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.


Beyond the Sugar Rush


Strategic stimulus for Chinese stocks

Photo contributed by AB

By John Lin and Stuart Rae, Contributing Columnists

Whenever the Chinese economy slows and its stocks take a serious hit, investors have come to expect the government to unleash large-scale fiscal and monetary stimulus. Another heaping spoonful of sugar may do more harm than good this time around, however. It's time for the ailing market to take some medicine.

The MSCI China A Index has tumbled by more than 26% through November 23 on concerns about a weakening domestic economy and the escalating trade war with the U.S. Many investors who were attracted to the opening of the Chinese domestic market earlier this year are now watching for signs of a bottom.

This is the point at which the government would normally administer a generous shot of domestic stimulus, as it did in 2008 and 2015. If the government pumped enough money into the economy, it could help offset the pain from higher tariffs, buoy the domestic economy and lift stocks out of the doldrums. But stimulus also has its dangers, particularly when it's used as a tool to manage markets.

The Debt Discount

Ask investors and economists alike what worries them most about China, and debt levels would inevitably be at the top of the list. China's ratio of corporate debt to GDP is 164%, the fifth-highest among the 44 countries tracked by the Bank of International Settlements. Its corporate debt ratio has grown more in percentage terms than that of all but eight other countries since 2013.

Who's to blame for this heavy debt burden? Past stimulus packages are partly responsible. In addition to funding massive infrastructure projects, these packages usually involve lowering interest rates, reducing bank reserve requirements and something called "window guidance," in which the central bank essentially telegraphs which industries they would like banks to lend to.

Private companies and even individuals have taken full advantage of loose credit conditions. Rising corporate bond defaults and nonperforming loans, as well as the recent collapse of hundreds of peer-to-peer lending platforms, suggest that at least in some cases, the money came too easily. Concerned global equities investors are already applying a substantial discount to Chinese stocks because of debt issues. Another borrowing binge won't help that situation, in our view.

How Effective Will a New Mega-Stimulus Be?

The government is aware of the problem. Recognizing the danger posed by the high level of debt in its economy, the Chinese government had until recently been committed to a well-publicized deleveraging program that included raising key interest rates and cracking down on shadow banking.

It also made clear that bank officials-and even local bureaucrats-would be held to account for nonperforming loans, and those officials may be reluctant to shift gears and return to easy lending mode. So, a massive stimulus now simply may not be as effective as it was in 2008 or 2015.

Too much stimulus can also have unintended side effects, including overinvestment.  Barely used bridges and uninhabited ghost cities have failed to generate enough revenue to justify their existence and can't produce the kind of economic multiplier that can have a broad-based impact on financial markets. China still needs infrastructure, but we think rampant stimulus is the wrong way to achieve it.

The Right Kind of Stimulus

Though it may be counterintuitive, China investors should be happy that the government has taken a relatively hands-off approach to market moves this time around. The central bank has cut interest rates and reserve requirements, but Chinese securities regulators have not intervened to stop trading to prevent a freefall in the stock market, as they did in 2015. In fact, they announced a new limit to the amount of time companies can suspend their shares, which should reassure investors looking for signs that markets function more or less independently.

Still, we're not arguing against any government action. Loosening fiscal and monetary policy when economic conditions deteriorate is part of every well-run economy's playbook. We're advocating for a targeted, strategic stimulus that would allow much- needed structural reforms to proceed.

We believe that Chinese markets would benefit most from tax cuts, rather than monetary stimulus. Companies run the risk of overextending themselves when it's too easy to borrow, and they have an incentive to engage in capital expenditures rather than other forms of capital distribution. Lower taxes would allow companies to allocate resources to what they see as the most productive ends, including share buybacks and dividends.

China cut the value-added tax rate for several key sectors earlier this year, but we think there is room for further cuts. We also would like to see corporations, particularly private enterprises, which are responsible for the bulk of job creation, bear less of a burden for funding Social Security.

Pain Is Priced In

Anything short of another mega-stimulus will inevitably disappoint investors, but much of that disappointment is already priced in. China is already the cheapest major equity market in the world.

Besides, the domestic equities market stands to gain more in the long term from doing stimulus properly than it will suffer in short-term losses. The right kind of stimulus would reduce the risk of moral hazard, incentivize better distribution of financial resources and help create a growth model that doesn't rely on massive amounts of debt, which in turn would help investors properly price risk.

