San Diego County to scrutinize timber investment

The San Diego County Employees' Retirement Association will be reviewing its $50 million commitment to Molpus Woodlands III ”out of an abundance of caution,” according to a memo to the board of the $7.99 billion system from CEO Brian White that was posted on the association's website.

That review could occur as early as the board's scheduled April 7 administrative board meeting.

Also, at the April 21 investment board meeting, the board is expected to consider creating an approved list of 19 alternatives investment managers, with which Lee Partridge, the fund's outside portfolio strategist, and fund staff would have full discretion to make investments.

The board is also expected to discuss April 21 the investment staffing structure, according to an e-mailed response to questions by spokeswoman Johanna Shick. This could include division of power between its outsourced portfolio strategist and a chief investment officer, an internal position that has been vacant since March 2009.

The board is deferring a decision about filling the CIO position until after that discussion in light of Mr. Partridge's selling his company, Integrity Capital, to Salient Partners.

“When Integrity Capital was acquired by Salient, SDCERA gained access to additional resources (such as quantitative research, and identification of investment opportunities and risks) at no additional cost,” Ms. Shick wrote in the e-mail. “The board is revisiting the investment staffing structure in light of the additional resources Salient brings to bear.”

The flap around the Molpus timber investment occurred right after the March 17 board meeting at which the board approved it. Controversy arose over whether board members were informed that Salient Partners has ties with Molpus.

Salient Partners was a general partner on Molpus' first two funds, has two board seats out of a total of seven on those funds' boards and shares in the fees on those funds, said Michael Cooper, general counsel, chief compliance officer and risk manager of Molpus Woodlands Group LLC, Jackson, Miss., in an interview. Both funds are fully invested. However, Mr. Cooper said Salient has no involvement with Molpus' third fund, the one to which the association made the commitment.

Even so, Steve Rice, the association's general counsel, advised that “investment counsel and others should have brought this issue up during the due diligence process so that it could have been addressed proactively with the board,” according to Mr. White's memo. Mr. Rice also said there was no conflict of interests based on the information he was provided by Molpus and Salient, according to the memo.

“After reviewing the facts, I believe you will come to the conclusion that no further action is required,” Mr. White wrote. “However, out of an abundance of caution, we will bring this issue back to the board at the next meeting.”

Mr. Partridge, a managing director at Salient, said in an e-mail that he informed the board about Salient's relationship with Molpus.

According to a tape of the March 17 meeting, Mr. Partridge said: ”Salient has known Molpus for many, many years and has done some independent work with them, although we had nothing to do with the sourcing of this particular investment.”

He wrote in the e-mail that his statement at the meeting was enough: “I believe that was sufficient and we do not have a current relationship with Molpus other than managing the legacy funds we raised in a previous partnership. We do not have any interest in this investment.”

Timber fits within the fund's current asset allocation as a replacement for Treasury inflation-protected bonds, he said.

An agenda item the board tabled during the March meeting until the April 21 meeting, would give Mr. Partridge, Salient and the association's investment staff more control over the fund's investments. When the board approved a new asset allocation last year, it also approved allowing Mr. Partridge the power to devise an “approved manager list.” Once the list is approved, Mr. Partridge and the fund's staff would have the discretion to invest with any manager on the list, notifying the board after the commitment was made.

Also at the March 17 meeting, the board voted to give Mr. Partridge incentive pay of $723,000, the maximum the board could pay. Mr. Partridge. Mr. Partridge's annual base pay is $535,000, bringing his total annual compensation for 2010 to $1.26 million.

Board Chairman Doug Rose stated that Mr. Partridge's contract provides for qualitative and quantitative incentives. Half of the quantitative award is based on the fund's producing returns of more than 8.25%, which is slightly more than the fund's 8% return assumption; the other half is based on its topping the benchmark. According to a report to the board, last year's return was 12.2%, vs. the 11.03% of the benchmark. The qualitative award is based on achievements such as risk management and designing a diverse, risk-balanced strategic asset allocation, according to a statement issued by the association after the meeting.