(December 19, 2012) — The chairman of the meeting has a gavel.
It is not used for hammering out “Order in the Court!” amid unruly arguments—there aren’t any—or for signaling the close of every agenda item. No, at the New York City Employees’ Retirement System’s (NYCERS) latest investment board meeting, the gavel comes down just once: When something got done.
Public pension board meetings are odd creatures. The most knowledgeable person in the room is at the mercy of a dozen or so lesser experts, there to simultaneously learn about and pass judgment on the CIO’s investment proposals. Union heads, public servants, sharp-suited asset managers, and politicians gather around a table the size of a bowling lane to give their take on questions large and small. Should we sink a quarter of a billion dollars into hedge fund X? Is it appropriate to spend public money on in-house performance bonuses? Is that manager top quartile? Are we top quartile? These are demanding, critical inquiries, and boards typically have only a few hours a month or quarter to sort through them. Yet the temptation to rest one’s eyes seems to overpower many attendees.
Even a fully-conscious board doesn’t have a hope of absorbing all the information thrown at them over the course of a meeting. NYCERS allotted two hours and fifteen minutes to:
1.) Review of the $41.6 billion portfolio’s new quarterly and monthly performance data, including individual asset class reports
2.) Presentations from no less than four consultants/asset management firms
3.) An in-depth lesson on infrastructure investing
4.) Decide whether NYCERS should move into infrastructure investing, and if so, how
5.) Consider replacing the real estate allocation bucket with one for real assets
6.) Review of a proposed investment policy statement for a real assets bucket
7.) Deliberate and reach a decision on whether or not to approve the policy statement, and based on what conditions
If investment board meetings were an asset class, NYCERS’ portfolio would have been 55% overweight on its time allocation when things wrapped up. Still, that seemed like the bare minimum, and a triumph of efficiency and short-windedness.
Chief Investment Officer Larry Schloss, who presides over four other New York City pension funds in addition to NYCERS, kept his remarks brief—very brief. He narrowed down the latest monthly earnings to about three points and question: October returns (0.27%), six-month returns (“North of 5%”), and approximate gains for the calendar year (14%). Then the question: “Since we just heard about the quarter, does anyone want me to go over October more? No? Alright, moving on.” And it was onto the next order of business.
The United States Senate may tolerate filibusters, but public pension boards have better things to do with their time. Like actually reading everything they’re given over the course of a meeting. The amount of paper dedicated to a single pension board meeting is staggering. When the fourth bound presentation comes around, you can’t help but feel sympathy for the trees and admin staff committed to producing those many, many reports. At a minute-and-a-half per page, it would take over nine hours to read every page I received—and that doesn’t include the much bulkier ‘Executive Agenda.’ (Half the meeting is radically transparent—NYCERS has an audio/visual team broadcasting the session live to anyone with an internet connection and penchant for pensions. But like turn-of-the-century gentleman retreating for cigars and brandy, trustees and CIOs reconvene for a closed-door ‘executive session’ after the public show is over.)
A moment of high irony arose during the board’s discussion of the real assets investment policy proposal. One man spoke up to ask Schloss, “How does ESG [Environmental, Social and Governance] fit into this? I’m not seeing it anywhere.” A flurry of page flipping ensued, as everyone rifles through the end product of clear-cutting to find earth-friendly investing guidelines.
NYCERS may be indulgent with their hard-copy habits, but the fund’s commitment to responsible investing is more than just lip-service and policy documents. As the board and staff kicked around investment ideas at the meeting, they took both financial and social outcomes into account. This is one area where the fund may deviate from the average US public pension: NYCERS strives to put its money to work for the entire state, not just the retired employees of New York City.
“It is my understanding that America’s infrastructure funding needs are about $2 or $3 trillion at the moment,” Chairman Justin Holt—the man with the gavel—asked during the infrastructure lesson. “What percentage of that do you estimate will be open to the private sector in the next few years?”
Mark Weisdorf, CEO of infrastructure for JP Morgan Asset Management, tried to let his pupils down gently. “I want to be careful how I put this,” the amiable Canadian cautioned. “States and municipalities have infrastructure funding subsidized by the federal government by issuing tax-exempt debt. So the number of projects open to private investment will go up, but they won’t be the majority.”
Weisdorf must have a seen some crestfallen faces look back at him, because he quickly qualified his position. “Of course, there’s plenty of opportunity for investors like yourselves.” But the board pushed him on in-state investing prospects, and he chose to educate instead of market. “There are very limited opportunities for direct infrastructure investing in New York State,” he stated plainly. “The Tappan Zee [Bridge] has been discussed for ten years—and it looks like it won’t be open to private funding. We wish there were more, but opportunities are muted.”
