Wednesday, August 23, 2017

Investors should look at the entire picture when considering carbon emissions in asset decisions

By Dr. Dinah A. Koehler
Guest Columnist

The investment industry has begun to incorporate carbon emissions data into asset decisions, but investors who focus on simple solutions such as divestment or footprinting without considering other important factors may end up divesting companies that are successfully transitioning to lower carbon exposure. To build carbon-aware portfolios, consider carbon emissions while leveraging additional data, such as in-depth assessments of mitigation activities and progress toward a carbon reduction goal.

First-generation carbon-aware: Footprinting
Any conversation managing carbon exposure must start with data on corporate greenhouse gas emissions. Commercial providers of this data rely on voluntary corporate disclosure of carbon emissions, but less than half of these corporate disclosures are third-party reviewed, let alone audited. Providers make estimates for companies that do not report, which can lead to significant differences between provider data. Some investors use the data to report on the carbon emissions associated with stocks in a portfolio at a point in time—commonly called “carbon footprinting.”

Moving beyond footprints to glidepaths

While footprinting is useful for comparisons, carbon-aware investment should capture how companies and entire industries can contribute to the goal of limiting global warming to 2°C by 2100. The International Energy Agency has modeled what it will take to achieve the 2°C scenario, or 2DS. The 2DS provides guidance on the rate of change needed to reduce carbon emissions (see Exhibit 1) and focuses on those industry sectors that emit the most carbon (see Exhibit 2). The 2DS can be thought of as the optimal “carbon glidepath" to meet the goal. 

Glidepaths offer a framework for rewarding overachievers and punishing underachievers by helping investors evaluate whether or not a company is likely to stay aligned with its carbon glidepath. Because carbon emissions are so highly concentrated in a few industry sectors, optimizing solely on carbon emissions can quickly change the portfolio’s characteristics. A better way to incorporate carbon into portfolio (or carbon-aware index) construction is to take into account all material portfolio factors along with active risk. It is possible to significantly reduce carbon emissions by 50 percent in alignment with the IEA 2DS carbon glidepaths, while maintaining a low active risk of about 30 bps.

Carbon as an investment theme
Financial products that effectively incorporate carbon data into investment decisions can meaningfully contribute to “decarbonizing” entire economies. Investment teams that understand the relevance and nuances of carbon data can provide solutions that deliver financial returns and meaningfully reduce carbon emissions and climate risks.

Visit to access the full paper. 

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular investment, strategy, investment manager or account arrangement. 

Dr. Dinah Koehler
About the Author:
Dr. Dinah Koehler is head of research for the Sustainable Equities team of UBS Asset ManagementOne of her roles is to develop partnerships with academic institutions to create UBS' Global Sustainable Impact Equity methodology. Koehler joined UBS Asset Management in 2015. Previously she advised and worked for large global corporations, national governments and international organizations on sustainability issues. She holds a science doctorate from Harvard University.

Investment Strategy

Periodic Table of Investment Returns

illustrates benefits of diversification

By Rick Rodgers
Guest Columnist

Diversification is an investment strategy of spreading assets in a portfolio across several different asset classes. It is key to managing risk and helping your money grow over time. The Periodic Table of Investment Returns (above) illustrates the benefits of diversification.

The table shows the performance rankings of several asset classes for each of the last 10 calendar years. Each asset class is represented by a unique colored box that contains the asset class name and the total annual return for the correlating year. The best performing asset class for each year is ranked on the top row, while the worst performing is listed on the bottom row. In a perfect world, investors would somehow know in advance which asset class will perform the best and allocate to those assets, capturing the largest returns each year. However, in our imperfect world of investing, we are unable to know or consistently predict this information.

Choose an asset class listed in the first column (calendar year 2007) and follow its return for each of the next nine calendar years. For example, International Stocks was the second-best performing asset class in 2007, with a total annual return of 11.17 percent, a nice return. However, the following year, which was difficult for nearly all asset classes, International Stocks was the worst performing asset class, losing over 40 percent of its value. As you follow the performance of International Stocks through the remaining calendar years you’ll notice that it moves all over the table. This example illustrates how difficult it is to predict investment performance of a single asset class from year to year.

Credit: William Potter/iStock
Assets aren't all the same. Put several in your basket to 
maintain a diversified portfolio.
One of the most common mistakes of individual investors is attempting to choose an investment, or investments, this year based upon performance last year or in the past few years. This approach is referred to as “rearview mirror investing” or “chasing past performance.” The investor’s objective is a misguided attempt to increase returns by investing only in what appears to be hot at the time. The problem with this approach is the evaluation of the investment comes after it has already performed well, and the investor believes that the hot streak will somehow continue. While some asset classes may be the best or worst for two or more consecutive years, it is impossible to predict when the streak will begin and how long it will last. 

