Urban renewal getsa pension fund twist

CAMBRIDGE, Mass. — Public pension fund executives are pushing ahead with investments aimed at revitalizing urban areas in their backyards despite the political risks that come with pursuing non-financial goals. Sponsors of a recent Harvard Law School/Oxford University conference on “Pension Funds: Investing to Build Strong and Sustainable Communities,” said their data suggest growing momentum for such “economically targeted investing.”

Public pension funds’ allocations to ETIs doubled to $12 billion over the three years through June 2007, noted Lisa A. Hagerman, a research fellow with Harvard Law School’s Pension Funds & Urban Revitalization Initiative.

A number of heavyweight public funds — including the $245.4 billion California Public Employees’ Retirement System and the $169.2 billion California State Teachers’ Retirement System, both in Sacramento; the $110 billion New York City Employees Retirement Systems; and the $50.4 billion Massachusetts Pension Reserves Investment Management Board, Boston — have been at the forefront of that growth.

The number of money managers pursuing ETI mandates also has been growing rapidly. There now are 15 to 20 managers capable of responding to an ETI-focused request for proposal, up from a handful only five years ago, according to the managing director of one ETI manager, who declined to be named.

The conference explored such topics as efforts to better quantify the social and environmental benefits of targeted investments, but only because a growing number of investors have managed to clear the biggest hurdle: garnering ETI returns that compare favorably with non-targeted investments.

For example, New York City Comptroller William C. Thompson Jr., in a keynote address to the June 10 conference at Harvard Law School, said annualized returns on investments by the NYC funds to help “transform communities” were 6.5% annualized over the past three years, better than the system’s overall fixed-income return of 5.7%.

Other pension fund executives reported similar successes. Priya Sara Mathur, chairman of the health benefits committee of CalPERS’ board of the trustees, said CalPERS’ $475 million in socially responsible private equity investments have averaged annualized returns of 18% over the past seven years. Laurie Weir, a portfolio manager for CalPERS’ Urban Investment Program, said CURE’s $2.5 billion portfolio has delivered annualized returns of 33% a year over the past five years.

Even so, public pension fund officials noted the huge public relations risks that accompany economically targeted investments. No one builds a monument to you if you get it right, “and if you get it wrong, there you are, in front of God, and everyone to see,” said William Atwood, executive director of the $12 billion Illinois State Board of Investment, Chicago.

Depending on the markets, the value of mainstream investments can drop by millions of dollars and no one bats an eyelash, “but lose $200,000 on an ETI investment and the whole world is collapsing on your head,” agreed Kathy Martino, director of economically targeted investments for the New York City comptroller.

Nevertheless, the broader economic benefits can add to the social benefits, pension executives said. Fred Buenrostro, CalPERS’ chief executive officer, said researchers working with CalPERS concluded its ETI investments added 124,000 jobs and $830 million in tax revenues to California’s economy.

Allan Emkin, managing director of Encino, Calif.-based investment consultant Pension Consulting Alliance, praised the role that policymakers at public funds have played in making successful investments in underserved capital markets. Outperforming the market always entails asking “where will the world be in 10 years” and investing accordingly — an exercise where pension fund executives consistently prove bolder than “reactionary, conservative” consultants, he said.

Growing efforts to institutionalize ETI investments — to shield the process from political interference and ensure that risk-adjusted returns remain the top criteria — have helped the industry get beyond earlier missteps, said Tessa Hebb, senior research associate with Harvard Law School's labor and worklife program. She cited the rigorous process recently introduced by Massachusetts PRIM for evaluating ETI investments as a prime example of the way the sector is becoming “no different from other asset classes.”

Despite the political risks, pension executives said they’re looking to put more money to work. “We can do more” in the area of economically targeted investments, said Mr. Thompson, noting that the 2% allocation target the New York City Employees Retirement Systems set in 2004 would bring ETI investments there to more than $2 billion.

Contact Douglas Appell at [email protected]

(Updated with correction.)