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Thursday, January 17, 2019


Texas lobbyist offers insights on start of 86th Legislative Session


By Eddie Solis, Guest Columnist


The 86th Texas Legislature convened on Jan. 8 and will run 140 days, adjourning May 27; and it's already off to a busy start with the appointment of a new House speaker and bill filings. 

Gov. Greg Abbott and Lt. Gov. Dan Patrick, the Senate’s presiding officer, will be working with a new House speaker this session. Rep. Dennis Bonnen, R-Angleton, was elected speaker on the first day of session. The speaker’s seat had been occupied by former representative Joe Straus, a San Antonio Republican, for the last five sessions.

Bonnen is an extremely smart and tactical House member who was first elected into the Texas House in 1997 at the age of 24. He has held critical chairmanship positions, most recently in the tax policy committee of Ways and Means and was also Speaker Pro Tem under Straus.

The governor, lieutenant governor and speaker have all established two main priorities this session, school finance and property tax reform. These issues are not new to the legislature and will take time, attention and resources to work on solutions to these areas of state policy.

Public pensions will certainly be discussed this session. However, the policy area may not need the attention it received last session as Dallas and Houston pensions were moving, and passed, reform efforts. The state pensions will have a priority in discussion as the legislature will be discussing funding for the Texas Employees Retirement System and the Texas Teachers Retirement System. TRS will also be needing to address costs related to its active and retired teacher health care plan.

This session, the House Committee on Pensions will be combined with the House Committee on Investments and Financial Services. Jurisdiction over public pensions was previously combined with investments and financial services during the 81st and 82nd sessions and a separate House Committee on Pensions had sole jurisdiction from the 83rd through the 85th sessions.

As of Jan. 15, neither House nor Senate committee membership has been assigned. The House has 29 freshmen with three House districts vacant for various reasons in Houston, San Antonio and El Paso. The Senate also has six freshman members, two of whom served in the House prior to winning their current Senate seats.

During the legislative interim, the House Pensions and Senate State Affairs committees released reports covering pensions. Each spotlighted the areas local and state pensions should continue working on with the House report recommending a look at funding for the Pension Review Board to allow a greater effort of intensive reviews as well as a recommendation to lower the amortization threshold that triggers a statutorily required Funding Soundness Restoration Plan. The current plan is triggered if a system’s amortization period exceeds 40 years over several actuarial valuations. The current Texas Pension Review Board guidelines have a target amortization period of 10-25 years but not to exceed 30.

At this point, a few bills have been filed that impact local pensions. Two of them were filed during the previous session, one proposing a constitutional amendment establishing the prohibition of state money funding local pension liability and another establishing new reporting requirements and review of pension investments. A couple of bills filed reference local pensions, but with no specific impact. Regarding the Constitutional amendment proposal, it is worth noting that an attorney general’s opinion in 2016 established that the state is not responsible for local pension liabilities if a municipality is unable to meet its financial obligations, something that has never happened in Texas.

Several bills have been filed addressing the state public pension systems – the ERS and the TRS – related to various aspects of those systems such as proposing cost of living adjustments, increasing the current 10 percent constitutional cap on contribution level, board composition and various funding and benefit proposals.

Additionally, as the session continues the Pension Review Board will also continue its responsibilities of bringing local plans before the board in the Funding Soundness Restoration Plan process that requires local plans to work with respective sponsoring entities given certain amortization triggers. The state review board will also be in the process of establishing its appropriation funding requests as well, as all state agencies do.

Note: Track pension-related legislation via TEXPERS’ new TEXPERS Advocacy website tool available at www.texpers.org. Or, click here to visit the site tool where you can enter your contact information to find out who represents you in the Texas legislature, join an email list to receive up-to-date news and information regarding public pension legislation, and be informed of how you can help be an advocate of secure retirement benefits for all public employees.


Eddie Solis
About the Author: 
Eddie Solis is a lobbyist with HillCo Partners, an Austin-based public and government affairs consulting firm contracted with TEXPERS.

