Wednesday, May 15, 2019

Texas Senate Honors Retired Police Officers Association's Former Executive with Resolution

By Allen Jones, TEXPERS Communications Manager

The Texas Senate adopted on May 14 a resolution honoring and congratulating W. M. "Bill" Elkin on his retirement from the Houston Police Retired Officers Association.

Senate Resolution 732 recognizes Elkin's service to the organization as well as his prior 38 years as an officer of the Houston Police Department. 

Elkin retired as the association's executive director in December of last year. He spent roughly 21 years with the organization, serving as its first executive director. This year, the association gave Elkin the honorary title of Lifetime Director Emeritus.

"Whereas, during a span of over four decades of noteworthy leadership with these various associations, [Elkin] worked with the Texas Legislature to improve pension benefits and address other matters of significance for both active and retired officers; he helped give voice to those who devoted their careers to protecting and serving area citizens, and this year, he became the first person awarded the title of Lifetime Director Emeritus of the Houston Police Retired Officers Association;..."

The resolution was authored by Sen. John Whitmire, D-Houston.

Anthony Kivela is the new executive director of the Houston Police Retired Officers Association. In a Feb. 24 post to the association's website, Kivela says he is "thrilled and privileged to have the opportunity to follow" in Elkin's footsteps. 

Texas Senate Confirms Keith Brainard to State Public Pension Oversight Agency

By Allen Jones, TEXPERS Communications Manager

Keith Brainard
The Texas Senate has confirmed the reappointment of Keith Brainard to the State Pension Review Board. 

Brainard is vice-chair of the agency, which reviews all state and local public retirement systems for actuarial soundness. His term expires in 2025. 

Gov. Greg Abbott's office announced on May 1 the reappointed of Brainard to the Pension Review Board. The appointment was subject to Senate confirmation.

Brainard is a research director for the National Association of State Retirement Administrators, a nonprofit with members representing more than two-thirds of the $5.2 trillion held in trust for nearly 15 million working and 10 million retired employees of state and local government in the United States. Brainard is a co-author of The Governmental Plans Answer Book, according to a NASRA staff biography. Through his work, he established databases of public pension statistics. He also is a recipient of the Award for Excellence in Government Finance from the Government Finance Officers Association. Also, according to the announcement of his reappointment, Brainard is a former city council member for the City of Georgetown, where he resides. 

Thursday, May 9, 2019

TEXPERS’ Members Stay on Task, Beat Long-term Benchmarks

James Perry, Maples Group study coordinator, along with
Elizabeth Shiang, presents results of the asset allocation
study during TEXPERS' Annual Conference in Austin. 
By Joe Gimenez, Guest Contributor

The TEXPERS annual survey of its members revealed upbeat statistics about their collective investment performance: They beat the benchmark indexes which held the same types of investments in the most crucial 20-year period.

Our survey’s respondents – nearly two-thirds of the systems monitored by the Texas Pension Review Board – had a 7.3 percent composite return for the 20-year period ended September 30, 2018.

Even though this composite return slightly underperformed their collective 7.4 percent target rate, our members outperformed a widely recognized industry benchmark of global stocks and bonds. They beat, by 1.8 percent, a passive 60 percent allocation to the MSCI ACWI Index and a 40 percent allocation to the Bloomberg Barclays Global Aggregate over the last two decades on an annualized basis net of fees.

“It is remarkable how the pension systems have handled the preceding 20-year period,” said James Perry, the Maples Group study coordinator which produced the TEXPERS survey. “Considering that it included the Dot-Com bubble and bust of 1998-2003, the global financial crisis of 2007-09, and the uncertainty of quantitative easing and its unwinding, it’s safe to say that as a group these systems have successfully navigated some of the worst that the global markets have thrown at them. It’s a credit to their ability to manage their members’ retirement assets.”

TEXPERS released its yearly “Report on the Asset Allocation and Investment Performance of Texas Public Employee Retirement Systems" at its 30th Annual Conference for pension fund trustees and staff in Austin. The study confirmed that Texas pension funds hold 51 percent of their dollar-weighted asset allocations in domestic and international stocks. Alternative strategy investments comprised 28 percent and fixed income 20 percent of their portfolios. The respondents manage $58.45 billion in combined total assets.