In other words, if the government ever wants foreign investors to stop levying an automatic and steep discount on its stocks, it must rethink its tactics. And investors who want to tap into China's long-term growth potential should prefer a plan that supports sustainable growth and returns rather than the fleeting high of an artificial sweetener.

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 or TEXPERS.

John Lin
About the Authors:
John Lin is a portfolio manager of China equities at AB, responsible for managing the China A Shares Value Portfolios and the China Opportunity Fund. He also serves as a senior research analyst, responsible for covering financials, real estate and conglomerate companies in Hong Kong and China. 






Stuart Rae
Stuart Rae is chief investment officer of Asia-Pacific Value Equities at AB. Prior to taking on the additional management responsibility for AB's Japanese team, Rae was chief investment officer of Asia-Pacific ex Japan Value Equities from 2006 to 2017, and CIO of Australian Value Equities from 2003 to 2006.


Diversity and Financial Performance

Years of hard data draws an undeniable link


Photo: pixabay/rawpixel

Contributed Article Submitted By Invesco Global Thought Leadership

Despite years of research touting the benefits of diversity in the workplace, it remains a difficult and controversial topic for some. While some commonly complain that diversity is incompatible with the pursuit of meritocracy and fosters box-ticking and tokenism, the reality is that fostering an inclusive culture has intrinsic value and an unmistakable impact on the bottom line.

Decades of research on the topic of diversity and inclusion, from its early roots to a growing body of research that shows a positive impact on the bottom line. A lack of diversity could even be a risk, according to Christine Lagarde, managing director of the International Monetary Fund, who famously postulated that Lehman Brothers might not have collapsed if it had been “Lehman Sisters.”

As investors gain access to more and more data linking diversity to organizational performance, it’s becoming a key issue for asset managers and asset owners alike, who can increasingly use it as a criteria for long-term decision-making. To highlight the importance of considering diversity for investors, here are four critical data points that clearly show potential for financial upside:
Workplace diversity drives performance: According to McKinsey’s report, Delivering Through Diversity, companies in the top-quartile for gender diversity on executive teams were 21% more likely to outperform on profitability and 27% more likely to have superior value creation. But it’s not just about gender. Companies in the top-quartile for cultural diversity on executive teams were 33% more likely to have industry-leading profitability.
Gender diversity on the board improves the bottom line: A 2011 study by Catalyst, The Bottom Line: Corporate Performance And Women’s Representation On Boards (2004–2008), furthers the case for diversity. It shows clear evidence that companies with more women board directors perform better financially than those with the least -- a 16% on return on sales and 26% for return on invested capital. At the same time, companies with sustained high representation of women on the board significantly outperformed those with sustained low representation by 84% on return on sales, by 60 percent on return on invested capital, and by 46 percent on return on equity.
Demographic diversity breaks through “groupthink”: According to Deloitte’s influential 2011 study, Only Skin Deep? Re-Examining the Business Case for Diversity, diversity in the workplace can also provide companies with a competitive edge through better and more diverse ideas. As the study points out: “demographics act as a lead indicator as to whether organisations are drawing from the full knowledge bank and making merit-based, rational decisions.” Figure 1 shows this correlation clearly.
Click image to enlarge.
 The workforce will demand it: In 2016, the Institute for Public Relations published research showing that 47% of millennials would consider the question of diversity in the workplace when looking for a job, whereas only 33% of generation X members and 37% of baby-boomers would give the matter thought.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Invesco Global or TEXPERS.

Wednesday, December 19, 2018

Women in Investing: Growing Influence

Graphic: pixabay/geralt

By Romina Graiver, Guest Columnist

The profile of women has never been higher. Everywhere you look women continue rising.
Today, more women graduate from college and vote than men.

We see these demographic changes reflected in politics. Women now hold 107 of the 535 seats in Congress and 23% of all statewide executive offices.

Around the world, of the 15 women national leaders today, eight are their country’s first female head of state. Then there are global policymakers like International Monetary Fund (IMF) head Christine Lagarde and former U.S. Federal Reserve Chair Janet Yellen.

In sports and entertainment, women have never had more influence. Serena Williams, Meryl Streep, and Beyoncé are just a few that come to mind.