Basic Trustee Training returns for TEXPERS' 30th Annual Conference in Austin


By Barbara Zlatnik, TEXPERS

TEXPERS opened registration for the 30th Annual Conference last week and had reintroduced Basic Trustee Training as a pre-conference program offering.

TEXPERS typically provides pre-conference training. It is set for Saturday, April 6 at the Hilton Austin. Anyone at funds interested in training my register.

The association stopped offering Basic Trustee Training at the conferences because TEXPERS weren’t getting enough students registered to make the program worthwhile. But at the October Basic Trustee Training class, more than 30 students attended, and the class was well received. Association members appear interested in additional basic training classes so its added to this year's Annual Conference as a training opportunity.

TEXPERS staff often hear that the BTT class is intensive for new trustees. As such, the association would like to ensure that its members know that it is acceptable, and encouraged, to retake all or part of the Basic Trustee Training class. TEXPERS will be offering Advanced Trustee Training as well. Both trainings meet the Continuing Education requirement under State Pension Review Board rules.

Funds with brand-new trustees/staff that have not met the PRB minimum training requirement for new trustees, they should consider if they wish to meet the requirement by taking the April 6 BTT class.

Funds that have trustees that have met the initial requirement but need or would like to take additional training, they should consider taking the Advanced Trustee Training class. The Advanced Trustee Training class content varies from year to year and even class to class.
Also, TEXPERS recently announced various registration fee changes. Read about it here: https://www.texpers.org/blog_home.asp?Display=138.

Agendas for both Basic and Advanced Trustee Training will be posted soon. For additional details, email texpers@texpers.org.

About the Author:
Barbara Zlatnik is the associate director of programs and training at TEXPERS.

Members to advocate for TEXPERS during the 86th Texas Legislative Session 


By Barbara Zlatnik, TEXPERS

The Capitol building in Austin.
Forty-three TEXPERS members have registered for next week’s “Communicate Effectively with Legislators” workshop to be held Jan. 22 and 23 in Austin.

The Workshop begins on Tuesday at the DoubleTree Suites, located at 303 West 15th St., with a working lunch. A facilitated session follows, which covers best practices for Capitol visits, “what not to do” at legislative meetings, effectively giving legislative testimony as well as the basics of the law-making process and the environment in which public policy is made.  

Joe Gagen, legislative advocacy trainer, will conduct this program; he has conducted several workshops for TEXPERS in recent years. TEXPERS’ lobbying firm, HillCo, will review the association’s legislative agenda, any pension-related legislation currently filed this legislative session, as well as talking points for members with lawmakers. A reception will take place after the conclusion of the workshop. Legislators have been invited and the reception is sponsored by HillCo. 

Joe Gagen
Then, on Wednesday, attendees will have breakfast at the DoubleTree before walking over to the Capitol at 8 a.m. to attend pre-scheduled appointments with their representatives.   

In addition to meeting with legislators, TEXPERS members will participate in a recognition of TEXPERS’ 30th Anniversary on the floors of the House and Senate. U.S. Rep. Henry Cuellar, D-Dist. 28, will sponsor the House of Representative’s resolution commemorating TEXPERS along with U.S. Rep. Lance Gooden, R-Dist. 5. TEXPERS Board members will be introduced on the floor of the House at 10 a.m. and on the floor of the Senate at 11 am. Sally Velasquez, TEXPERS’ executive director, worked with State Rep. John Wray, R-Waxahachie, to draft the resolution, which he will introduce to the House. Then, State Sen. Robert Nichols, R-Jacksonville, will introduce the resolution on the Senate floor.  

TEXPERS attendees will attend scheduled appointments throughout the day Wednesday before the event concludes. 

To learn more, contact TEXPERS at texpers@texpers.org or call 713-622-8018. 

About the Author:
Barbara Zlatink is the associate director for programs and training at TEXPERS. 

