SACRAMENTO, Calif. - The real estate consultant for the $68 billion California State Teachers' Retirement System resigned before last week's trustees' meeting, and the general consultant came under fire at the meeting.
The turmoil occurred as fund trustees broadened their questioning of the fund's investment performance.
Institutional Property Consultants, San Diego, resigned abruptly as real estate consultant, raising questions about whether the system ever will execute the real estate securitization program it embarked upon last year.
And at the meeting, State Treasurer Matt Fong said Allan Emkin, a principal with Pension Consulting Alliance, Studio City, Calif., the fund's general consultant, gave "false impressions" and made "inconsistent" statements generally about how the fund was slow to increase its target allocation to international equity investments.
IPC had been expected to make a presentation to the board last week on CalSTRS' real estate performance and on steps it should take on its real estate portfolio. Company Chairwoman Barbara Cambon sent a letter of resignation to CalSTRS Chief Executive Officer James Mosman five days before the meeting. She did not attend the session.
Ms. Cambon also had been expected to discuss the new lines of business into which her firm had entered (Pensions & Investments, March 17). Some trustees and investment staff members had become concerned that IPC's foray into discretionary consulting and involvement with a real estate fund-of-funds might be in conflict with the consulting services it provides to CalSTRS, according to Mr. Mosman.
In her resignation letter, Ms. Cambon said, "CalSTRS appears to have entered a period of transition, during which we understand it will be re-evaluating its long-term investment strategy.
"During this period and until CalSTRS determines its strategic decision, IPC cannot effectively fulfill its commitment to provide superior advice as real estate investment consultant."
CalSTRS' real estate investment strategy has been hampered by acrimony between board members, State Controller Kathleen Connell in particular, and Chief Investment Officer Thomas E. Flanigan, whose contract is set to expire. Meetings have been so contentious that managers attending the meetings to make presentations often don't get the opportunity.
Boston-based AEW Capital Management, hired last year to execute an ambitious securitization strategy for the fund's real estate portfolio, has not been able to make any progress, according to numerous sources.
AEW officials could not be reached for comment.
Ms. Cambon, in an interview, said she had three recommendations to the board regarding its real estate: "Get out; maintain the status quo, which is a slow exit strategy; or adopt a strategy and do it."
"They are now in a reactive mode," said Ms. Cambon.
"We all have to make judgments about the effectiveness of relationships," Ms. Cambon said about her resignation "I had to make my best judgment.
"It wasn't easy."
At the board meeting April 9, Mr. Fong, an ex-officio member of the CALSTRS board, made the statements challenging Mr. Emkin as the consultant answered trustees' questions about the fund's asset allocation.
The questions continued to center on whether the fund's internal investment staff was complying with the board's policy on equity allocations. The fund is in the fourth quartile of performance for public pension funds of $1 billion and larger over the past three years.
In response to Mr. Fong's complaint, Mr. Emkin said he was "willing to accept criticism" and had been "possibly unclear" about the difficulty in reaching international equity allocations at the speed desired by the trustees.
Mr. Fong's support of Mr. Flanigan on the international equity issue could be important for the embattled CIO, who is seeking reappointment to his post next month but reportedly is contending with five other candidates.
Mr. Flanigan has faced severe questioning about allocations to equity investments by some board members, particularly Ms. Connell (Pensions & Investments, Feb. 17).
At the April 9 board meeting, Ms. Connell and other board members broadened the question on equity investments to include international, alternative investments and real estate.
Some trustees are voicing continued concern about the fund's investment performance. In a report to the board, Mr. Emkin said CalSTRS' total investment portfolio produced an average annual return of 10.6% for the three years ended Dec. 31, underperforming its passive policy benchmark by 90 basis points per year.
"This result was largely due to the overweighting of fixed-income investments during a period when equities produced strong investment performance," the report said.
The CalSTRS portfolio finished in the 84th percentile in the Trust Universe Comparison Service for public funds with assets in excess of $1 billion. The median TUCS return was 12.1%.
Mr. Emkin said CalSTRS' allocation to equity was less than its peers partly because of a deliberate decision by staff to move slowly to reach the fund's allocation to international equity.
Mr. Emkin said the greatest impact on investment performance would have come from international equity, rather than the smaller allocations to real estate and alternative investments.
But Mr. Fong said Mr. Emkin had earlier told the board that there would have been a negative investment performance impact if the fund had tried to move too quickly into international equity.
Mr. Fong said that at one point, Mr. Emkin had stated it might take two to three years to make the targeted investment in international equity but "five minutes ago, you said it could be done with one year."
In board discussions, Mr. Fong said Mr. Emkin had changed his statements about international equity funding twice within a few minutes.
Mr. Fong said Mr. Emkin had created some inconsistent ideas and "false impressions" about staff actions.
In retrospect, Mr. Emkin said, he probably should have set some interim targets in moving to international equity. Mr. Emkin said he felt the move to international equity could have been done " a little bit quicker" but it was a "judgment call."
Outside the boardroom, Mr. Emkin said of the exchange with Mr. Fong: "I wasn't clear about some things, and it needed to be cleared up."
Mr. Fong said in an interview that investing $3 billion safely in international equity markets takes time. The time it took, he said, "shouldn't reflect negatively on staff. That was all I was trying to point out."
At the meeting, Mr. Emkin pointed out that although the fund was at the lower end of its range on domestic equity investment, it was always within policy.
Mr. Emkin also said money unallocated to international, real estate and private equity markets could have gone into the domestic equity market. But he said the CalSTRS staff informed the board that the allocated money was being placed in fixed income, and the "board did not object that the money go into the bond market."
Mr. Flanigan said the slow move into international equity permitted the CalSTRS fund to avoid a huge fall in the Japanese equity market.
In a requested report to the board, Mr. Emkin said the CalSTRS TAA*fund increased by approximately $512 million less than the benchmark portfolio during the six-quarter period ended Dec. 31.