It is no surprise to see the business world is also changing. Even though men far outnumber women as CEOs and stubborn challenges remain, including the gender pay gap, women hold powerful corporate positions. IBM, General Motors, PepsiCo, and Fidelity are all led by women. In 2017, women and minorities accounted for half of the 397 new independent board members at S&P 500 companies, according to executive recruiter Spencer Stuart—the highest since it started tracking the data in 1998.

Within the financial world, the power of women—in assets managed, donated, and invested—also grows. According to a Boston Consulting Group study, in 2015 women controlled 30% of the private wealth globally, or $50.5 trillion — up from $33.9 trillion in 2010.



Women’s Wealth Has Social Impact


“Women’s wealth is a natural byproduct of greater integration into the labor force,” says Olga Bitel, partner, global strategist at William Blair. “In developed markets where women can work, they are getting more wealthy, more independent. In emerging markets, the male-female dichotomy is different but you’re getting women to be empowered out of economic necessity.”

The growing influence of women presents challenges and opportunities for institutional investors and managers. Women’s wealth is also having a tremendous social impact. 

“On a whole you have women who are very engaged and passionate about their communities and they understand the value of combining financial resources with volunteerism and relationships to really make an impact,” says Laura Coy, William Blair’s director of community engagement.

Socially responsible assets have grown significantly over the past year as investors have sought strategies that include progressive environmental, social, and governance (ESG) factors, according to a Bloomberg Industry Focus report. This trend has been largely influenced by women.

The growing influence of women presents challenges and opportunities for institutional investors and managers.

Women, says the CFA Institute, are the “universal diversifier.” But they are under-represented in the field of investment management. In no country do women represent half of CFA members.

It’s not surprising, then, that the CFA Institute has implemented a “Women in Investment Management Initiative” that seeks to improve investor outcomes by encouraging gender diversity in the investment management profession.

That is our goal as well, and that is why, in our recent “Client Focus” publication, we shared the views and experiences of four women with William Blair relationships who are forging new paths in their investment management careers and personal lives.

Click here to read about the journey of several professional women.

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


Romina Graiver
About the Author:
Romina Graiver is a portfolio specialist for William Blair’s global equity strategies. In this role, she participates in the team’s decision-making meetings, conducts portfolio analysis, and is responsible for communicating portfolio structure and outlook to clients, consultants, and prospects. Previously at William Blair, she was a senior client relationship manager. Before joining William Blair in 2012, Graiver was deputy head of the international equity investment team at BNP Paribas Investment Partners, where she was responsible for product development and investor communication. Before taking on that role, she was a product specialist for model-driven equity investments and a marketing manager.


Who Will Audit the Auditors?

KPMG/PCAOB Theft Scandal Casts Doubt on Audit Quality


Graphic: Pixabay/mohamed_hassan

By Hannah Ross and Tony Gelderman, Guest Columnists

Investors rely on auditors to provide neutral, independent, and accurate assessments of the financial condition of public companies. Reliable outside accounting and an auditor’s signed statement are the bedrock of company valuation.

However, despite a wave of major accounting scandals and legislative fixes in recent years, audits of public companies contain a shockingly high rate of errors and new scandals have arisen undermining public confidence.

A 2017 inspection of public company audits by The International Forum of Independent Audit Regulators found that 40 percent contained serious errors, including issues pertaining to accounting estimates and internal control testing, and a 2014 analysis by the Public Company Accounting Oversight Board found that one third of audits were so deficient that they should not have been issued.

In the face of these misrepresentations, ensuring the validity of audits has become even more important. Unfortunately, within the past year, KPMG, a “Big Four” audit firm, was embroiled in a scandal regarding the theft of confidential information from the PCAOB, which also brings into question the ability of the PCAOB to do its job and meaningfully “audit the auditors.”

In January 2018, the SEC and DOJ initiated an enforcement action against several former KPMG employees and one PCAOB employee in connection with attempts by KPMG to cheat on PCAOB inspections. At the same time, in a parallel proceeding, the DOJ issued an indictment against the same individuals in USA v. Middendorf et al., in federal court in the Southern District of New York. Earlier this year, defendants in the DOJ criminal action tried but failed to have several counts from the case dismissed. In October 2018, two of the defendants in the DOJ action pled guilty. One, KPMG’s former partner-in-charge of inspections, admitted that he and “other partners and employees of KPMG…agreed to share and use confidential information from PCAOB, to which we were not entitled.”

