The next time Alice falls through the rabbit hole, she may find herself at a meeting of the San Diego County Employees Retirement Association as trustees struggle to make sense of a new asset allocation that they recently realized could be leveraged more than 200%.
Board members will have to decide on Oct. 2 whether to press the restart button or the reject switch on the $10.1 billion pension fund's new allocation and outsourced CIO governance structure they've been touting for five years. They are expected to decide whether to terminate outsourced CIO Integrity Capital LLC and Integrity parent Salient Partners LP, both of Houston. Salient manages $3.5 billion or about 35% of the pension fund's assets.
The board is also scheduled to decide whether to adopt a new investment policy statement that gives Salient expansive powers and the ability to add leverage to every asset class.
Nevertheless, executives at Salient and the pension plan's general investment consultant are implementing the new asset allocation before a new investment policy statement has been adopted.
“Somebody jumped the gun and started implementing before the board authorized them to do so,” Dianne Jacob, SDCERA trustee, who is also on the county's Board of Supervisors, said in an interview.
The investment policy statement is not a completed document, she said.
When Ms. Jacob posed the issue to Scott Whalen, executive vice president and senior consultant at Wurts & Associates, SDCERA's general investment consultant, he acknowledged this is not the typical process, but added that Salient had given the board updates on the implementation.
Implementation began at the end of the second quarter and is nearly complete, Mr. Whalen said. He declined to comment for this story.
It was not until the summer that the board had any notion of how much leverage would be involved with the new asset allocation. Earlier drafts of the investment policy statement “had no numbers associated with leverage, and the amount of exposure was unclear,” Ms. Jacob said. It was at the last meeting's update on Sept. 18 when the board discovered it would have $22 billion of exposure, Ms. Jacob said.
At press time, Lee Partridge, founder of Intregity Capital and CIO of parent Salient, had not responded to e-mailed questions.
Salient earns more than $10 million a year under the new structure, which started when the board hired Integrity as its outsourced CIO, effectively outsourcing SDCERA's investment staff in June.
By comparison, Integrity earned $1.9 million a year when it was first hired by SDCERA to replace former Chief Investment Officer David Deutsch in 2009. Mr. Deutsch's annual salary was $209,000.
Use of large amounts of leverage is not typical, although broad industry data is not readily available, said Julia Bonafede, president, Wilshire Consulting, Santa Monica, Calif.
“Despite its potential benefit in constructing more diversified portfolios, it is very rare to see significant amounts of leverage explicitly deployed at the total plan level,” she said, speaking generally.