Markets are cyclical and impossible to accurately predict from year to year. Therefore, a more prudent approach would be to maintain a diversified portfolio, which is illustrated in the black boxes in the Periodic Table of Investment Returns. The Diversified Portfolio is never ranked at the top or the bottom of the table. It will never be the best or worst performing, whereas a single asset class may be the best or worst performing investment for a single year or multiple years.

Another benefit of diversification is the ability to manage risk in the portfolio. The two columns on the far right of the table rank the annualized performance (average annual performance for each of the 10 years shown) and risk. You will notice the performance ranking of the Diversified Portfolio is near the middle of the group, while the risk is ranked much lower. The message of the Periodic Table is that diversification can help manage risk and create more consistent returns over the long term. 

The views expressed herein do not constitute research, investment advice or trade recommendations.

Rick Rodgers
About the Author:
Rick Rodgers is a principal and director at Innovest Portfolio Solutions.  He is a member of Innovest’s Retirement Plan Practice Group, a specialized team that identifies best practices and implements process improvements to maximize efficiencies for our retirement plan clients. 

'Do the Right Thing'

Investment industry should follow 

Spike Lee film's mantra

By Gilbert Andrew Garcia
Guest Columnists

I love the classic Spike Lee movie, "Do the Right Thing." It is ahead of its time and is a masterpiece about racial tensions. In the movie, Da Mayor, played by Ossie Davis, and Mookie, played by Spike Lee, have a memorable exchange: 
Da Mayor: Doctor...
Mookie: C'mon, what. What?
Da Mayor: Always do the right thing.
Mookie: That's it?
Da Mayor: That's it.
Mookie: I got it, I'm gone.
In our business, we should always “do the right thing!” To translate, we should always “follow best practices.” Here are a few best practices I suggest for our industry. 


A successful money manager needs adequate capital. Best practices would suggest retaining some profits every year to build a cash reserve. Capital allows a firm to hire good people and to implement new systems. A firm without capital means that management is unwilling or unable to invest in itself, which is a precursor of future troubles.    


A well-known minority firm recently closed its doors, causing naysayers to ask if minority firms are too risky. They are no more nor less risky than large firms: see Merrill Lynch, Bear Stearns, Lehman Brothers and a slew of hedge funds. What they should be asking about is firm structure. Best practices require buy/sell agreements to cover all partners in case of death, divorce, bankruptcy and other unforeseen events. Buy/sells should be at a predetermined valuation to avoid disputes. Furthermore, automatic financing should be in place to preserve firm capital. Key man life insurance on large shareholders is strongly encouraged to protect both the firm and heirs.    

Recent headlines have exposed managers inflating bond prices. Best practices require the use of an independent third party pricing source. It is best to not change/override prices. Pricing services do a great job with high quality, vanilla securities but are regularly too high for collateralized mortgage obligations, commercial mortgage-backed securities, and other derivatives. Changing prices can easily lead to abuse and manufactured alpha. 

Soft Dollars

Commissions belong to clients! Soft dollars, particularly in fixed income, should be discouraged. The premise behind soft dollars is that managers use client commissions to pay certain manager bills for items that benefit clients. Ask for the evidence! And, ask for the soft dollar liability balance. Utilizing soft dollars is usually a sign that a manager is undercapitalized. The practice can easily lead to excessive trading (mortgage-backed security dollar rolls, repurchase agreements, etc.) of client portfolios to generate commissions to pay manager bills.   

Outside Revenue

It is best to avoid conflicts, real or perceived, by deriving revenue from one source, managing client assets. It is important to ask if managers/consultants are receiving revenue outside their core competency to expose potential conflicts. Best practices should require consultants to disclose any revenue derived from money managers, especially those brought before clients for potential hire during final presentations. 

Paying It Forward

Stay humble and always “pay it forward.” Firms should compensate employees generously. It is the right thing to do.  After employees, give generously in time and money to communities, both your own and those of your clients. Summer internships are a great way to give back and to expose young people to the business.   

Stand Against Injustice 

Injustice has no place in 2017. And, we should all stand against it. Last year, we were subjected to an unbelievable, racially charged line of questioning during a due diligence with a major West Coast consulting firm. I wrote their CEO directly. Shockingly, their firm defended its actions. In the end, the market will force them to change their behavior. We should all stand against injustice so our kids will never be exposed to such treatment and will be allowed to compete fairly.    

