points in the fund’s allocations to equities.

“At this point in the cycle we’re much more concerned about liquidity,” she said. “If we have a downturn, I don’t want to sell equities on the low.”

The assets likely will be investment-grade fixed income, such as US Treasury bonds. About half of the investments in the system are in global equities and about 25% are in bonds, said Titarchuk.

She is concerned about a lower rate of return on stocks up ahead. The fund pays out about $1 billion in benefits each month. Titarchuk also said the fund is likely to keep its private equity allocation around 10%, with managers’ high fees discouraging the idea of raising that percentage.

“I actually give a little pause when I see the entire market move in one direction,” said Titarchuk, referring to the proliferation of private equity for large investors. “To me that’s more of an indication that it’s a crowded trade.”

In August, New York State Comptroller Thomas DiNapoli appointed Titarchuk CIO of the fund. As interim CIO, she challenged a bill that would require the state to divest from fossil fuels.

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Mined from our Power 100 list, here are our top endowment and foundation chief investment officers, factored from an equation that considers industry influence, innovation, collaboration, talent development, fund size, and time spent as allocators:

1. David Swensen, CIO, Yale Investments Office, New Haven, Connecticut
2. Britt Harris, president, CEO and CIO, University of Texas Investment Management Company, Austin, Texas
3. Scott Malpass, vice president and CIO, University of Notre Dame, South Bend, Indiana
4. Mark Schmid, vice president and CIO, University of Chicago, Chicago
5. Kim Lew, vice president and CIO, Carnegie Corporation of New York, New York
6. Joel Wittenberg, vice president, CIO, W.K. Kellogg Foundation, Battle Creek, Michigan
7. Jagdeep Bachher, CIO and vice president of investments, Regents of the University of California, Oakland, California
8. Mark Baumgartner, CIO, Institute for Advanced Study, Princeton, New Jersey
9. Tom Joy, director of investments, Church Commissioners for England, London
10. Rosalind Hewsenian, CIO, Helmsley Charitable Trust , New York
11. Erik Lundberg, CIO, University of Michigan, Ann Arbor, Michigan
12. Tim Barrett, associate vice chancellor & CIO, Texas Tech University System, Austin, Texas
13. Eric Doppstadt , vice president and CIO, Ford Foundation, New York
14. Ana Marshall, staff vice president and CIO, William + Flora Hewlett Foundation, Menlo Park, California
15. Andrew Golden, president, Princeton University Investment Company, Princeton, New Jersey
16. Rick Slocum, CIO, Harvard Management Company, Boston
17. Sue Manske, vice president and CIO, MacArthur Foundation, Chicago
18. Michael Larson, CIO, Cascade Investment (The Gates Foundation), Kirkland, Washington
19. Shawn Wischmeier, CIO, Margaret A. Cargill Philanthropies, Eden Prairie, Minnesota
20. Donna Dean, CIO, The Rockefeller Foundation, New York

See the full Power 100 list here.

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Take heart, President Trump. The head of one of the nation’s premier investment banks believes that no recession will occur next year.

To David Solomon, CEO of Goldman Sachs, “the chance of a U.S. recession between now and the election is small.” In an interview on Bloomberg Television, Solomon gave the odds of a recession before the November 2020 election as 25%.

That’s slightly greater prospects of a downturn than the ones he gave nine months ago (15%), Solomon added.  The reason to forecast a slightly higher likelihood of a 2020 recession is the deeper uncertainty nowadays, the Goldman CEO explained.

If he’s right about no near-term recession, Donald Trump has reason to be cocky. History shows that presidents seeking second terms with good economies end up winning. That’s the conclusion of Moody’s Analytics, which back tested its data to 1980.

Incumbents with recessions or sluggish recoveries around their necks went down to defeat: Jimmy Carter in 1980 and George H.W. Bush in 1992 demonstrate that. Moody’s believes that Trump could surpass his 2016 electoral college victory next year, should the economy cooperate.

Solomon said that the US manufacturing sector hasn’t fared well lately. Still, he noted that consumers are still spending well, amid record low unemployment and (slight) wage gains.

He takes heart about a seeming positive break in US-China trade tensions. “If you’re watching what’s coming out of the administration in Washington, if you are listening what’s coming out of China,” he said, “I think it feels like both are incentivized to have some sort of a phase one deal, so there looks like some progress, some movement forward.”

The Goldman chief has previously expressed leeriness about the trade war.

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Once little noticed, the hospitality real estate segment has been growing in prominence during the past decade, becoming one of the highest performing property plays. That’s according to data provider Preqin and investment firm Pro-invest Group.

Returns for the hospitality real estate sector have met or outpaced the MSCI US REIT index over one-, three-, and five-year horizons, the Preqin-Pro-invest report indicated. The report said that fund managers have put this capital to use by deploying more than $110 billion into hospitality assets since the beginning of 2015. It also said they are increasingly targeting larger deal opportunities and are diversifying into Asia and Australia.

The hospitality industry includes hotels, amusement parks, golf courses, cruise ships, and restaurants.

“The hospitality sector has seen a flurry of activity in the past couple of years, hitting levels not seen since the global financial crisis,” Justin Hall, real estate product manager for Preqin, said in a release. “Returns in the sector have outpaced both office and residential assets in every vintage year since 2010, and investors are taking note.”

Investors’ search for yield has led to robust private equity real estate fundraising. The capital secured by funds focused on hospitality real estate has nearly tripled since 2010 and has outpaced that of the global market. The number of hospitality funds has also grown as a record 62 funds targeting hospitality held a final close in 2018.

Investors have been attracted to the returns provided by the sector: Hospitality real estate returns have surpassed those of public market benchmarks such as the MSCI US REIT Index in recent years. Hotels have also outperformed other property types.  The report attributed hospitality’s outperformance to the steady growth in international tourism, which it said is leading to an increase in hotel occupancy rates and revenue per available room (RevPAR).