In his January 2018 statement announcing the actions, SEC Chairman Jay Clayton wrote that, based on discussions with SEC staff, he believed that investors could continue to rely on KPMG’s audit reports — despite the fact that KPMG was attempting to steal information from the PCAOB specifically in order to game the PCAOB’s inspection of its audits.

Since that time, court filings have revealed details about some of the KPMG clients whose audits were implicated in the scandal, and experts believe that Chairman Clayton’s statement should be re-evaluated in light of these disclosures. According to Nell Minow, a corporate governance expert, the “breadth and seriousness of the charges and the importance to the financial markets of the companies affected should require a thorough internal investigation with results made public. If the SEC or KPMG do not insist on it, investors and clients should.” Lynn Turner, the SEC’s former chief accountant, echoed such sentiments, stating: “I believe chairman Clayton misled investors when he said they could rely on the audits report issued by KPMG. In my opinion, the information that has come to light raises a serious question with respect to the integrity, objectivity and professionalism of the audits.”

Trial in the ongoing litigation is scheduled for February 2019, and given the conflicting views from the SEC and governance experts, investors and their counsel should think carefully about how much faith to put in these audits.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of Bernstein Litowitz Berger & Grossmann LLP or TEXPERS.  

Hannah Ross
Tony Gelderman
About the Authors:
Hannah Ross is a partner and Tony Gelderman is counsel at Bernstein Litowitz Berger & Grossmann LLP. They specialize in advising and representing institutional investors in securities fraud and corporate governance matters in state and federal courts nationwide.

Monday, December 3, 2018


Retail industry experiencing surge in holiday sales

Photo: stevepb/pixabay

By Allen Jones, TEXPERS Communications Manager

Brick-and-mortar and online retailers are expecting holiday sales this year to increase between 4.3 and 4.8 percent over last year, ringing up somewhere between $717.45 billion and $720.89 billion October through December.

Click image to enlarge.
The forecast comes from the National Retail Federation, the world’s largest retail trade association consisting of department stores, specialty, discount, catalog, internet, and independent retailers; chain restaurants and grocery stores. The projection, which excludes automobile, gasoline and restaurant sales, compares with an average annual increase of 3.9 percent over the last five years.

“Our forecast reflects the overall strength of the industry," says Matthew Shay, president and CEO of the National Retail Federation, in a news release. “Thanks to a healthy economy and strong consumer confidence, we believe that this holiday season will continue to reflect the growth we’ve seen over the past year. While there is concern about the impacts of an escalating trade war, we are optimistic that the pace of economic activity will continue to increase through the end of the year.”

The trade association didn’t have any Texas-specific data. However, the Houston Chronicle recently reported that the average family in the state’s largest city is expected to spend $1,512 this holiday season, which is just shy of the national average of $1,536. The news article’s data comes from a survey conducted by accounting and consulting firm Deloitte.
Click image to enlarge.

The firm also looked at the Dallas/Fort Worth metropolitan area and projected that shoppers there would spend about the same as their national counterparts. Deloitte’s annual holiday economic forecast is a bit higher nationally than the projection provided by the National Retail Federation. You can view Deloitte’s full report online.

Although Deloitte’s forecast for the nation is between 5 and 5.6 percent, the bottom line is that holiday sales projections are optimistic. Both sales estimates also point to strong online sales, with Deloitte reporting that the internet remains the lead shopping medium with 57 percent of sales expected to occur online.

Already, Adobe Analytics is reporting that Black Friday, the day-after-Thanksgiving retail sales push often regarded as the first day of the traditional Christmas shopping season, saw online stores alone pull in a record $6.22 billion. This new high in online Black Friday spending is a 23.6 percent increase from a year ago. The company, which tracks transaction for 80 of the top 100 internet retailers in the U.S. like Walmart and Amazon, also reports that this year’s Friday after Thanksgiving was the first to see shoppers spend more than $2 billion on smartphones.

According to the National Retail Federation, consumers will focus spending on gifts ($637.67); non-gift holiday items such as food, decorations, flowers and greeting cards ($215.04); and other non-gift purchases that take advantage of the deals and promotions throughout the season ($154.53).