Thursday, December 20, 2018

Alternatives can provide diversification and downside protection if done right


Graphic: Pixabay/nattanan23


By Biagio Manieri, Guest Columnist

Today, with interest rates rising and volatility returning to stock prices as valuations seem somewhat stretched, some alternative strategies can provide investors with sources of return that are not correlated with traditional asset classes and that offer downside protection. But carving out an allocation to alternatives requires deep understanding and thorough due diligence. 

Advantages of Alternatives

Incorporating alternatives into a portfolio of traditional strategies broadens the universe of potential strategies and managers from which to select, which should lead to better returns over time. Going forward, publicly traded fixed-income returns will be challenged as rates rise and credit spreads possibly wid¬en. Alternative fixed-income strategies such as distressed credit, fixed-income arbitrage and other similar strategies may help returns. If certain segments of the equity market continue to propel higher and valuations become more stretched, strategies such as long/short equity, event-driven, activist strategies, etc., can add to returns and/or help reduce risk and volatility. 

Alternatives can improve the overall efficiency of the portfolio in various ways. One, alternative strategies that have low correlation with other investments in the portfolio help to reduce the overall risk of the portfolio. An example would be event-driven strategies that do not correlate highly with traditional long-only strategies. Another way that alternatives can lead to a more efficient portfolio is by enhancing the return of the portfolio or delivering a return stream that cannot be accessed via traditional strategies. 

Considerations for Investors

Questions that investors should always ask themselves include: What are my goals? What’s my risk profile? What are my liquidity needs? Then they should assess the current economic and market environment, and based on that analysis, construct a portfolio of strategies that are expected to meet those goals in the most efficient way possible. 

The biggest hurdle for most investors is access to top-performing funds. This matters because the dispersion of returns is very large in the alternatives space versus traditional funds. Another issue is the significant increase in the number of firms and assets under management, which we believe will result in lower performance for alternative strategies going forward. 

There is also the issue of how best to model alternative strategies for analytical and portfolio construction purposes. We cannot simply rely on quant models; we need to understand the underlying fundamentals of each strategy to decide when to include the strategy and how much to allocate to it. 

High fees make it much more difficult for any strategy to outperform. For us the important metric is net-of-fee performance: In addition, the calculation of carry needs to be well understood by investors. It is important to identify managers that align their incentive fees with the best interests of investors. 

Liquidity or illiquidity is also important. While some investors believe in an “illiquidity premium,” they typically do not include an “illiquidity cost” in their analysis. While it is debatable whether an “illiquidity premium” actually exists, the drawbacks of illiquidity are easier to show and should be taken into consideration when constructing portfolios.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of PFM Asset Management or TEXPERS.

Biagio Manieri
About the Author:
Biagio Manieri is managing director of PFM Asset Management. He has 32 years of experience in economics research, finance and fund management. Manieri, who was an investment officer with the Federal Reserve, serves as chief multi-asset class strategist, working with a team of analysts concentrating on the economy, capital markets, and investment management products.

Three ways to create a holistic view of 

your approach to shareholder litigation


Graphic: Pixabay/Activedia

By Mike Lange, Guest Columnist

The world of class actions has evolved dramatically over the last decade. The demand for improved corporate governance and transparency has never been higher. Institutional investors have expanded their efforts beyond simply filing claims in shareholder class action to include claims filing in antitrust matters and joining recovery efforts outside the U.S. A comprehensive solution may be in your best interest to maximize recoveries.

Here are three ways to create a holistic view of your approach to shareholder litigation:

