SACRAMENTO, Calif. - The California State Teachers' Retirement System has split the role of alternative investment consultant into separate strategist and gatekeeper duties.
By unbundling the roles, officials at the $95.5 billion pension fund seek to avoid having the consultant review its own performance. Currently, Pathway Capital Management LLC, Irvine, Calif., performs both roles for CalSTRS. The division of duties will better align the interests of the consultants, the board and the staff, Christopher J. Ailman, CalSTRS' chief investment officer, told the investment committee last week, according to spokeswoman Sherry Reser.
Dividing the job between two external consultants is unusual if not unique among pension funds.
The $144 billion California Public Employees' Retirement System, Sacramento, has shifted the gatekeeping function to internal staff over time, turning to a pool of nine or 10 expert firms when it needs to conduct due diligence. Monitoring functions are provided by Pacific Corporate Group, La Jolla, Calif., and Hamilton Lane Advisors, Philadelphia, which also are in the pool.
Other pension funds are concerned about giving the consultant discretionary authority to select managers. Officials at the $52 billion Public Employees Retirement System of Ohio, Columbus, currently seeking a private equity consultant, are pondering how large a role in manager selection the fund will give to a private equity consultant (Pensions & Investments, Oct. 29).
According to a CalSTRS staff memo to the investment committee, the fund needs to split the consultant's role to address the burgeoning size of the retirement system's alternative investments program. The CalSTRS board last month approved increasing the fund's allocation to alternatives to 8% of total assets from 5%, to be implemented over the next four years.
The fund has $4.6 billion invested in the asset class, but projected growth of the total fund to $150 billion in 2006 means alternative investments actually would nearly triple, to $12 billion, according to CalSTRS projections.
"While the current AI Advisor/Consultant structure has served CalSTRS well in the past, it is important that CalSTRS structure its governance with the best practices as the portfolio moves into the future. Our structure is good, but it can be made better," said the staff memo.
As a result, the investment committee on Nov. 8 voted to issue two requests for proposals. Both RFPs are expected to be issued in December, with proposals due in February.
Finalist interviews likely will occur in March.
Under the new structure, the alternative investments consultant would help the investment committee develop strategy, analyze market trends and monitor investments, and report back to the committee on a regular basis.
The program adviser would recommend partnerships for investment, conduct due diligence and analysis, and monitor partnerships.
Also, CalSTRS will seek legal services on a bundled and unbundled basis in the adviser contract. Currently, legal services are provided indirectly through the adviser, but the CalSTRS investment office expects to obtain more customized legal representation if the services are bundled. More information, however, is required before fund officials make a decision on this issue.
Outsiders lauded CalSTRS' initiative.
"No one really has gone out and pitched for a strategic consultant before, so we haven't had a chance to do that. It makes a lot of sense," said Gary Robertson, head of private markets at Callan Associates, San Francisco.
Chris Bower, chief executive officer and founder of consultant the Pacific Corporate Group, said he thinks the division will "lead to greater transparency."
Mr. Bower said his firm, which numbers both CalSTRS and CalPERS among its clients, has resolved the issue of independent verification of results by having its performance data audited by a Big Four accounting firm.