The World Tourism Organization (UNWTO) said that international tourist arrivals rose 5% in 2018 to 1.4 billion, reaching the level two years faster than it had predicted. The increase has been spurred in part by the growing number of middle-class families in emerging economies such as China and Indonesia that are spending more holidays overseas.

The world’s top 10 tourism destinations based on international tourism receipts, generated close to 50% of total tourism receipts in 2018, according to the UNWTO. They are the US, Spain, France, Thailand, the UK, Italy, Australia, Germany, Japan, and China.

“Given the sector’s out-performance and positive outlook for tourism this year,” said the report, “it is no surprise that hospitality is attracting more and more investors from around the world.”

The report said that private equity real estate deal activity in the hospitality sector has soared in recent years as deal value grew by more than 210%. It hit a record $28 billion between 2012 and 2017 before dipping to $27 billion in 2018.

There have been several major private equity hospitality real estate deals at $500 million or larger to date this year. That includes the Blackstone Group’s €900 million ($1 billion) portfolio sale of seven hotel properties in Europe to Aroundtown Property Holding. There also was the $610 million sale of 1 Hotel South Beach in Miami Beach by a joint venture that includes Starwood Capital Group.

The report said that although the industry remains heavily focused on North America, there could be significant opportunities for growth in less saturated markets. As of August 2019, hospitality funds investing in Europe have raised $3 billion, already surpassing last year’s total of $2.9 billion. Hospitality funds investing in North America have raised $3.9 billion for the year to August.

“With a stable and growing tourism industry across international borders, the hotel sector has increasingly come in the spotlight and is progressively accepted as an institutional grade asset class,” said Ronald Stephen Barrott, CEO of Pro-invest Group.  “In many cases, hotels outperform traditional real estate asset classes, as hotels have the ability to yield high returns.”

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Guy Opperman, the UK minister for pensions and financial inclusion, has chastised investment mangers for their lack of action regarding climate change. Opperman  even suggested that pension plan trustees should give their investment managers the sack if they don’t support climate resolutions.

“Some asset managers won’t support climate resolutions, or vote through pay awards for poor performance, and won’t vote out managers who show conflicts of interest or lack of independence,” Opperman said. His remarks were in a speech at the Association of Member Nominated Trustees’ (AMNT) autumn conference in London last week. “If you use these people – well, then you as trustees are far from limited in what you can do. Put simply, you can fire them. You have a great deal of power.”

Opperman said he backed the AMNT’s campaign to make asset managers take more notice of pension funds’ stances on ESG issues. But he was “shocked” by a report it released earlier this year that found that half of the fund managers polled said they did not have a climate change-related voting policy or guidelines in their overall voting policy.

The AMNT has complained to the Financial Conduct Authority and Treasury Select Committee that it is impossible for pension plans to develop robust ESG policies and to take savers’ views into account. That’s because fund managers are not always prepared to listen, the AMNT said.  

“Our market is afflicted with some asset managers – they are certainly not the small ones – who are struggling to have an impact,” said Opperman. “I have in mind asset managers who tell you how many people are in their stewardship team, and the unspecified long-term engagement they have carried out with firms – which on further examination has achieved no substantive change in policy from those firms for 20 years or more.”

He said that it is the trustees’ responsibility to keep their investment managers to task, adding that “you are responsible for your own destiny … while the government is doing our bit, it has to be asked: What are you doing?”

Opperman has written to the 40 largest defined benefit plans and the 10 largest defined contribution programs, to find out what their policies are concerning ESG investing. These programs are responsible for approximately 50% of the assets in their respective sectors. He said a majority of the of those pension plans have responded.  

“To put it politely, some are better than others,” said Opperman. “I welcome recent [FCA] changes … but I don’t think we can wait for managers with weak policies to be found out or get their act together. I think we need trustees to be able to set their own voting policies and guidelines now.”

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The Securities and Exchange Commission charged online auction portal Collectors Café for withholding distributions to its investors unless they signed agreements prohibiting them from reporting potential securities law violations to law enforcement—which would be a clear violation of the SEC’s whistleblower protection rules.

“We allege that the defendants attempted to cover up their fraud by holding investors’ money hostage until the investors signed agreements preventing them from seeking law enforcement intervention,” said Kurt L. Gottschall, director of the SEC’s Denver Regional Office. “Through the amended complaint, the Commission seeks to hold the defendants accountable for their fraudulent stock offerings as well as the separate claims for violations of the Commission’s whistleblower protection laws.”

The company’s CEO, Mykalai Kontilai, who also received independent charges from the SEC, was accused of filing a lawsuit against two investors who had apparently breached the insidious agreement.

The CEO also lied to investors and claimed that the capital they invested into Collectors Café was being used to pay Kontilai back for millions of dollars’ worth of loans he personally lent to the company, “when, in reality, he never lent the company the amounts that he claims.”

In May 2019, the SEC said that Kontilai diverted about $6.1 million of the $23 million raised in investor funds through his personal bank account to spend on a lavish lifestyle. Kontilai then attempted to conceal this fraudulent activity by creating fake documents for the SEC detailing his expenses, and falsely asserting that he had loaned millions of dollars to the company, the agency charged. The SEC froze the company’s assets at the time.

The SEC has been on a roll lately with suits related to fraudulent activity. Meridian Capital’s founder recently pleaded guilty for committing securities and investment advisor fraud in October 2019. Three managers of Mediatrix Capital Blue Isle Markets were charged with playing a similar hand to Kontilai by using investment funds to support a luxurious lifestyle.

Attempts to reach the company were unsuccessful.

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