By David G.
During his career, Rodney June has seen situations where public pension plans could have generated sizable returns – if they could have moved faster.
With that in mind, the chief investment officer of the $22 billion Los Angeles City Employment Retirement System (LACERS), proposed a policy change that would have given his investment team the ability to deploy up to 5% of the fund, or roughly $1 billion, in “unique or time-sensitive strategies” without board approval.
But with several LACERS’ board members expressing concerns about both the potential size of the program and the absence of board oversight, June and his staff will work to revise the policy.
LACERS’ proposal is notable in that many institutional investors would welcome having the ability – especially in the current environment – to move quickly to take advantage of potential opportunities.
Some plans, such as the New Jersey Division of Investment, have increased their cash allocations, in part, to take advantage of market opportunities that may arise in the coming months. But having the ability to do it quickly is something that every CIO would welcome.
“We’re looking for opportunities where time is of the essence,” June told the LACERS’ board.
He said he wants his staff to be able to approve investments where “every day that is prolonged” is the difference between getting a “satisfactory return” vs. another investment in the market.
June, who has been CIO of LACERS for the past 10 years, laid out his initial thoughts on the policy in an interview with Markets Group in May.
In a memo to
the LACERS board, the plan’s investment team said the Unique Investment
Opportunities Policy (UIOP) was developed to provide LACERS staff flexibility
and authority to take advantage of potential “unique and time-sensitive
strategies” that are expected to enhance risk-adjusted returns.
UIOP would be utilized to make investments that typically arise during periods of market stress, dislocations, or changing market dynamics, and have the potential to generate returns in excess of those expected from traditional investments within the portfolio.
The two key “defining characteristics” of an UIOP investment are a “short window of time to capitalize on the opportunity and a short-term investment horizon.” In essence, an opportunity that could not be capitalized on if it were subject to the traditional – and often lengthy – request for proposal process.
Under the proposal, staff, with concurrence from an investment consultant and LACERS’ general manager, would be able to approve individual investments of up to 0.5% of the plan, or $100 million.
June said the average size of such investments would likely be around $50 million.
LACERS currently has a similar approval process for its private equity program.
In speaking to the board about the proposal, June pointed to the past efforts of LACERS and one of his former employers, the Employees State Retirement System of the State of Hawaii, to invest in the governments’ TALF and TARP programs and how moving faster would have generated greater returns. In the case of the new LACERS’ proposal, he saw it likely being used to invest in private market strategies – specifically hedge funds – that might be able to take advantage of specific market opportunities. But it could also be deployed in public market opportunities as well.
The program would be deployed through external managers – managers who already are investing on behalf of LACERS. The plan’s staff said that it would look to use firms from its emerging manager program as well.
LACERS’ investment committee voted in early July to bring the policy to the full board. Several members of the board, though, suggested putting in place “guardrails” for the program, i.e., a means for an ad-hoc committee to at least review the transactions. There also was concern about a “pilot program” having the potential to deploy $1 billion.
June said he would work with his staff to alter the policy and would return with an updated version for approval at a later date.