“Best Practices” means different things to different people. And, one’s interpretation of “Best Practices” says a lot about a person and a firm. Somewhere, Da Mayor is smiling and saying “Doctor, keep doing the right thing.”

The views expressed herein do not constitute research, investment advice or trade recommendations. 

Gilbert Andrew Garcia
About the Author:
Gilbert Andrew Garcia graduated from Yale University in 1985. After graduation, he joined Saloman Brothers in New York where he became a vice president specializing in mortgage-backed securities. In 1990, he joined former  San Antonio Mayor Henry Cisneros to build Cisneros Asset Management Co., ultimately becoming its president. In 2002, he joined Garcia Hamilton & Associates and is the firm's managing partner.

Risky Business

Investors face more risk for the same reward

By Julia Moriarty and Jay Kloepfer
Guest Columnists

With interest rates historically low in the United States and abroad, fund sponsors reluctant to lower their return expectations face one of the most difficult investing environments in history.

To measure just how difficult, investment consulting firm Callan Associates decided to examine what investors need to do to achieve a 7.5 percent return with the least amount of risk possible. Using forward-looking capital market projections the firm compiles, investors in 2015 needed to take on three times as much risk as they did only 20 years ago. 

The same theme of much greater risk for the same return holds true with more recent data. Also, portfolios seeking to achieve that performance have become more complicated and expensive over that period, allocating more to assets such as private equity and emerging market stocks.

In 1995, our expectation for broad U.S. fixed income was exactly 7.5 percent. We found a 100 percent fixed income portfolio was an efficient way to achieve that return.

But in 2005, investors looking for that same return needed a portfolio with just 52 percent in fixed income and the rest in riskier, return-seeking assets. And by 2015, the same return required a portfolio with just 12 percent in fixed income.

Exhibit 1
Same Return, Increasing Risk
Projected portfolio returns over past 20 years

At the same time, the risk of the portfolio significantly increased. The standard deviation for the model portfolio of 100 percent fixed income was 6 percent in 1995, compared to 17.2 percent for the model portfolio just two decades later. Standard deviation is a broad measure of risk, so the headline is that in just two decades, the risk required to achieve a 7.5 percent return nearly tripled.

Our projections for virtually all asset classes have come down gradually over the years. The unnerving consequence of lowering capital market projections is that if an institutional investor does not lower its total fund return requirement, that investor will have to keep taking on more and more risk.

This shift in the investing environment stems from the secular decline in interest rates and bond yields that has taken place over the last several decades and accelerated over the last decade. After the Global Financial Crisis, the world financial system entered an era of unprecedented monetary easing.

Governments and central banks started a unified fiscal and monetary response, driving interest rates to zero to keep liquidity going. The goal was to push investors into riskier assets because those are the ones expected to lead to economic growth. The thinking was: Don’t let people sit on piles of money; instead, make it so painful that they have to go invest.

One can argue that this zero-interest rate policy kept the world financial system from going into a deep, dark tailspin from which it may have not yet emerged. However, investors have to live with this overhang of historically low interest rates. For example, an all-bond portfolio in 2015 was expected to produce a 3.0 percent return compared to the 7.5 percent expected 20 years before that, a stark sign of the dramatic decline in interest rates.

With all these factors, fund sponsors face a particularly tricky set of challenges. Lowering their return expectations means the plan’s funded status will drop and the amount of money that must be contributed will have to go up for a given level of benefits. A higher required contribution means less spending elsewhere in the budget, or perhaps a tax hike. Alternatively, a lower funded status could force a cut in benefits. Changing the return target has impacts measured in real dollars and this is a dilemma that a lot of our clients face.

For the full story behind Callan’s research, readers are invited to read Callan’s White Paper at

The views expressed herein do not constitute research, investment advice or trade recommendations. 

Julia Moriarty
Jay Kloepfer
About the Authors:
Jay Kloepfer is executive vice president and director of Capital Markets Research at Callan Associates. Julia Moriarty is a senior vice president and co-manager of Capital Markets Research at Callan. Both are based in San Francisco.

Traditional active asset managers aren't adjusting to new investment challenges

Photo Credit: SIphotography/iStock
Identification and collection of information used to be as important to the analysis of 
that information, according to columnist Ken McAtamney. 

