It's unfortunate that some public pension funds, most recently the $36.5 billion Illinois Teachers' Retirement System, are withholding information about hiring and terminating money managers. They contend they must do this to protect against market manipulation, which could harm portfolio transition and performance.
The system's recent action raises anew the issue of public funds restricting information over concern about others trading in advance of transitions. Under Illinois Teachers' new policy, trustees will delay releasing information on hires and terminations until transitions are completed. In addition, TRS staff is considering asking the board to close the part of board discussions dealing with manager changes.
But these policies might not solve the problem. Simply clamping down on disclosure won't mitigate the problem of others taking advantage of transition information to the detriment of public funds if the cause is poor transition management.
Transitions can be a costly problem for all institutional investors. But the issue is especially acute for public funds, which face a higher level of scrutiny than corporate funds and endowments and foundations. Public pension trustees have to reconcile the mandates of transparency and fiduciary duty to manage the fund solely in the interest of participants.
Public fund trustees might believe they have no choice but to restrict information to avoid raising costs and to protect the integrity of transitions as traders and investors become more astute in trying to profit from such activity. Trading in advance of three TRS transitions this year doubled anticipated costs, particularly for less liquid small-cap stocks. The Illinois fund trustees, however, aren't sure why transition costs have risen.
Stan Rupnick, TRS chief investment officer, was quoted as saying staff is "making an educated guess about what parties are responsible. It could have been hedge funds, it could be some other party. It may have been poor transition management. I don't care who is doing the trading; we have to stop it."
If the problem is poor transition management, then the system needs to replace those transition managers. It needs to re-evaluate them to ensure they are up to the task. After all, part of the job of transition managers should be to anticipate advanced trading and possibly use hedging to help minimize costs. Also, the system should re-evaluate transition and trading execution benchmarks. Better benchmarks and analysis should help improve transitions.
Some transition managers used by Illinois Teachers' and other pension funds refuse to be co-fiduciaries. These pension funds need to justify to participants and the public why they have non-co-fiduciary transition managers.
The Illinois teachers fund should do all it can to unveil the cause of the unexpected rise in transition costs. An investigation might tell if information to obtain such an advantage is nonpublic and thus could be a securities law violation and have nothing to do with public disclosure. If public fund staff and trustees still believe they have no choice but to restrict information, such systems need to make public more information once transitions are completed. Systems should identify which transition managers handled what trades — short of revealing proprietary trading strategies — and which were or were not co-fiduciaries. The Illinois system should do so for the three transitions since June 30, where the staff noticed irregular trading and disclose the expected and actual costs of the transitions.
The TRS board and staff deserve praise for monitoring transition costs. But they should recognize market manipulation is a misnomer if the trading is based on public information, which is fair game; good traders and investors look to all sorts of public information to gain an advantage. Hedge funds or other astute asset managers blamed for trying to profit on transitions at the expense of the pension funds whose securities are in transition might at the same time have these retirement systems as clients. Have any retirement fund executives ever asked their managers if they trade on such public information? If so, has a pension fund then adopted a policy forbidding it? No one could hamstring a trader like that.
But closing information to the public won't in itself improve management of the funds unless justified and, if so, it then must be coupled with equally detailed disclosure of information once transitions are completed.