Jack Kleinhenz, the chief economist for the retail trade association, says several factors are behind the optimistic holiday spending forecasts, including one of the lowest unemployment rates the U.S. has seen in decades, higher hourly earnings, and increases in net worth.

“When you go across all of those indicators, the landscape looks very good for the holiday season,” he said during a phone interview with TEXPERS. “That’s consistent, no doubt, with a very strong economic performance for the economy.”

Public pension systems make investments on behalf of their active and retired members. The National Retail Federation doesn’t provide financial recommendations, but Kleinhenz says retail sales is another critical component of an overall economic outlook.

“The economy isn’t just the stock market,” he says.

Plus, the holiday sales forecast is just a snapshot of a few months out of an annual or multi-year context.

“Consumer attitudes are very strong,” he says. “I think you’ve got to just take that into context. The consumer, when they believe their finances have improved steadily, that means they are in a position to spend. Certainly, the consumer has been the driver of the economy, actually since the expansion started in 2009 [after the great recession].”

The trade association’s annual holiday spending forecast takes into account several economic factors to project overall spending instead of relying on per-consumer spending assumptions. Also, according to the NRF’s forecast, gift cards are the most popular items on holiday wish lists, requested by 60 percent of those surveyed, followed by clothing and accessories at 53 percent, books/movies/music at 37 percent, electronics at 29 percent, home décor at 23 percent, jewelry at 22 percent, personal care or beauty items at 19 percent, sporting goods at 18 percent and home improvement items at 17 percent.

Wednesday, November 14, 2018

State and U.S. jobless rates fall to 

record lows in September


By Allen Jones, TEXPERS Communications Manager

A key economic indicator, the unemployment rate, continues to fall in the U.S. and Texas is among states showing continued job growth in September.


The state’s unemployment rate fell to 3.8 percent in September, down from 3.9 percent in August, according to data from the Texas Workforce Commission. The September unemployment rate is the lowest in four decades.

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The state added 15,600 nonfarm jobs in September, helping to continue boosting Texas’ annual employment growth streak. Nonfarm is the compiled name for goods, construction, and manufacturing companies in the U.S. and it doesn’t include farm workers, private household employees, or nonprofit organizational employees. Texas’ annual employment growth was 3.3 percent in September, resulting in 27 consecutive months of year-over-year job growth.

“Texas employers continue to contribute to our state’s success with private-sector employers adding 16,700 jobs in September and accounting for an impressive 402,500 jobs over the year,” said Ruth Ruggero Hughs, chair of the Texas Workforce Commission. “Texas’ continued addition of jobs over a 27-month period demonstrates the competitive advantage and market opportunities available to our Texas employers and world-class workforce.”

The Texas Workforce Commission, the state agency charged with overseeing and providing workforce development services to employers and job seekers, also notes in its Oct. 19 unemployment report, that the construction industry added 3,000 jobs since August. Other high-growth industries included manufacturing with 2,800 positions. The mining and logging industry added 2,600 jobs since August.

According to the agency, the Midland Metropolitan Statistical Area had the lowest unemployment rate among the state’s economic geographical regions. The Midland area had an unemployment rate of 2.2 percent, followed by the Amarillo MSA and the Odessa MSA which had the second lowest with a rate of 2.7 percent. The Austin-Round Rock and College Station-Bryan MSAs recorded the third lowest rate of 2.9 percent for the month.
Much of the U.S. is experiencing decreases in unemployment. The U.S. unemployment rate was 3.7 percent in September. The national unemployment rate declined by .2 percent from August to 6 million people in September, according to a U.S. Bureau of Labor Statistics report.

That is its lowest level since the Vietnam War, according to an article in The Wall Street Journal, in which Andrew Chamberlain, the chief economist at recruiting site Glassdoor, called it “the best job market in a generation or more.”

A highlight among September’s national unemployment rate: The unemployment rate for women in the U.S. is the lowest it has been in more than six decades, according to a September jobs report released last month by the U.S. Department of Labor.

“The unemployment rate for women was 3.6 percent, the lowest in 65 years,” said U.S. Secretary of Labor Alexander Acosta in a prepared statement.

Total nonfarm payroll employment increased by 134,000 jobs and was spurred by job gains in professional and business services, health care, transportation and warehousing. Jobless rates haven’t been that low since 1969, according to labor department data.