By Ken McAtamney
Guest Columnist

As the shift from active to passive investing in the discretionary equity space has continued to accelerate, it has become evident that traditional active asset management firms—such as long-only, fundamentally driven stock-pickers—are facing a crisis of relevance.

One reason is that, collectively, traditional active asset managers have fallen short of investor expectations in failing to deliver risk-adjusted, net-of-fee performance. Maybe this is just a cyclical reversal, but perhaps there is a more enduring reason: that the world has changed while many traditional managers, proudly clinging to their artisanal approach, have not been able to adapt to the changing dynamics, and this lack of evolution has hampered risk/returns.

For decades, the identification and collection of information were almost as important as the analysis of that information. Recently, regulatory changes and technological advances have shifted the paradigm. Access to timely information is now ubiquitous and free—in a word, commoditized. This, in turn, has created new challenges, highlighting the human limitations of processing so much information in a conventional analog fashion.

I believe most traditional active managers have yet to adjust to this new reality and need to add more “science” to the “art” of investing to harness the new challenges. As in many other endeavors, technology will be crucial for the future of active management.

So, are fundamental active managers investing sufficiently in technology and in the right areas to preserve that future? While they are spending large sums on information technology, the spending has not adequately focused on alpha enhancement.

According to Gartner and Institutional Investor, the investment management industry spends two times the global industry average on information technology, which is about 8 to 9 percent of revenue (versus 3 to 4 percent for the global average).

Looking more closely, the majority (50 to 70 percent) of this IT spending has focuses on middle- and back-office operations, which we could qualify as defensive (or necessary) spending. Approximately 10 to 30 percent focused on client-related activities.

Only the balance (10 to 30 percent) is spent on the front end or actual investment process (and, of that, one-fourth is for market data, which is not really technology). This offensive spending has largely focused on risk-management systems (especially after the global financial crisis of 2007-2008) or other non-alpha-generating areas, such as compensation and benefits.

The most significant opportunity in investment-related spending is in technologies designed to enhance the existing investment process, slowly moving away from using technology to access data to incorporating more advanced analytics focused on investment decision-making and alpha-generation. No technology solution will fix a subpar investment process, but having the right systems to support the process is key.

Industry consultant Boston Consulting Group stated in a recent report on the outlook for the asset-management industry: “It will become increasingly clear that competence in advanced data and analytics will define competitive advantage in the industry in the not-too-distant future.” 

I believe the future of technology adoption in the investment arena lies on applying business intelligence, machine learning, and artificial intelligence to big data (both structured and unstructured) to visualize the investment process and potential outcomes in a way that most investment professionals cannot see as clearly today.

By allowing a faster and more efficient analysis of the information available and continual improvement of the decision-making process, existing and future technologies can improve human judgment.

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

Ken McAtamney
About the Author:
Ken McAtamney is a portfolio manager for the William Blair Global Leaders and International Leaders strategies. He joined William Blair in 2005 and previously served as codirector of research, as well as midlarge cap industrials and healthcare analyst. Before joining William Blair, Ken was a vice president for Goldman Sachs and Co. There, he was responsible for institutional equity research coverage for both international and domestic equity, and he was a corporate banking officer with NBD Bank.

The MAC Appeal

Hedge funds have broken assurances of consistent earnings

By Jon C. Ritz
Guest Columnist

Hedge funds’ assets flourished from $500 billion in 2000 to almost $3 trillion in 2015 by offering investors the promise of consistent revenue generation with a low-risk asset correlation, but many have failed to deliver on their promises.

They appealed to plans looking to plug funding gaps in a world where enduring low yields on most conventional bonds and equities have led many to look further afield to meet investment requirements.  The global financial crisis of 2007-2008 showed us that many hedge funds were unable to produce the promised risk/reward profiles, and many investors endured serious capital losses. Many hedge funds exemplified headline risk—the very thing plans seek to avoid.  The Credit Suisse Hedge Fund Index reveals an annualized net return of +3.75 percent over the 10 years ended December 31, 2016, well below the +6.75 percent annualized return of the S&P 500 Index.  

Cutting Back the Hedge
But disappointing performance is only one reason why pension plans have been reducing hedge fund exposure recently. The California Public Employees' Retirement System was the first major public pension plan to abandon hedge funds in 2014, but many have followed suit since. Specific issues relate to cost (2 percent fee on assets plus 20 percent on outperformance), complexity, lack of transparency and illiquidity.

