SFERS Membership Update

 

February 1, 2015

Dear IFPTE Local 21 Member,

As you may have heard, for the last several months the Retirement Board has been re-evaluating the SFERS investment strategy for our pension plan, and might vote on a change in strategy as soon as February 11.  Given how badly SFERS did compared to other retirement plans in the 2008 recession (our plan performed worse than 75% of pension plans during this time) and that your contributions are tied to SFERS meeting its performance goals, Local 21 has been actively monitoring SFERS Board discussions and decisions, including creating a Pension Advisory Committee, of which I am the chair.

We thought it might be helpful to have an informational session about what SFERS is considering and why including a presentation and a Q&A session sometime in the near future. We’re currently working on scheduling it, and we’ll let you know as soon as we have a date.   
 
We put together the Pension Advisory Committee, made up of 12 members who had a range of opinions on hedge funds and other alternative investment strategies.  After hearing the presentation from SFERS staff, as well as independently researching the alternatives generally considered by pension funds, the Pension Advisory Committee unanimously voted to recommend that Local 21 recommend to the SFERS Board that they consider responsible investment strategies to protect against another recession, including a minimal investment in hedge funds as part of such a strategy.

And a clarification: Recently some members have mentioned they received an anonymous survey asking them for feedback on hedge funds.  Local 21 is neither distributing nor endorsing this “survey” and we do not recommend that you respond or give your personal information to any unknown outside entity. To be clear, Local 21 does not have a vote on the investment strategy the Retirement Board decides on. However, we do think it’s important to educate members on what the Board is considering, and will continue to advocate for members’ interests on the best ways to protect your retirement.
 
Thank you,
Gus Vallejo


SF Council Advisory Committee Report Back on Hedge Funds

December 3, 2014

Asset Allocation Recommendation

SF Council Advisory Committee Report Back on Hedge Funds

The addition of Hedge Funds to the SFERS Board portfolio has caused concern among a small number of retirees and active members. In keeping with our long standing tradition of making fact-based decisions, L21 convened a Hedge Fund Advisory Committee made up of roughly 12 to 15 members from across the City and invited SFERS representatives to a frank discussion regarding the proposal and our member’s concerns.

On November 19th the Advisory Committee met with Jay Huish, SFERS Executive Director and Bill Coaker, SFERS Chief Investment Officer to discuss the proposed plan fund reallocation that included the addition of Absolute Return or Hedge Funds into the SFERS investment portfolio.

We learned the fund reallocation is part of a tri-annual review of plan assets and their performance.

It was pointed out that where Bonds performed well in the past and provided a safe return, performance has deteriorated in recent years to a 4% return, substantially below our required 7.5% return.

As part of the plan reallocation, SFERS staff made the following recommendation last May:

Some of the concerns raised by our committee are listed below:

1.      Socially Responsible Investing: We expressed concern over socially responsible investing and learned the SFERS Board has an ESG (Environmental Social Governance) policy and any addition of new funds would be covered by that policy.

2.      Fee Structure:We expressed concern over the management fee structure and learned the fee structure is similar to the fees charged for equities management and there is a move among other pension plans to move towards a lower fee structure.

3.   Transparency:We expressed concern over the lack of transparency in hedge funds and learned the following:

o   Regulation after the 2008 downturn requires greaterdisclosure

o   The execution of a particular strategy requires the use of proprietary models that may appear opaque but are necessary to maintain a competitive advantage

4.      Performance relative to the industry standard S&P benchmark: We learned that while Hedge Funds will lag behind the S&P benchmark during a bull market, they loose less and recover quicker when there is a downturn. As a point of reference, SFERS management pointed out we are the longest running bull market in history and need to take defensive measures against a downturn.

5.      The long-tail nature of pension fund investing:It has been argued that pension funds are built to take the ups and downs of the stock market and should absorb any downturn losses easily. The SFERS fund recovered from the 2002 downturn and the 2008 downturn, why change the mix? The difference is two fold: first, 2011’s Proposition C changed active member contributions from a static 7.5% to a variable cost share model. If the fund suffers a downturn, our contributions go up. In addition, we have never fully recovered from either down turn – the fund was 180% funded prior to the 2002 downturn. While the fund has recovered, it has never fully recovered because of the large losses.

6.      Negative Press regarding Hedge Funds: SFERS representatives agreed there is negative press over hedge funds but pointed out there are over 10,000 funds and the industry has grown from a 1 trillion dollar industry to a 3 trillion dollar industry- but only the bad funds get press coverage

7.      CALPERS Withdrawal:We pointed out the concern that we are entering a market that CALPERS recently withdrew from. We learned that the issue with CALPERS is a problem with scalability. At $300 Billion in plan assets, CALPERS would have to invest $30 Billion in hedge funds to achieve the level of protection that make the fees worthwhile and as there are a finite number of good funds, the market would have trouble absorbing such a large investment from a single player.

8.       Alternate Models:We asked if there were alternate investment models that would achieve the same level of protection and were advised SFERS staff looked at a number of alternate models including risk parity and put/calls but found none provided the same level of projections as absolute return/hedge funds. As a point of reference, our internal research found many other union trust funds, endowments, etc.  all include hedge fund investments in their portfolios

In our discussion, we learned SFERS management is open to modifying the original proposal and would be open to a 15%, 12.5% or 10% allocation to absolute return/hedge funds but anything lower than 10% would be ineffectual.

Therefore, the Hedge Fund Advisory Committee unanimously agreed to support a 10% allocation to absolute return/hedge funds.

We recognize this is a complicated and, sometimes, emotional issue and invite anyone with additional questions, comments or concerns to contact Gus Vallejo or Mike Seville directly.