Pension board to consider firing CIO
Trustees schedule discussion of Salient Partners contract in two weeks
After hours of hand-wringing from trustees and pleadings from retirees to safeguard their livelihoods, the county pension board voted Thursday to formally consider firing their Texas investment consultant.
The decision on the future employment of Salient Partners of Houston was set for Oct. 2, one day after the last of the county’s in-house investment staff was scheduled to go to work for the investment firm as part of a years-long outsourcing push.
In the meantime, Chief Investment Officer Lee Partridge of Salient will no longer be permitted to risk up to five times the amount of San Diego County’s pension money invested under his “risk-parity” strategy.
The retirement board voted 5-2 to limit leverage in that $2 billion portion of the pension fund to two times’ leverage, limiting exposure in that portion of the $10 billion portfolio. Trustee David Myers and Chairman E.F. “Skip” Murphy were opposed to the cap.
“That tightens the reins on an interim basis,” said Supervisor Dianne Jacob, who represents the county on the pension board.
Should the county pension fund keep using Salient Partners for portfolio strategy?
Yes 26% (101)
No 74% (281)
382 total votes.
Jacob tried to call a vote for terminating the $10 million annual contract for Salient during a seven-hour meeting. The lawyer for the San Diego County Employees’ Retirement Association recommended that such a vote wait until it could be posted on a public agenda in order to comply with state open-records rules.
“There needs to be notice,” attorney Steve Rice said.
Trustees later approved taking up the Salient termination in two weeks, again with Murphy and Myers opposed.
Before the meeting ended, the three county investment officers who planned to start working for Salient on Oct. 1 had rescinded their letters of resignation, according to pension system CEO Brian White.
The day’s developments marked a significant turn-back in a years-long trend. Since hiring Partridge as an outside consultant in 2009, the pension system has been transferring more responsibility, more staff and more money to him. The agency has also loosened its policies to allow more risk, with more leeway to borrow against current assets to make additional investments, a process known as leverage.
That mix of risk and leverage — uncommon among conservative public pension funds — landed the agency on the front page of The Wall Street Journal this summer, lending weight to concerns some board members have had for some time.
A number of retirees testified in front of the pension trustees on Thursday, pleading with them to dial back the risk and do away with relying on so much leverage to boost returns. Cheers and applause followed most of the testimony.
“The current leverage strategies are too risky and are not yielding the results that were anticipated,” retiree Phyllis Elkind told the board as many in the audience clapped in support.
Some trustees were already convinced the strategy is flawed.
“I think risk-parity needs to say bye-bye, and we need to say bye-bye to it, ” said Dan McAllister, the county treasurer who serves on the board as part of his elected duties.
In scheduling the debate on Salient’s future, the board put off an agenda item to formalize its investment strategy, a policy that allows for more investments to be leveraged. Parts of it were already being put to use. In a report dated Thursday, the agency was informed that the $10 billion fund was exposed to $22 billion in various liabilities.
The nearly daylong meeting did not only focus attention on Partridge and his investment practices. Some trustees also challenged the leadership of CEO White.
Newcomer trustee Samantha Begovich repeatedly raised questions about the quality of information she receives from White and his level of trustworthiness.
“There’s been derision and marginalization whenever there has been criticism of Salient,” she said at one point. “That’s unhealthy. I don’t think it will get (better) with Salient and the current leadership.”
McAllister also questioned White’s performance, saying he has experienced a history of his questions and concerns not being addressed by staff.
“The bottom line is, my concerns were dismissed in 2012 and never addressed by SDCERA management,” McAllister said. “We have to protect the assets of our members first and foremost.”
White defended the way he responds to inquiries from trustees.
“The information I’ve provided to the board has been focused, fair and reasonable,” he said during a break in the meeting.
The discussion on Oct. 2 will not include a referendum on White, who has run the pension system for more than 15 years.
Myers twice made the point Thursday that retreating from the risk-parity strategy would require the board to consider lowering its annual assumed rate of return, now set at 7.75 percent. Lowering that rate would mean county employees and taxpayers would have to increase the amount of money they contribute to the fund each year.
Myers also complained that even discussing their strategy so openly could jeopardize earnings by signaling their intent to investors ahead of making specific investments.
“I’m opposed to this continuing discussion,” he said in the midafternoon. “It’s a breach of our fiduciary duty and puts the board at direct risk. It has long-term implications for the credibility of this board.”
Partridge declined to discuss the board decision to rethink his oversight of the fund, answering a simple “no comment” when asked for a reaction to the divided vote.
In addressing the board later in the meeting, the Salient executive said the fund is performing very well.
“The good news is, we have a lot of good news to report,” he said. “SDCERA is very healthy today.”
The county fund has been outperformed by other public pension systems, as the agency has asked Partridge to emphasize downside protection over chasing yield.
In the year ended June 30 for example, the county fund returned 13.4 percent. The state teachers and state employees funds earned 18.7 percent and 18.4 percent, respectively.
The Partridge files
- Pension board to outsource portfolio oversight
- Retirement board turns testy about expert's pay
- New role carved for portfolio strategist
- Pension guru could have large payday
- Pension fund missed out on Treasury gains
- County outsider calling some pension shots
- Pension officer claims risk limits breached
- Retirement board OKs risk in two fund classes
- County pension fund earns less than peers
- Pension officer raised risk issues, got fired
- Pension strategist when on risk: 'Bring it on!'
- Pension fund contract called 'way outrageous'
- Pension fund mix modified
- County pension charts path through risky waters
- F-minus for pension fund from trustee
- Pension fund posts 13.44 percent gain
- Was pension fund leverage approved?
- Pension board keeps manager for now
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