Many hedge funds also employ a predetermined asset allocation process derived from quantitative models. Some of these “black-box” strategies mask the rationale behind investment decisions, as well as the assets or risks to which the underlying strategy may be exposed. This opacity became an issue during the global financial crisis when many hedge funds suffered significant capital losses, and investors struggled to access liquidity to fund pressing liabilities.  While there are some good hedge funds still operating, their numbers appear to be dwindling. 

Introducing Liquid Alternatives
Traditional long-only asset managers are filling the gap with multi-asset class strategies, or MACs, sometimes referred to as “liquid alternatives.”  There are four broad categories:
  1. Absolute return strategies, offering, for example, LIBOR plus 3-5 percent with target volatility between equities and bonds and relatively low market correlation.
  2. Relative return strategies, which offer a 60/40 split of equity and fixed income with a higher risk/return profile.
  3. Risk parity strategies, which allocate equally across asset classes based on risk, and employ leverage to boost returns.
  4. Risk premia strategies, which use a quantitative-analysis approach to produce low-volatility returns that unearth quality and value, and tend to have the highest risk/return profile.
MACs may appeal to a broad range of institutional clients seeking a return stream with low correlation to risk assets. In contrast to hedge funds, they should be inexpensive, offer daily liquidity and low leverage levels, and should not short individual securities. They should also seek to reduce overall portfolio volatility.  

Transparent security selection, asset flexibility across global markets unconstrained by indices, and a focus on capital preservation are also key requirements.

MACs can be a viable alternative to hedge funds for institutional investors. However, investors should review each MACs category to determine which type best fits their investment requirements.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular investment, strategy, investment manager or account arrangement. 

Jon C. Ritz
About the Author:
Jon C. Ritz is head of Institutional, North America Newton Investment Management. He is based in New York.

Three Emerging Opportunities (Almost) Nobody’s Talking About

Like meerkats, investors are perking up
over global emerging equity markets. 

By Sammy Suzuki
Guest Columnist

Emerging equity markets are rich in possibilities for globe-trotting investors. But great investments are often where you least expect to find them. Here are three themes that deserve a bigger spotlight.

1. Europe’s New Industrial Heartland Revs Up
As the extended production line of German industry, the central European nations of Poland, Hungary and the Czech Republic are in the early stages of an economic revitalization. These former Soviet satellite states form a thriving manufacturing hub, not only supplying raw materials and components but also assembling cars and heavy machinery. Industrial production in the region has rebounded sharply over the past year (see Central Europe Rides The Pickup in German Industrial Demand chart below), fueled by growing demand from a healing Eurozone and, particularly, German manufacturing.

Financial-services stocks offer an attractive gateway to this unfolding recovery. The region’s banks suffered huge losses on foreign-denominated household and corporate loans in the wake of the European credit crunch and recession. But with economic activity picking up and balance sheets now largely repaired, these institutions look poised for stronger and more profitable loan growth. Rising local real estate values, record-low unemployment (supportive of strong real income growth) and the prospect of higher interest rates as inflation revives should also help. What’s more, central Europe accounts for less than 2 percent of the MSCI Emerging Markets Index, so passive investors won’t benefit much from this trend.

2. The iPhone 8 Supercycle
This year marks the 10th anniversary of the iPhone’s debut, and rumors are rampant that Apple plans to celebrate the milestone with the rollout of an innovation-packed iPhone 8 this fall. Industry talk suggests that the phone will boast a completely new design, including such features as a next-generation organic light-emitting diode, or OLED, display; 3D sensing; an all-glass enclosure; vertically stacked camera lenses and wireless charging.

Whenever it arrives, we expect the iPhone 8 to set off a massive shakeup of the Asian technology supply chain—richly rewarding well-positioned players and leaving tech laggards by the wayside. For example, backlighting (a technology used to support LCD displays) could become obsolete if OLED displays take off, and it’s unclear whether metal casings will be as prominent as they have been. We expect big winners and losers so it will be imperative to gain a deep knowledge of these new technologies and the likely competitive shifts the next-generation iPhone may foster.

3. EM-Savvy Global Brand Champions
As the global economy gains a firmer footing, we expect some of the best emerging-market (EM) investments to come from outside emerging markets. Some investors consider this cheating but selected carefully, such investments can be a more attractive way to gain exposure to developing-world growth. After all, investors need to stay open-minded and should always be evaluating opportunities through a global lens. As important, these companies tend to have better governance than their EM peers.