“It’s very important that pension funds have strong long-term performance to match their employees’ anticipated career path and retirement goals,” said Paul Brown, the president of TEXPERS’ Board of Directors. “Our members’ ability to get close to future targets is remarkable. It is comforting to public employees who want to know their benefits will be there after 20 or more years of service.”

In addition, a shorter term measure was positive as well. TEXPERS members’ 15-year composite return of 7.5 percent also beat the Global 60/40 portfolio return of 6.5 percent.

TEXPERS conducts the annual survey to document its member systems’ diversification with respect to the types of assets invested in, and the investment performance of these systems with respect to their actuarially assumed returns, market benchmarks and other public funds.

The report findings are conveyed to members of the Texas Legislature and help us to demonstrate that local systems are being managed in compliance with the “prudent expert” rule. As the report notes, this rule requires that fiduciaries to exercise their duties with the care, skill, prudence and diligence under the prevailing circumstances that a prudent person acting in a like capacity and familiar with matters of the type would use in the conduct of an enterprise with a like character and like aims.

Of particular value to members is the analyses of standard deviation in the 5-, 10-, 15- and 20-year periods, on pages 15-19 of the report. Those pages can help benchmark your system’s performance against those pensions systems which are similar in size to yours and take into account the investing environments for those time periods.

Another benefit of the report is the asset allocation analysis, which allows you the opportunity to compare your portfolio mix with funds of similar size, or those of higher and lower performance. These can provide some guidance to those Boards considering changes to their portfolio mix.

TEXPERS’ report notes that, overall, Texas pension funds continued to orient their target rates toward more conservative expectations. The average rate in 2018 was 7.4 percent, down from 7.5 percent in 2017, and 8.0 percent in 2013. By lowering their target rates, the pension systems have responded to widespread sentiment that the higher returns of the late 1990s and early 2000s may not be possible in future market and economic environments.

In a Texas-wide press release announcing the report findings, TEXPERS Board President Brown recognized the following standout systems for 20-year performance above the target:
  • 8.71 percent - Houston Municipal Employees Pension System
  • 8.33 percent - CPS Energy Employees' Benefit Trust
  • 8.20 percent - Austin Police Retirement System
About the Author: 

Joe Gimenez is a public relations professional who specializes in pension fund communications. He has assisted TEXPERS and several Texas pension funds in crisis situations and public affairs.

Reports: Sharmila Kassam to leave Texas ERS

By Allen Jones, TEXPERS Communications Manager

Sharmila Kassam, second from right, participates in a panel discussion.
UPDATE May, 15, 2019: Sharmila Chatterjee Kassam, the former deputy chief investment officer at Texas Employees Retirement System, has joined Funston Advisor Services as a senior consultant, according to a May 15 article in Pensions & Investment. A managing partner at the firm confirmed the hiring in an email with P&I.

Texas Employees Retirement System's deputy chief investment officer, Sharmila Chatterjee Kassam, is leaving the fund, according to two news reports. 

A spokesperson for the $29.6 billion fund confirmed Kassam is stepping down from her position with the system, according to Pension & Investments. And Institutional Investor's Leanna Orr reports that Kassam told the publication that although she has not resigned from the fund, she is "creating an orderly transition" out of the ERS.

Kassam told Institutional Investor that she is proud of her achievements and indicated that she and the ERS are seeing things differently when it comes to the management of the fund and its staff. Kassam co-managed the fund's investment program and a 77-person staff. In the article, she describes the public-sector job as one that has aged her.

Mary Jane Wardlow, Texas ERS' spokeswoman, states that the deputy chief investment officer position is in transition but did not provide additional detail in an email to P&I. Aso of May 9, the position was not listed as open on the fund's website. Job openings are listed here.

Kassam has worked as the fund's deputy chief investment officer since 2014. According to her LinkedIn profile, she has worked for Texas ERS for more than 11 years. She began as an assistant general counsel in the ERS' Investments and Securities division in 2008. 

