Tuesday, October 7, 2014

San Diego County Retirement System Grapples with an Outsourced CIO

San Diego County Retirement System Grapples with an Outsourced CIO

Last week, the San Diego County Retirement System (SDCRS) voted to retain its outsourced CIO, Salient Partners after a heated debate.  As I wrote several weeks ago, Salient had proposed to restructure the System’s asset allocation, so that it directly managed more of the pension’s underlying investments.  Critics charged that Salient was increasing the pension’s overall risk.  As best as I can tell, the overall investment risk isn’t increasing.  Rather, the risk would be managed in a different manner.  Apparently, opponents of this proposal took the opportunity to question whether San Diego should be using an outsourced CIO in the first place.  According to detailed reporting in the San Diego Union-Tribune,[1] the trustees haven’t made a final determination of whether or not Salient should be retained.  For now, Salient has retained its contract.

Critics cited the large and growing fees paid to Salient, along with relatively poor investment performance in arguing for Salient’s termination.  Supporters argued that the critics were engaging in scare tactics in order to oust a manager who is doing a reasonable job.  In the end, I think Salient survived because the calmest among the trustees recognized that SDCRS doesn’t have a back up plan if they terminate Salient.  Who is going to over see the plan’s assets the day after Salient is fired?  Should SDCRS find another out-sourced CIO (interestingly their investment consultant, Wurts & Associates, provides this type of service)?  Or should SDCRS bring oversight back inside the pension? 

At the risk of offending a few of my friends who are outsourced CIOs, I believe that a public pension plan needs to have a person whose sole duty is to look out for the interest of the pension’s assets.  Even if there were no questions about Salient’s strategies and Lee Partridge’s (the outsourced CIO) role, trustees should be concerned.  Salient offers a wide array of products for a host of different types of clients.  As a result, Mr. Partridge is engaged in a myriad of investment and marketing activities that take time away from his role in looking after the interests of SDCRS’s assets.  Moreover, there are a host of built-in conflicts of interest that Mr. Partridge must balance as he tries to help SDCRS and simultaneously help Salient expand its business.  I’m sure that Mr. Partridge strongly believes that he is doing an excellent job of managing the conflicts, while looking out for the best interests of SDCRS. 

In my view, pension trustees need to have someone who doesn’t have any other interests when it comes to investing.  Making investment decisions isn’t easy in the first place.  The right answer is seldom apparent, and proponents of a particular asset allocation or money manager are usually quite skilled at making compelling arguments.  Thus, trustees need to know that at least one professional in the conference room isn’t trying to balance a variety of outside business and investment considerations.

As was reported back in 2004, I tried to act as the out-sourced CIO for North Carolina on a temporary basis.  After resigning as CIO, the State Treasurer asked me to consult on asset allocation and policy questions, while he searched for a new CIO, and I tried to build a consulting practice.  I thought I was doing all the right things to address the situation, such as disclosing all potential business opportunities to the Treasurer and recusing myself from any investment decision involving a client or potential client.  However as I’ve written in this blog, while I tried to provide my best advice, there was an inherent conflict of interest built into this arrangement.  I was thrilled when the State Treasurer announced that he’d hired a CIO.

If public pension trustees are willing to spend millions of dollars to hire money managers, they certainly can afford to put together a reasonable compensation package to attract and retain a CIO and other key professionals.  They owe it to themselves and their beneficiaries.

[1] http://www.utsandiego.com/news/2014/oct/02/sdcera-board-opts-not-to-fire-pension-guru-yet/

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