The enduring love affair between global brands and EM consumers makes it essential to understand the key factors influencing these shoppers’ tastes and aspirations. There are a handful of EM-focused multinational brands offering high, stable cash flows and generous cash-return policies. They cover an array of industries, including world-renowned household and personal-care products, athleisure wear and American fast-food restaurant franchises. High-end luxury brands also fit the bill.

Timeless Luxury
As affluent shoppers from emerging Asia, Latin America, Russia and the Middle East snap up iconic cars, watches, leather goods, jewelry, wines, spirits and cosmetics, they could account for roughly half of the world’s luxury market by 2020, according to Bain & Co., up from an estimated 40 percent in 2016. Established European heritage brands such as LVMH (Moët Hennessy Louis Vuitton, owner of Christian Dior and Givenchy), Richemont (owner of Cartier), Gucci and Hermès enjoy ages-old legacies that are impossible to replicate. These brands continue to open exclusive shops in fast-growing cities across the developing world and expand their online presence. But a major chunk of their growth is still likely to come from wealthy EM tourists, who love to buy luxury items when traveling abroad (see Chinese Shoppers Love to Buy Luxury Brands on Their Travels Abroad chart below). Fundamental research can help investors determine which companies will benefit most from these trends.

Cast a Wider Net
With fundamentals strengthening and valuations still enticing, especially relative to developed-world stocks, we continue to see huge payoff potential in EM stocks. Transformative forces are driving new sources of growth and prosperity across the developing world. While there is no shortage of opportunities, EM investors should be selective. An active “smoother-ride” approach that favors stable, cash-generative business models and strong balance sheets, while also considering valuation, is the right strategy for navigating the inevitable twists and turns of these inherently more volatile markets.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

Sammy Suzuki
About the Author:
Sammy Suzuki is portfolio manager of Strategic Core Equities with investment management and research firm AB. He has been managing the Emerging Markets Strategic Core portfolio since its inception in July 2012 and the Global, International and United States portfolios since 2015. Suzuki has managed portfolios for more than 13 years and emerging-markets portfolios for a decade. From 2010 to 2012 he also held the role of director of Fundamental Value Research, where he managed 50 fundamental analysts globally. Prior to managing portfolios, Suzuki spent a decade as a research analyst. He joined AB in 1994 as a research associate covering the capital equipment industry and then became an analyst covering the technology industry. From 1998 to 2004 Suzuki served as senior research analyst for the global automotive industry. Before joining the firm, he was a consultant at Bain & Company. He is a CFA charterholder and is based in New York.

Monday, August 21, 2017

PRB Establishes Committee to Study 'Principles' of Pension Fund Design 

By Allen Jones, TEXPERS' Communications Manager 

The State Pension Review Board of Texas established a three-person committee to develop “principles” its members consider best for retirement plan design. Once compiled, the committee is to present its recommendation to the entire board for review and possible adoption.

Keith Brainard, board vice chairman, suggested the formation of the committee during an Aug. 11 board meeting held at the state Capitol. The committee was formed after discussion of an item on the meeting’s agenda that called for the development of “PRB Principles of Retirement Plan Design.”

A timeframe to submit a report was not discussed, and Brainard says any “best principals” of retirement plan design eventually adopted by the board would not be enforceable by the agency. He says any approved report would serve as a general statement of appropriate elements funds should consider.

The committee will discuss benefit plans. However, Brainard says he doesn’t want to consider moving from pooled asset plans to anything that would require individuals to oversee their own investments.

He was appointed by the board to lead the committee. Board member Stephanie Leibe and Josh McGee, the PRB chairman, also were named to serve on the committee.

During the meeting’s public comments session, TEXPERS board member David Stacy said he appreciated Brainard’s interest in establishing best practices and urged the board to keep meetings open to the public.

“I know it is a pain and cumbersome [to keep meetings open],” Stacy says, “but it ensures the meetings are fully vetted [by constituents].”

TEXPERS will continue to provide updates regarding the committee’s work. Click here for a link to the agenda and meeting materials.

