Securities Lending Veteran Resurfaces | Chief Investment Officer

As ‘risk’ continues to be the theme of the day, a seasoned veteran takes up a new post to oversee and control it at an independent securities lending firm.

(July 27, 2012) — A leading figure in securities lending, who quit the top job at State Street to launch a rival agent, has popped up at independent company eSecLending.

Peter Economou has joined the firm as chief risk officer, eSecLending announced this week. In the newly created position, Economou will be responsible for the oversight and strategic development of enterprise risk management on a global basis, reporting to the firm’s CEOs.

Economou, who had been global head of securities finance at State Street, dramatically quit the bank in June 2010 and took a team of seven to launch a rival firm with former colleague Craig Starble.

State Street immediately began court proceedings against those leaving the bank and the new company was never launched. Several of the former State Street team have since resurfaced in the asset servicing industry.

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Karen O’Connor, co-CEO of eSecLending sad: “In recognition of the industry’s advancement and increasing focus on risk management, this new role has been established to ensure eSecLending remains at the forefront of managing risk for our company and our clients.”

This week, clearer guidelines on securities lending practices were unveiled by the European Securities Markets Authority. The new rules demand that all asset managers operating in Europe return any profits generated from their securities lending transactions to the end investors.

Earlier this week, leading economist John Kay called for similar moves from asset managers lending out their securities.

Wyoming Pension: Time for a Fund Manager Fee Structure Makeover

The $6.5 billion Wyoming Retirement System's John Johnson and Jeffrey Straayer say that fee structures for fund managers need to shift control into the hands of asset owners -- the chief investment officers and other investing heads of pensions.

(July 26, 2012) — The $6.5 billion Wyoming Retirement System says it’s time for “capital owners,” or public pension funds more specifically, to change the way they compensate their fund managers, because as of now, the managers are often the ones getting most of the benefits — even when they underperform.

Thus, according to the public pension fund’s John Johnson, chief investment officer, and Jeffrey Straayer, a senior investment officer, the Wyoming scheme is changing its methodology of fund manager compensation. It has introduced a revised fee structure in a request for proposal (RFP) in March and is expecting implementation by mid to late August. While traditionally, fund manager fee structures used by pension funds lead to overpaying managers when they’re doing well, managers maintain that payment when they’re underperforming, according to Johnson. Most asset owners have fund manager fee structures that include a high fixed active fee with a performance fee added to it, which leads to a tendency among fund managers to index and gather assets to attain the highest fees, Johnson said. “That business model shifts risk to the pension fund rather than the risk being on the fund managers,” he said.

Consequently, Johnson and Straayer are introducing the idea of a performance fee bank — an idea they say that was generated by conversations with a range of money managers, particularly Goldman Sachs. The concept in a nutshell: If a fund manager employed by the Wyoming Retirement System generates return above a certain benchmark, they are paid for it. The Wyoming fund’s new fee structure creates a performance fee bank in which fund managers are paid a base fee that is near passive as opposed to an active base fee that rewards managers if they generate returns that match the benchmark.

“We wanted to create a holdback period rather than a clawback period,” Straayer noted. “With clawbacks, if fund managers are paid in excess of what they should have been paid, a pension’s investment head must ask them to repay what’s been lost, which is a problem.”

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Johnson added: “Our experience has been that managers generate alpha and then lose it all, yet they still get paid a high fee because we need to pay an active management fee for passive returns.”

The Wyoming Retirement System, however, wants to pay managers when they consistently beat the market. “The performance fee bank is essentially a high-water mark, because if they don’t outperform the index, the fee bank is reduced. If it goes below zero, managers must build the fee bank back up before we pay out a performance fee,” Straayer asserted.

For Wyoming’s pension fund, the key for fund managers proving their value is only by demonstrating sustained returns, the two pension heads said.

“We’ve spoken with a number of pension folks — they’re intrigued and some of them are taking it to their managers. It’s still a new concept,” Johnson noted. “The reality is that the business is changing, and if managers want to be successful, they need to give value to capital providers.”