Rhode Island takes transparency to new level

Rhode Island's new investment policy requiring transparency from investment managers might lead more public plans to insist on similar openness from money managers, including private equity firms.

The “Transparent Treasury” initiative put forth by Rhode Island Treasurer Seth Magaziner requires money managers wishing to do business with Rhode Island to publicly disclose information about performance, fees, expenses and liquidity. All fund managers must agree to the release of this information before overseeing state investments.

The treasurer's website also will feature a new data portal that offers access to state treasury information on investments of all state funds.

The Rhode Island State Investment Commission, Providence, which manages the $8.3 billion Rhode Island Employees' Retirement System, voted unanimously in favor of adopting the initiative last month.

“This is something I've wanted to do (since) before I was elected,” said Mr. Magaziner in a phone interview shortly after the initiative was adopted on May 27. “Transparency was something I campaigned on. There's been a national discussion on transparency within our pension plans.”

Although Rhode Island isn't the first pension plan to promote transparency, it appears to have one of the most comprehensive and wide-ranging transparency policies in the U.S. “We are not aware of any other states that require fund-by-fund disclosure not only of management and performance fees, but also investment-related fund expenses, such as accounting and legal expenses,” said Shana Autiello, spokeswoman for Mr. Magaziner's office.

“We also believe there are very few states that post online calendars of when they intend to put contracts out for bid years in advance, have online data portals with raw investment data going back three decades and have had transparency policies made permanent by their state investment committees,” she added.

Alan Kosan, senior vice president, head of alpha investment research at consultant Segal Rogerscasey, Darien, Conn., said he doubts Rhode Island is alone in requiring the public disclosure of this information from its managers and general partners, but admits “what they've done is very comprehensive and clearly in the forefront of this movement to dig deeper and provide more disclosures.”

“It will be interesting to see how the manager community reacts to this,” he added.

And the state might not be alone in launching transparency initiatives this year. Although they're currently just in the “kicking-the-tires” phase, investment officials with the $90 billion North Carolina Retirement Systems, Raleigh, will launch a structured third-party review of fees and incentive payments later this summer as a means of seeking more transparency and having “greater assurance about the fees that we are paying,” said Kevin SigRist, North Carolina's chief investment officer, at a May 20 investment advisory committee meeting.

Other pension plans already are disclosing information from their managers. The California State Teachers' Retirement System, for example, requires transparency on fees and performance history from its managers, which feeds into the $193.1 billion West Sacramento-based pension plan's reporting on performance and costs.

And the $51.7 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, has been publishing details of its hires and terminations of funds in which it invests and recommendations from its investment consultants on its website for years.

“If anybody goes to our website, they can see the board resolutions and the staff memos and presentations on who we hire,” said James H. Grossman Jr., CIO of PennPSERS. “We've been providing this information publicly for a number of years.”

Rhode Island also is insisting on such openness from its private equity general partners.

Although some private equity firms have begun to review the fee practices they had not specifically disclosed to limited partners, not all have been on board. Menlo Park, Calif.-based Sequoia Capital Partners and Charles River Ventures, Waltham, Mass., for example, in 2004 refused to accept as clients public pension funds that must disclose investment information.

Arthur Levitt Jr., former chairman of the U.S. Securities and Exchange Commission and a current director of Bloomberg LP, New York, said in an interview that this type of transparency within the industry is “something that's long overdue.”

“Private equity has surrounded itself with an aura of mystery that (discourages) necessary disclosure and transparency,” he said.

The $302.8 billion California Public Employees' Retirement System, Sacramento, in trying to cut managers and costs, have been hamstrung by a dearth of available data on what is being paid to private equity firms. (P&I, June 15)

Mr. Levitt added that he hopes Rhode Island's initiative leads to a trend among more public plans. “Very few of the management teams of state and local funds have precise ideas of the values of the various private equity investments have been made,” he said. “So I think the transparency that Rhode Island has implemented should be implemented by every (public) fund.”

“It's just a matter of time before full transparency comes to the world of private equity as well,” said Michael A. Elio, a New York-based partner at alternative investment consultant StepStone Group, who focuses on global private equity investments. But he added, “We still have a ways to go.”

Mr. Magaziner believes greater transparency will also inspire other pension plans to adopt similar policies.

“Getting more information out there could lead to a public dialogue that will help us do our jobs better,” Mr. Magaziner said. “It could lead to better ideas.”

Some sources said that having unified performance and fee information enables the asset owner to make more informed choices of where to invest.

Jonathan Grabel, CIO of the New Mexico Public Employees Retirement Association, Santa Fe, said that after the $14.5 billion pension plan's staff analyzed the fees its board paid to its managers, it found no consistency. “It's very difficult to compare an index fund with a private equity firm. There are different expectations,” he said.

So, the New Mexico staff took fees from performance-adjusted and risk-adjusted factors and ranked every manager to see how they compared in terms of performance. The result was that the board was able to consolidate managers, improve various risk metrics within its entire portfolio and reduce fees.

Although New Mexico PERA isn't necessarily looking to make the data it receives from its investment managers public, the plan has started asking its managers to provide more detailed information about fees.

“It's more for internal purposes,” said Mr. Grabel. “Our goal isn't to change the investment management industry, our goal is to best monitor the performance of our managers and to give the board understandable, actionable information.”

So far, Mr. Magaziner said most managers that do business with Rhode Island have been happy to comply with the state's new requirements.

“The vast majority of our managers want to work with us and be compliant,” Mr. Grabel explained. “Most realize their incentives are quite lucrative and don't have anything to hide.”

Mr. Levitt said if more pension plans adopt similar transparency policies, private equity firms won't be able to “afford to push back, because with all the publicity that came with the SEC investigations of funds and fund reporting, their industry simply has to be transparent in order to compete.”

“I would see there being more disclosure rather than less,” said PennPSERS' Mr. Grossman about pension plans demanding more transparency in the future. “Given the funding strains on all the state plans, there'll be an increased level of scrutiny on these plans, which will require more transparency on them. And you're seeing the moves on this purely because of that.”

Mr. Grabel did warn, however, that although the trend of “transparency is good ... at some point, there can almost be too much data out there.”

“Fees need to be seen within context. Data need to be curated in order to be able to extract the right decisions from it,” he added.