Highlights from the PRB meeting:
  • New pension funding guidelines went into effect June 30. A funding requirements document outlines six funding policies that are intended to help funds “determine a reasonable approach to responsible funding” regardless if a plan’s contribution rates are fixed or actuarially determined. Among the guidelines, the PRB suggests actual contributions made to a plan should be sufficient to cover typical costs and to amortize unfunded actuarial accrued liability during “as brief a period as possible, but not to exceed 30 years.” The guideline states that 10 to 25 years is a preferable target range. “Plans with amortization periods that exceed 30 years as of June 30, 2017, should seek to reduce their amortization period to 30 years or less as soon as practicable, but not later than June 30, 2025,” according to the document. Plans that use multiple amortizations, according to the document, should make sure the weighted average of all amortization periods does not exceed 30 years. The guideline also states that “benefit increases should not be adopted if all plan changes being considered cause a material increase in the amortization period and if the resulting amortization period exceeds 25 years.” Click here for the funding requirements document. 
  • Funded ratios of public pension plans in the state are the same as they have been, says Kenny Herbold, the PRB’s staff actuary. He presented an actuarial valuation report on the fiscal conditions of 93 registered plans during the agency’s Aug. 11 board meeting. According to his report, the funded ratio of assets and liabilities is 79.4 percent for the current effective date. The prior effective date funded ratio was 79.8 percent. Market value of assets are $243 billion. The last effective date value of assets was $235.5 billion. Actuarial value of assets for the current effective date is $253.3 billion. The prior effective date value of assets was $242.6 billion. Of 93 plans registered, 29 plans have amortization periods between 10 and 25 years, 19 range between 25 and 30 years, 18 have periods ranging between 30 and 40 years, 13 have periods ranging more than 40 years but are not infinite, seven have ranges less than 10 years, four have infinite amortization periods, and three have zero years. Plan discount rates for the current effective date among the 93 registered plans: 25 range between 7.5 and 8 percent, 22 have 8 percent, 16 have 7.5 percent, 11 are between 7 and 7.5 percent, nine are less than 7 percent, seven are at 7 percent, and three are more than 8 percent. The median plan discount rate is 7.75 percent. 
  • Ashley Rendon, a policy analyst with the PRB, updated the board on progress of 12 pension plans making towards achieving a 40 year amortization period. The systems previously submitted funding soundness restoration plans with the PRB. Two plans, the Harlingen Firemen’s Relief and Retirement Fund and the Odessa Firemen’s Relief and Retirement Fund, previously had infinite amortization periods. As of Dec. 31, 2016, the Harlingen fund had an amortization period of 48.4. As of Jan. 1, 2017, the Odessa fund had a period of 48.6, although the calculation was still under review. Among the plans, Wichita Falls Firemen’s’ Relief and Retirement Fund had a Jan. 1, 2015, reported amortization period of 105.9. That plan is now at 49.4 as of Jan. 1 of this year. A full list of funds are listed under TAB 3C in the document link above. 
  • The PRB is seeking to copyright its trustee training materials. Although the material will remain open source, anyone who copies the text of the materials will be required to attribute the PRB as the source. • The next PRB meeting is set for 10 a.m. Nov. 16. The location has not been determined, however, it is expected to be held at the state Capital building, says McGee, chairman of the PRB. The meeting’s agenda will be posted to the PRB’s website at

Wednesday, August 16, 2017

Hedge fund management firm for two San Antonio pension systems closes

By Allen Jones
TEXPERS Communications Manager

The closure of Los Angeles-based macro hedge fund firm CommonWealth Opportunity Capital GP LLC will not impact its two public pension system clients in San Antonio.

The funds will most likely move to another manager. The funds’ beneficiaries also should not see an impact by the firm’s shutting.

According to a July 26 Reuters report, CommonWealth’s closure follows a loss of about 2.7 percent this year through mid-July in one of its hedge funds. The firm was launched in 2008 and produced average annual returns close to 10 percent. The news agency says many macro hedge funds struggled this year, reporting that the HFRI Macro Index is down 0.73 percent this year through June and fell 2.4 percent during the 12 months prior.

The firm’s leader, Adam Fisher, is joining Soros Fund Management LLC. 

Allen Jones
Author Bio: Allen Jones is the communications and public relations manager for TEXPERS. He has a bachelor's degree in journalism and communications. He is a former community journalist and editor. He previously worked for the Houston Community Newspapers group, international community lifestyle magazine publisher Hibu, and was a freelance writer for the Houston Chronicle. 

TEXPERS members attend 

symposium and game in Chicago

TEXPERS members attended the Commodities, Futures and Derivatives Symposium June 19-21 in Chicago. Over two ½ days and one full day, attendees visited the Chicago Board Options Exchange, Chicago Mercantile Exchange and the offices of Associate Advisor William Blair. The agenda was filled with education and training around options; retirement system trustees already investing or considering investing in this space were fully informed about it by the end of the third day.  Fifty trustees and sponsors heard speakers on topics that included: macro-diversification, energy sector investing, listed options markets, and much more. One evening’s networking event featured a visit to Wrigley Field to watch the Chicago Cubs play the San Diego Padres.