Perhaps a few years playing for the other team kept Weisdorf honest in his presentation. Before J. P. Morgan, he served as a vice president of private market investments at the Canada Pension Plan Investment Board (CPPIB). But on December 18 in Downtown Brooklyn, Weisdorf sat opposite the asset owners, at the helm of a crowded conference table and with lower Manhattan spread 22 floors below. Holt and the board members faced Weisdorf. The opposite wall reminds any asset manager in the hot seat just whose turf he or she is on. Between two flags, hefty wall-mounted letters the size of dinner plates spell out “New York City Employees’ Retirement System.”
Public pension CIOs in the United States are practiced outsourcers, and Schloss more so than most. “Of the top ten US public pension funds—NYC is number five—we’re one of two outsourcing everything,” he told aiCIO during his interview for the Power 100. (The other is Washington State.) “It hasn’t at all changed in 70 years.” This fall, Schloss will go to the system’s board with a proposal to start the insourcing process—but he estimates it will take 10 to 20 years to complete.
Plans large and small fork over substantial portions of their assets to external managers, often lacking the resources or expertise to co-invest or go direct. So it’s no wonder, then, that fund chiefs like Schloss will enlist outsiders for board education. In the corporate sphere, United Technologies’ CIO Robin Diamonte brought in Ray Dalio, Bridgewater’s founder, to explain risk-parity investing to the board. It worked: “My original recommendation was for 3%,” she recently told aiCIO. “The pension committee asked me if I was positive, if I was committed—and when I said yes, they said ‘why not make a real dent and allocate more?’”
Diamonte and Schloss made a strategic choice to align interests. CIOs broadly want their recommendations accepted; consultants and asset managers want to sell their services. Outsourcing board education brings these goals in line, and puts the task in the hand of experts. Who, after all, can explain an investment idea with greater clarity and appeal than a top asset manager? The only hitch, of course, is that they’re a manager.
At NYCERS, Weisdorf spent most of the Q&A period answering questions about his three years on the asset owning side, despite arriving a decade and a half after CPPIB began its move into real assets. “What’s the investor experience of that like?” one person on the board wondered. “I’d love to ask someone involved what their early core investments were in ’94. Maybe they wouldn’t tell us.” (Ed. Note: They probably would.)
When the manager and his colleagues left the meeting, the members’ discussion took a strange turn. The lesson did do its job. Members now had the fundamentals and jargon of infrastructure investing down, but began to argue over the projected and historical return figures cited by the external presenters.
“I’m just encouraging realism,” argued one member to another. The two sat almost diagonal at the giant table, as far apart physically as they were in their opinions. “You say the returns are potentially unlimited—I disagree. Just because you want something to be does not mean it will be. I’m skeptical.”
No one questioned Schloss’ data or the estimate he floated for the calendar year. Yet conflict peaked over just how much salt to take with the managers’ roughly 10% return projection for infrastructure. As the board members hashed it out—neither one convincing the other to be more or less trusting—Schloss wandered back to the breakfast spread, taking his time to peruse the baked goods. However optimistic the 10% figure was, Schloss looked confident in his case for infrastructure investments and in the board’s judgment.
Schloss picked a single battle at that meeting, and recused himself from most of the action and all the conflict up until that last agenda item.
“There’s nothing dramatic in the real assets IPS [investment policy statement],” he told the board by way of introduction. For real assets beyond real estate to enter the portfolio, the board had to approve the document laying out acceptable leverage, allocation ranges, and permissible markets, among other details. Without that approval, nothing would get done until the next board meeting at the earliest.
When the chairman referred to the IPS as “provisional,” Schloss pushed back. “I’m not sure what’s provisional about it. I think we should just go ahead and approve it. Today. If we don’t approve it, we won’t have a real asset allocation.”
The NYCERS board of trustees, like most any public pension board, is inclined to move slowly and conservatively. As they should, serving as a check and balance investment teams’ impulse to charge ahead.
So it is with public pension board meetings. They always run long, but barely skim the information at hand. Asset managers and consultants deliver accurate data that may be cherry picked to flatter their performance. Potential investments may be attractive, middling, or poor, but are never perfect—no matter what the guy shilling them claims. Boards of trustees are not boards of directors. With public pension funds, boards intentionally pull together diverse backgrounds and perspectives, yet the position demands expertise in an esoteric little pocket of finance. In some ways it’s a miracle of democracy and cooperation that anything moves forward at all. But it does, the tangle of interests and incentives even giving rise (albeit slowly) to consensus.
Schloss won the only round he chose to play that day. The board voted unanimously (with one abstainer) to approve the real assets IPS—but on the condition it’s “recognized as a living, breathing document, and that other amendments may be brought forward,” namely ESG.
After the tap of the gavel, I made a remark to the woman beside me about Schloss’ late-hour win to secure a real asset allocation.
She spotted my confusion.
“Well, he may have it—after four more board approvals.”