In addition to working for the Austin-based Texas ERS, Kassam's LinkedIn profile lists she is a board member of the YMCA of Austin. Kassam also has served as a speaker on a number of investment discussion panels at TEXPERS conferences and educational forums. She most recently served on two panel presentations at TEXPERS' Annual Conference in Austin last month.

Prior to joining the ERS, she was chief operating officer and general counsel for the Trevor Romain Co. and worked as an attorney for Wilson Sonsini Goodrich and Rosati. She has spent 15 years in the venture and corporate industries.

Monday, April 29, 2019

Applying AI to Traditional Industries

Image by sujin soman from Pixabay 

By Kurt Wiese, Guest Contributor

When people think of artificial intelligence, or AI, and machine learning, images of autonomous driving, virtual reality, and other high-tech, start-up–dominated fields that didn’t exist a decade ago typically come to mind.

However, in our continuous search for durable growth drivers, we are finding that AI has open-ended potential across many areas, including those that currently depend on labor- and time-intensive research and development processes. Companies with technology platforms that can solve for challenges across multiple applications are interesting in any industry. One such company is Codexis, a leader in protein engineering.

At the recent William Blair CONNECTIVITY conference, John Nicols, president and CEO of Codexis, described how companies are using technology to tackle previously insurmountable research and development (R&D) challenges in the food and pharmaceuticals industries.

Faster, Cheaper, Sweeter

Stevia, a sweetener extracted from the leaves of a plant native to South America, has gained some popularity as a sugar-alternative because it’s non-caloric and natural. But many consumers experience a bitter aftertaste, which limited its historical market acceptance.

Codexis collaborated with a U.K.-based food ingredient company to engineer an enzyme process that eliminates the bitter aftertaste by extracting 95% pure Reb M glycoside, as opposed to the bitter but higher-yielding Reb A.

Researchers have known what part of the plant they needed for years, but until recently, the time and labor required to develop the extraction process had not been economically viable.

New machine-learning platforms allow for this by processing information faster than we could previously imagine. Projects that once took about 20 scientists and up to two years of labor to complete now can take a few scientists a matter of months.

Bending the Healthcare Cost Curve Downward

The healthcare sector faces many risks and uncertainties, including pressure to reduce drug pricing. As a healthcare analyst, I’m especially interested in companies that can maintain healthy margins and robust R&D pipelines in the face of lower prices.

We believe that AI is already ushering in a new era of innovation in the healthcare industry. By dramatically streamlining the drug development and testing process, AI tools have the potential to yield tremendous benefits for society, both in terms of reducing costs and unlocking better ways to treat diseases and patients. For example, thanks to next-generation sequencing, blood samples can be used instead of tissue biopsies in some cancer diagnostics, improving the speed, accuracy, and ease of detection and treatment.

A mega-cap pharmaceutical company uses a machine learning derived enzyme to manufacture one of its most-prescribed drugs, which treats diabetes. The production process provides a better yield to meet the growing global demand, which allowed it to gain higher production efficiencies and avoid additional capital investments. It has also allowed the pharmaceutical company to move to a more environmentally friendly production process.

When evaluating a research-driven company’s ability to create sustainable value for investors, partnerships can be very important. Companies that are able to understand the R&D challenges facing their clients and do the front-end work to create innovative solutions to those roadblocks should have a growing and highly defensible position in the value chain—regardless of industry.

Innovating for Profitability—and Sustainability

One of the biggest challenges facing manufacturers across industries is determining how to create a product with the same or higher quality at the same or lower cost—and with a smaller impact on the environment. This trend is being driven not just by regulators, but by consumers who are increasingly conscious of the environmental impact of their purchase decisions.

AI is playing a leading role in solving this engineering challenge. For example, by streamlining the drug development and manufacturing process or by increasing the yield from plants, AI is lessening the need for energy, water, chemicals, and other resources throughout the supply chain.

Across industries, companies that recognize the quickly evolving regulatory, competitive, and consumer demand environments and enlist innovative solutions to enhance the speed, quality, and sustainability of their R&D efforts will likely be among the longer-term winners.

References to specific securities and their issuers are for illustrative purposes only and are not intended as recommendations to purchase or sell such securities. William Blair may or may not own any securities of the issuers referenced and, if such securities are owned, no representation is being made that such securities will continue to be held. It should not be assumed that any investment in securities referenced was or will be profitable.