Advocacy Advice

5 Tips to easily take advantage of national observances to promote defined benefits

By Allen Jones
TEXPERS Communications Manager

National holidays and observances offer pension systems prime opportunities to promote the importance of defined benefits.

Some national celebrations, like Public Service Recognition Week, are no-brainers when it comes to potential avenues for advocacy outreach. That observance honors public employees such as your system's members. However, there are many other holidays and observances that you might not realize can prove to be prime opportunities to promote your cause online.

For example, Aug. 21 is National Senior Citizens Day, an observance created to show appreciation to our senior citizens and to recognize their achievements. State demographics indicate that persons age 65 and older made up 3.1 million of the state’s population in 2014, the most recent census data provided by the Texas Demographic Center. Also, consider that many of the state’s older residents are retired police officers, firefighters, teachers and other public servants who have dedicated their careers to working for their fellow Texans.

This observance could allow your fund the chance to advocate for defined benefits through your system’s various online social media channels, such as Twitter and Facebook.

Here’s how your fund can use this observance and others to your advantage:

Plan Ahead. Take time to search out the state’s and nation’s various observances and holidays. Knowing in advance what is out there gives you time to establish research and initiatives to promote. 

A good source is In addition to listing the multitude of observances held across the United States, the site offers historical background on each date’s designation.

Consider all Observances: Even obscure observances can gain your fund attention. May 4 is often referred to as Star Wars Day (May the Fourth be with you – get it?). Each year, the topic trends on social media sites such as Twitter and Facebook. The hashtag #MayThe4th and #StarWars were used to help audiences track the observance on their social media platforms. Think of hashtags as labels that help organize topics on social media channels.

TEXPERS took the opportunity to create a Facebook post encouraging people who saw posts featuring the hashtags to ask their state legislators to support defined benefits for firefighters, police, and city employees.

Screenshot of TEXPERS Facebook post related to the national observance of Star Wars Day.
TEXPERS also took advantage of Mother’s Day and International Firefighters Day by posting a brief statistic and pleas for support. For example, for Mother’s Day, TEXPERS wrote, “There were an estimated 252,000 firefighters working in the U.S. in 2016, according to the Bureau of Labor Statistics. Women, many of them mothers, made up 3.5 percent of the total workforce for the occupation, not counting those in leadership roles. Like their male counterparts, female firefighters spend time away from their families and children working to save lives and property. The least we can do is protect their retirement pensions. Tell your legislators to support defined benefit plans for all public employees.” The hashtags #TxLege, #Pensions, #MothersDay #Firefighters and #Retirement were used to help get the message in front of social media users that may track those topics.

Screenshot of TEXPERS Facebook post observing Mother's Day while advocating for defined benefits.
You don’t have to create a graphic if you don’t have the skills. Just type up a message and include the appropriate hashtags for the observance and the audience you want to grab the attention of. You could take a photo of a system member on the job to post with your fund’s message. Or, use sites such as to create more graphic oriented posts quickly. The site’s basic features are free to use.

Tie Messages to Defined Benefits: Advocate for your system members and retirees by helping your community understand how defined benefits work and why the retirement plan is essential to maintain. For example, when state and local governments fail to provide promised funding and try to dismantle defined-benefit pensions by switching to 401(k)-like retirement programs, they fail to recognize the work these public servants provided, often at much lower wages than their private-sector cohorts. Visit sites such as for statistics and data that support your fund’s message.

Put Your All Into the Campaign: Spend a little time on crafting your message to the holiday or observance. Also, get more than one person involved in helping to promote the advocacy campaign. Fund executives, board members, and system members all can participate in some way, whether that is sharing social media posts on their personal Twitter and Facebook pages, asking their family and friends to write letters, or personally speaking with their elected officials regarding the campaign.

Include the Message Everywhere: Don’t just use one mode of advocacy to promote the campaign. Consider posting the message to your email signatures and writing a note about the observance to your system’s website. Also, consider having community supporters, such as local businesses, include information on their own communications materials such as emails and websites.

Using these tips, your fund can easily find unique ways to take advantage of observances and holidays to advocate for defined benefits.

Allen Jones
Author Bio: Allen Jones is the communications and public relations manager for TEXPERS. He has a bachelor's degree in journalism and communications. He is a former community journalist and editor. He previously worked for the Houston Community Newspapers group, international community lifestyle magazine publisher Hibu, and was a freelance writer for the Houston Chronicle.