  1. Using technology to illustrate the outer time limits by which filing decisions must be made. Each legal cause of action and separately each claim alleged in a complaint has its own time limits. Technology can depict the time clocks related to potential claims and empower investors by letting them see how the passage of time impacts their eligibility and damages, facilitating more informed discussion with counsel on whether and when to file their cases. DOWNLOAD THE FULL REPORT TO LEARN MORE
  2. Calculating inflationary losses for comparison to loss thresholds. More institutional investors are implementing investment recovery board policies that contain loss thresholds. Whether it is Market Loss, Recognized Loss, and Inflationary Loss, it is essential to understand the best way to calculate your losses for comparison purposes and the situations that trigger consideration for direct action in the U.S. or abroad. DOWNLOAD THE FULL REPORT TO LEARN MORE
  3. Implementing an "issuer-centric" shareholder class action policy. The purpose of an investment recovery policy is to articulate a framework for internal policies and procedures that further fiduciary responsibilities. As fiduciaries are increasingly implementing ‘issuer-centric’ policies to recover investment losses from fraud, understanding the potential risks and benefits will allow investors to ensure they evaluate losses in all securities by an issuer’s fraud, and when appropriate, give due consideration to recovery efforts for those not encompassed by pending litigation. DOWNLOAD THE FULL REPORT TO LEARN MORE

In sum, investors are being challenged to upgrade their approaches to governance, controls, and protocols to understand the cases that matter most to their portfolio and engage with counsel in a more informed way.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Financial Recovery Technologies or TEXPERS.

Mike Lange
About the Author:
Mike Lange, securities litigation counsel at Financial Recovery Technologies, is the senior member of firm's Legal & Research team responsible for global, direct, and antitrust case analysis and legal research. During his more than 20 years of practice, he has built a rich network of relationships around the world including corporations, government agencies, lawyers and other professions, which he brings to bear for Financial Recovery Technologies, a technology-based services firm that helps institutional investors identify eligibility, file claims and collect funds made available in securities class action settlements and litigations impacting global investors.

Growing turbulence in U.S. corporate credit in 2018 creates future opportunities and risks


Photo: Pixabay/Jan-Mallander

By Daniel H. Clare, Guest Columnist

As we head into the final weeks of 2018, investors have experienced declining performance in large parts of the public U.S. corporate credit markets throughout this year. 

For the year-to-date period through November 30, 2018, the Bloomberg Barclays U.S. Corporate Index, the Bloomberg Barclays U.S. High Yield Index, and the S&P LSTA Leveraged Loan 100 Index generated total returns (in other words, the combination of changes in market prices plus interest payments received) for the period of (-3.9%), 0.1%, and 2.6%, respectively. By contrast, prior to early December 2018 sell-offs in U.S. equities, the S&P 500 Index and the Dow Jones Industrial Average delivered year-to-date total returns of 5.1% and 5.6%, respectively. 

Of note, the greatest weakness experienced to date has been in what are typically considered the “safest” companies, those with “investment-grade” rated debt. This is not entirely surprising given the changes in this market since the Great Recession.  

According to Morgan Stanley, the amount of debt in this market has increased by 142% since 2007, and, since corporate profits have not grown at the same rate, the average leverage levels compared with earnings in these companies has increased by nearly 40% during this period. These issuances have been fueled by low market interest rates due to central bank policies which are now reversing, and, worse, much of the proceeds have left these companies in the form of dividends and share buybacks. Further, despite declines in prices in 2018 (which would increase rates provided to new buyers) and arguably higher levels of risk than historical periods, this debt on average still only provided a 4.4% annual yield to investors as of the end of November 2018.

A future area of risk in U.S. corporate credit that is increasingly gaining attention relates to the “leveraged loan” market, which provides loans to relatively-large (average annual revenues of $3.5 billion) but lower-rated, non-investment grade companies. This market has also grown dramatically since 2007, and, by some measures, is actually riskier than at the peak of the 2007 cycle. For example, according to S&P LCD, so-called “covenant-lite” loans (that is, loans without basic financial maintenance covenants) reached a record high of 79% in 2018, as compared with 25% in 2007, and other lender-friendly protections are also weaker than in 2007. On average, senior debt multiples for large corporate leveraged loans are also higher than in 2007. 

Overall, increasing volatility in the large, traditional U.S. corporate credit markets will create risks and opportunities for pension fund investors. Concerns surrounding the traditional corporate credit markets have also caused pension funds with a longer-term time horizon to look increasingly to opportunities in the private corporate credit markets.  Investment funds in these markets typically provide debt financing to middle-market companies, where, on average, leverage levels are lower, covenant protections are greater, and yields to credit investors are higher. 