Kurt M. Wiese
About the Author:
Kurt M. Wiese is a research analyst for William Blair Investment Management. He focuses on U.S. small-cap healthcare companies. Before joining the research team in 2001, he was a member of William Blair’s corporate finance healthcare team, where he was engaged in all aspects of transaction execution. Before joining William Blair in 2000, Wiese worked in the Chicago audit practice of PricewaterhouseCoopers for two years. He is actively involved in the Chicago community through his philanthropic work at the Chicago Jesuit Academy, a full-scholarship, college-prep middle school for underprivileged boys on Chicago’s West Side. Wiese received a B.S. in accounting and finance from Indiana University and an M.B.A. from the University of Chicago’s Booth School of Business. He was also a participant at the Center for Japanese Language and Culture at Nanzan University in Nagoya, Japan.

The Fed’s 'Financial Conditions' Conundrum

By Jason Brady, Guest Contributor

First-quarter returns marked a spectacular rebound from the December 26 lows, when investors were fleeing risk exposures. Many markets saw their best quarter in a decade. We’re back!

Not so fast. Markets and the U.S. Federal Reserve face a multifaceted conundrum: Where exactly are we in the economic cycle? Can we be late cycle but still have room to grow? Ex-energy, have we reached inflation targets, or is deflation still the concern? Is the labor market tight, as former Fed Chairwoman Janet Yellen recently said, or does significant slack still exist, as some current Fed officials assert? Excesses have built up, including corporate leverage and re-compressed yields, amid renewed investor risk appetite. After the selloff and subsequent rebound, should investors expect less volatility, or more?

Toward the end of her tenure, Yellen called out the excesses, but they haven’t become less spicy since current Fed Chairman Jerome Powell took over in early 2018. Risk markets suffered after the Fed hiked four times in 2018 and steadily shrank its still-bloated balance sheet. But since Powell’s end-2018 policy U-turn, the Fed’s focus now appears trained more on ebbing, albeit still decent, global growth and especially “financial conditions,” which nowadays means equity markets.

Stock prices are higher thanks to the Fed, not because earnings are better or growth is terrific. Ironically, U.S. blue-chip earnings rose last year, and price/earnings ratios declined. This year, it’s the inverse. Too often investors extrapolate the latest Fed signal out to the long run. That’s why we’re skeptical about the Fed’s about-face, which engendered hope its still-accommodative stance will long continue amid above-trend growth.

The Fed’s liquidity injections—not to mention those of the other major central banks—have fended off some problems. But they won’t produce higher growth if we can’t push credit creation further, a challenge when debt levels are running high globally. Typically, when the Fed is finished hiking, a relief rally ensues. Yet the close of an economic cycle isn’t good news.

Valuations don’t offer much support to equities or fixed income. When rates rose in 2018, it caused risk assets to falter because we are now dependent on ever-lower interest costs with debt burdens of corporations and governments quite high. The U.S. 10-year Treasury yield’s 80-basis-point fall helps. But most of the world is at the zero lower bound. Curves are flat or inverted not because there is imminent doom. Rather, markets expect medium-term rates to be lower to deal with a future downturn. Ultimately, this cycle won’t die of old age. It will die because we have borrowed and pulled forward growth, creating conditions for “Minsky Moment” instability.

Markets adjusting to better reflect current fundamentals and future prospects shouldn’t be cause for Fed capitulation amid above-trend growth. Nor should investors want rising valuations from easy money, absent improving fundamentals. Spotting the difference is crucial for successful investing.

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

About the Author:
Jason Brady
Jason Brady is president and CEO of Thornburg Investment Management. He is responsible for the company’s overall strategy and direction. He is also the head of the firm’s global fixed income investment team and a portfolio manager on multiple strategies. He joined the firm in 2006, was made portfolio manager and managing director in 2007, and president and CEO in 2016. His book, "Income Investing: An Intelligent Approach to Profiting from Bonds, Stocks and Money Markets," is a step-by-step guide to income investing. Brady holds a bachelor's degree with honors in English and environmental biology from Dartmouth College, and an master's degree with concentrations in analytical finance and accounting from Northwestern’s Kellogg Graduate School of Management. He is a CFA charterholder. Prior to joining Thornburg, Brady was a portfolio manager with Fortis Investments in Boston, and has held various positions at Fidelity Investments and Lehman Brothers.

