Sovereign debt crisis leads P&I's top stories of 2011

The ongoing European sovereign debt crisis that has roiled markets and placed the global economy in flux since late summer was the top story in 2011, according to Pensions & Investments editors.

A close second was the saga of — and subsequent trial to resolve — the battle between TCW Group Inc. and its former star money manager, Jeffrey Gundlach.

Civil lawsuits by public pension plans alleging the overcharging of foreign-exchange trading fees by global custody banks State Street Corp. and Bank of New York Mellon was third.

The remaining seven top stories, in order:

• States made it a priority to tackle pension reform early in 2011. Twenty-four states proposed legislation ranging from increasing current employee pension contributions, eliminating or freezing cost-of-living adjustments, and shifting employees to a mandatory defined contribution or hybrid plan in an attempt to lessen unfunded liabilities. This fall, the Rhode Island General Assembly approved a hybrid pension plan for the $7 billion Rhode Island Employees' Retirement System, Providence, while California Gov. Jerry Brown has touted a hybrid plan for new state and local employees that would raise the retirement age to 67.
  



• Several of the largest money managers in the world started reaping the rewards of expanding their customized solutions units, especially in investment solutions and strategic investment partnerships. Consultants believe it could be the start of a trend that could see managers increasingly paid for investment solutions, not just investment products. The top four players managed $248 billion in multiasset class solutions for institutional investors as of Dec. 31, 2010.




• On the flip side of that story, several large public plan sponsors entered into strategic partnerships with money managers, emulating moves by the South Carolina Retirement Systems, Columbia, and Ford Motor Co., Dearborn, Mich., in years past. The New Jersey Division of Investment, Trenton, entered into a strategic relationship with Blackstone Group to run $1.8 billion in early December; the California Public Employees' Retirement System, Sacramento, issued an RFP for two or three money managers to serve as strategic partners to run a total of $1 billion to $2 billion in a multiasset-class portfolio in September; Texas Teacher Retirement System, Austin, authorized setting up funds of funds of $3 billion each with Apollo Global Management LLC and KKR & Co. for strategic partnerships in early November; and Texas Permanent School Fund, Austin, will consider in January whether to restructure its hedge fund-of-funds approach to direct investment through strategic partnerships.




• The corporate landscape for investment consultants experienced a drastic change as corporate plan sponsors shifted their focus to fully funding pensions and minimizing liabilities. Consultants responded by changing course to focusing more on defined contribution plans and adding resources to advise non-pension related asset segments, such as endowments and insurers. Corporate defined benefit plans are in derisking mode, often with the end goal being to eventually close out the plans.




• 2011 was the year of alternatives as investors poured money into hedge funds, commodities and real estate. Gold prices hit record highs, corn prices surged in the summer, commodities closed out 2010 up 91% with institutional investors, and commodity-focused hedge funds became popular to public plans as an inflation hedge. Nearly $40 billion in hedge fund net inflows through Nov. 10 marked the highest rate since 2007 and was up 24% from calendar year 2010. Meanwhile, real estate managers reversed a two-year downward trend as worldwide assets under management increased 7.2% to $726 billion for the year ended June 30 and foreign investors attempted to get in on the anticipated commercial real estate market recovery.




• The Governmental Accounting Standards Board in July unveiled proposed rule changes that could have lasting effects on public pension plan accounting in an effort to improve transparency and uniformity. Draft rules included highlighting net unfunded liabilities on public plans' balance sheets and allowing less time to expense them. The rules are not expected to be adopted until summer 2012, but they would also require underfunded public plans to use a more conservative 30-year municipal bond index rate, and cost-sharing plans will be subject to full accounting for the first time instead of simply included in the combined statements.




• A federal budget proposal in February by the Pension Benefit Guaranty Corp. to set its own premiums for retirement plans it insures was not met well by business groups. The proposal, aimed at closing a $26 billion deficit in fiscal year 2011, would allow the PBGC to cut the premiums paid by financially healthy plan sponsors and impose higher premiums on riskier plans.

The top-ranking story — Europe's ongoing debt crisis — fueled a volatile stock market that plunged in the third quarter as European Union countries scrambled for solutions and bailouts to prevent countries like Greece, Ireland, Portugal, Spain and, now, Italy from defaulting on their debt. The markets and general attitudes toward a resolution changed on nearly a daily basis with different ideas floated about that included dissolving the EU or issuing union-backed bonds.

The debt crisis has resulted in the resignations of Greek Prime Minister George Papandreou and Italian Premier Silvio Berlusconi, while officials from France and Germany led discussions to solve the crisis, keep the EU intact and calm global investors' concerns.

The second-ranked story dominated summer headlines as Mr. Gundlach and associates of his new money management firm, DoubleLine Capital LP, went head-to-head with former employer TCW Group, in arguably the highest-profile money manager case to go to trial in civil court. TCW accused Mr. Gundlach and associates of stealing trade secrets and breaching fiduciary duties in starting DoubleLine just days after Mr. Gundlach was fired in early December 2009. In turn, Mr. Gundlach sought $500 million in future and back compensation. TCW sued for more than $400 million in damages.

Mr. Gundlach's team was awarded $66.7 million in unpaid wages by a jury in September. Mr. Gundlach was found liable of stealing trade secrets, and to have committed breach of fiduciary duty and interfering with TCW client contracts, but no damages were awarded to TCW for interference and the fiduciary breach; the judge will decide damages for stealing trade secrets at a later date.

The two largest U.S. custodians, State Street and BNY Mellon, face a hit to their bottom lines after a string of lawsuits from public pension plans this year accusing the banks of causing significant losses due to excessive foreign-exchange trading fees covering the past decade.

Attorneys general in at least 20 states reviewed whether to sue over claims that public pension plans in their states were overcharged when they traded U.S. dollars and other currencies. States that have filed suit on behalf of retirement plans include Arkansas, California, Florida, New York, Massachusetts, Pennsylvania and Virginia.

A few more notable stories in 2011:

• A volatile third quarter sent pension plan returns and money manager assets under management plummeting amid the European debt crisis, U.S. congressional standoff over the debt ceiling and concern over a ratings downgrade, erasing a strong first half of 2011 for investment returns. For the quarter ended Sept. 30, the median of the 10 largest publicly listed money managers to announce their results reported an 11.5% drop in AUM, while key domestic and international equity indexes experienced declines of 14% to 23%.



• MF Global Holdings filed for Chapter 11 bankruptcy protection on Oct. 31 amid its disclosure of heavy exposure to European sovereign debt, making it one of the largest bankruptcies in U.S. history. It listed total debt of $39.7 billion and assets of $41 billion. CEO and Chairman Jon Corzine resigned on Nov. 4. To compound matters, MF Global is now being investigated by regulators for up to $1.2 billion that may be missing from client accounts.