Last year, the unemployment rate for September was 4.2 percent, according to the labor department’s online database.

Politics


Lofty policy issues could shift 

lawmakers' focus off of public pensions 



ByTEXPERS Staff

The November 2018 general election is over and Texas is now readying for the 86th legislative session, which starts Jan. 8. Legislators have some lofty policy issues to address and may not have local public employee pensions at the forefront as was the case during the 85th legislative session in 2017.

Pre-filing for the 86th regular session of the Texas legislature began Nov. 12. Although pensions aren’t expected to be the focus of the legislative session, a few bills are looking to strengthen benefits for retired educators.

As of Nov. 14, House Bill 56 by Rep. Armando Martinez, D-Weslaco, would establish cost-of-living adjustments on pensions for retired teachers. Also, Senate Bills 92, 93 and 94, all authored by Sen. Jose Menéndez, D-San Antonio, would add a supplemental “13th payment” for retirees and otherwise shore up the Teacher Retirement System, according to an update provided by TEXPERS’ lobbying firm, HillCo Partners.

By end of day Nov. 12, legislators filed more than 400 bills. A sampling of the legislation propose raising wages, strengthening workplace benefits, expanding health care and improving access to higher education. Several measures address the problem of sexual harassment. Capital insiders see costs related to Hurricane Harvey and disaster recovery, school safety, local property taxes, mental health, and public school funding among the session’s top priorities, however.

The general election brought about transition at the Congressional level and the Texas legislature. Nationally, Democrats took control of the House in Congress turning at least 25 seats from Republican to Democrat but lost a few seats in the Senate. The outcome from an unprecedented voter turnout in a midterm election resulted in a split Congress. In the Texas legislature, the Senate saw two incumbents lose their seats bringing the 31-member Senate to 19 Republicans and 12 Democrats. The Texas House will have 12 new Democrats bringing the 150-member body to a 67 Democrat and 83 Republican membership (at the time of this writing).

At the federal level, several races and candidates received voter and media attention rare for a midterm election cycle. The race between incumbent U.S. Sen. Ted Cruz, R-Texas, and Democratic challenger Beto O’Rourke captured national attention and created voter enthusiasm in Texas. Ultimately, Senator Cruz defeated his Democratic challenger by 3 points.

Along with the national dialogue, the Cruz-O’Rourke race was a cause for the projection of a larger voter turnout than in prior midterm elections. Two Republican held Congressional seats, Congressional District 7 from the Houston area and Congressional District 32 in suburban northeastern Dallas, switched to Democrat.

Going into the general election, the Texas Legislature had 94 contested House races and 13 contested Senate seats. After votes were counted on election night, 12 House Republican seats went Democrat, with 2 seats in the Texas Senate being won by the Democratic candidate.

Bill Miller, co-founding partner of HillCo Partners, made this statement prior to Tuesday’s general election regarding the House contests, “Among state House races, it is uncertain how many Democrats will win competitive elections, but it is virtually certain more Democrats will be added to the House.”

“The net result for pensions,” he says, “is less pressure from the conservative Republican wing to change the status quo.”

Republicans still maintain control of the Texas Senate and House. However, the gain by Democrats in the House provided an appreciable impact to the most critical function that occurred the first day the 86th Texas House convened: electing a speaker. With Speaker Straus announcing his resignation, the speaker’s office became an “open seat,” something that has not occurred in over a decade. Rep. Dennis Bonnen, R-Angleton, received enough support from House members to become the next speaker.

When legislators convene in January, several policy issues will need addressing, which may shift their focus from local public employee pensions.

“Public pension issues may not have the focus the likes of which were on the table during the 85th session,” says Eddie Solis, who represents TEXPERS as a lobbyist with HillCo Partners in Austin.

During the 85th interim, House and Senate committees with jurisdiction over pensions received updates regarding the pension reform legislation passed last session and the state’s Pension Review Board has continued discussing remedies local plans are proposing as required by Funding Soundness Restoration Plans to resolve issues identified by both the pension system and respective sponsoring entities. The PRB continues to research how local plans are working with their respective cities to address funding issues.

TEXPERS continues to track political happenings that could impact pensions at the state and federal level. Members may log in to their member portals at www.texpers.org for legislative updates throughout the 2019 session.