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Constitution Capital Credit Partners or TEXPERS.

Daniel H. Clare
About the Author:

Daniel H. Clare  heads the Constitution Capital Credit Partners team. From 2010 to 2016, he was a managing director at Ascribe Capital, formerly known as American Securities Opportunities Fund. Previously, he was at Diamond Castle, a private equity firm focused on leveraged buyout investments in middle market companies, most recently as a Senior Managing Director. Prior to Diamond Castle, Clare was an investment professional at CSFB Private Equity/DLJ Merchant Banking Partners.

Untangling the Gordian knot of modern portfolios

Photo: pixabay/MikesPhotos
By William Emmett, Guest Columnist
Modern portfolios are increasingly complicated as they have expanded beyond stocks and bonds. The management of those portfolios—and the attendant illiquidity that can come with alternative investments—has many asset owners staring at a Gordian knot very much in need of untangling. With Alexandrian efficiency, a futures-based cash overlay can slice through many of the issues complicating cash allocations and return the portfolio to its targeted risk and return expectations.
Holding cash is a necessary but painful requirement to manage both outgoing cash flow requirements and the uncertain timing of funding or liquidity of alternative assets. Unfortunately, this “cash drag” can cause portfolios to painfully undershoot their target returns.
In addition, volatility and low covariance among assets within a portfolio create more opportunities to rebalance, but the timing and transaction costs associated with moving securities can be an obstacle. So how can an asset owner maintain a properly diversified portfolio and manage costs while still taking advantage of the opportunities created by volatility?
One potential solution is what is known broadly as a portfolio overlay. This strategy can encompass a number of variations with different effects; because our issue is excess cash, we will focus on cash overlay and rebalancing.
A cash overlay occurs when an investment manager is retained to manage a portfolio of derivatives to modify the market exposure of the cash portion of the portfolio. Specifically, the manager will be adding beta and/or duration in order to more closely mirror the target allocation of the portfolio. I mention rebalancing as a component of a cash overlay because if the overlay manager is allowed to use long and short derivatives exposures, the market exposures of other parts of the total portfolio (and not just cash) can be changed to almost exactly mirror the target allocation (without incurring the transaction and market impact costs of selling the physical securities).
As the margin requirement for maintaining futures exposures is relatively low, a small funding account can result in a large change in economic exposure. A cash overlay can be used to allow an asset owner to maintain a higher cash allocation without sacrificing total portfolio return by owning an asset class with a low return (cash).

What are the issues to contemplate with a cash overlay?

  • Typical cash overlays are funded with a small margin account and use exchange-traded futures. But not all asset classes (particularly alternatives) have an active market in these futures. Thus, the overlay benchmark created to “equitize” the cash allocation may not exactly mirror the overall portfolio benchmark.
  • Because the economic exposures of the cash overlay exceed the size of the margin account, asset owners will have to adjust their performance reporting to reflect returns with and without the overlay.
  • The quality of the reporting on the cash overlay program, provided by the manager, is critical, and bad reporting can lead to mistakes in oversight and monitoring with a potentially bad outcome.
  • The overlay manager has a separate fee schedule. While not typically as high as a traditional manager, it is not zero.
  • The investment policy statement may have to be amended to include a specific derivatives policy.

Asset owners face a wide array of challenges and opportunities in terms of new investments and return or risk enhancements to consider. Cash overlay oftentimes doesn’t make it to the “front burner.” However, as long as holding cash is a return drag versus the target return on the portfolio, a small change to the operation of the portfolio can bring to bear a powerful set of tools to assist asset owners in accomplishing their goals.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Callan or TEXPERS.
William Emmett
About the Author: 
William Emmett is a senior vice president in Callan’s Atlanta Fund Sponsor Consulting office. His responsibilities include client service, investment manager reviews, asset/liability hedge construction, fee reviews, investment policy construction, performance measurement, research and continuing education, and coordination of special client proposals and requests. Emmett earned a bachelor's degree in Finance from Georgia State University.