Double Digit Equity Returns 2019 YTD

 How do you protect your equity position for the rest of the year?

By Thomas Cassara and Ryan McGlothlin, Guest Contributors

With both international and US equity markets up approximately 15% year-to-date reversing most of the 4th quarter 2018 correction, many plan sponsors are asking themselves “should we consider any changes to protect the equity gains that we have received?”

Most pension plan sponsors, however, haven’t seen a strong improvement in their pension funding status since the beginning of the calendar year. This comes as a result of declining discount rates (i.e. declining interest rates and credit spreads) that have increased their liability values. Thus many plan sponsors, especially those on glide paths, may be staying the course as they rely on the plan’s funded status to dictate changes in asset allocation.

So, what are some options for consideration if plan sponsors want to protect their equity position for the year?

One choice would be to reduce the amount of a plan’s equity holdings. Selling now will lock in the gains for that portion of assets being sold. However the choice of where to invest those proceeds will need to be considered. If a plan sponsor is trying to increase their hedge vs. future interest rates movements, then buying additional hedging assets could make sense. However if these assets are still needed to drive growth, investing in fixed income now after the recent sharp decline in long interest rates may not be wise as these assets will lose money if rates were to increase. That would leave cash, alternatives, or other equity segments as potential options, but those may not make sense either.

A second choice would be to use equity options to protect your position. This can be done in many different ways and can be designed in a cost effective way. One such strategy would be to sell off equity upside beyond what a plan may expect or need to purchase some level of down side protection. As an example, a plan sponsor could sell equity returns over 8% from current levels in exchange for protecting the first 10% of downside over the next year for a zero premium today.

Another strategy would be to use equity derivatives to change the effective asset allocation of a portfolio without moving physical assets. For example, one can use futures to change a 70% equity/30% fixed income portfolio into the economic equivalent of a 50%equity /50% fixed income portfolio without incurring the expenses of selling and buying physical assets. Thus the position can be easily reversed if market conditions would warrant a higher equity position.

With uncertainty in the global economy looming, why not lock-in 2019’s positive equity returns now regardless of what discount rates do? Using strategies as described above, pension plan sponsors can effectively protect their equity gains and still leave room for a certain level of additional positive returns. If you’d be happy with a 15% return this year, now is the time to celebrate and lock it in for 2019. It’s important to act quickly as the times can quickly change.

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

About the Authors:
Tom Cassara is a managing director in River and Mercantile’s New York office. In his role, he consults with institutional clients across the investment and actuarial spectrum. This includes defined benefit, defined contribution, not for profit and retiree medical. Cassara works with clients to bring his 30 years of experience across a wide range of institutional organizations to provide custom solutions. Prior to joining River and Mercantile, he was a senior partner with Mercer leading their U.S. East Wealth business in addition to providing strategic investment and actuarial advice to clients. He has consulted to organizations with less than $100M in assets to greater than $5B in assets. Included in his experience is working with corporate, not for profit, church, healthcare and endowments and foundations. He is a Fellow of the Society of Actuaries, an Enrolled Actuary, a CFA charterholder and has a Series 3 license.

Ryan McGlothlin is a managing director in 
River and Mercantile’s Boston Office. He serves as global head of Strategic Relationships as well as acting as the U.S. Chief Investment Officer. McGlothlin works with all types of institutional investors on customized investment and risk management strategies. He joined River and Mercantile Solutions in 2007 to found its U.S. business. Prior to that, he worked for Barclays in London, helping institutions to structure and execute derivatives transactions. He designed and executed some of the earliest interest rate, inflation and equity hedging programs for United Kingdom defined benefit pension plans. He began his finance career as an investment banker advising on capital raising and M&A transactions. Ryan has 20 years of financial services experience, with most of that time focused on institutional investment and risk management. He is a regular writer and speaker on investment and financial risk management issues. He serves on multiple firm investment committees, including the Global Investment Committee. Ryan also is active in the firm’s product development efforts.