AFSCME District Council 36

LACERA Board of Investment Meeting for March 6, 2017

Article By: Fred Massey

LACERA’s Board of Investment had a busy March 6th meeting. The Board heard an economist discuss his expectations for inflation and interest rates, and Trump’s proposals for the economy. They endorsed Milliman’s recommended contribution rates for the coming fiscal year. Stepstone reviewed LACERA’s private equity portfolio and staffing pattern, and endorsed both. The staff attorney recommended that LACERA prepare a friend of the court’s brief supporting CALPERS appeal to the United States Supreme court. The Board agreed.

BOI’s Fixed Income Committee met before the Board meeting and heard a presentation from Michael Bazdorich, PhD., a Western Assets Management economist. Bazdorich received his doctorate in Economics from the University of Chicago. Chicago School Economists subscribe to monetary theory. Monetarists are concerned about the supply of money and the price of money in the economy. Western Assets is a widely respected manager of bonds. They manages LACERA’s 13 Billion Dollar Bond portfolio.

Bazdorich thinks that inflation will increase to about 2% and interest rates will rise marginally under the Trump Administration. He does not believe that interest rates will rise dramatically. Interest rates, in Bazdorich view, will be closer to historic long term rates. Historic long term rates mean the average rates over the past 160 years. Most interest rate analysts focus on the past 40 or 50 years. He does not think that Trump’s economic proposals will create inflation or result in high rates of economic growth. Bazdorich does admit that there is a lot of uncertainly associated with Trump’s proposals.

In the years since the Great Recession, the Federal Reserve Bank has lent 20 Trillion Dollars to the banks. They have held this money in reserve to meet capital requirements and have not lent it out. Bazdorich did not take a position on the reserve requirements or what he believes will happen to reserve requirements in the near future.

Milliman, LACERA’s actuarial consultant, presented their formal recommendation to the Board. They recommended that the County of Los Angeles increase the employee and employer contribution rate for this coming year. Because BOI lowered its expected rate of return from 7.5% to 7.25%, the contribution rate for employees will increase to 6.65% from 6.18%. The employee and employer combined rate will rise to 19.7%.from 17.71%. Over three years the combined rate will rise to 21.21%.

Milliman estimates the total cost of the pension obligation to be $62.2 billion. LACERA’s total assets were valued at $49.70 Billion on June 30, 2016. BOI’s assets represent 79.4% of the pension obligation.

Stepstone Group presented their annual Private Equity Update to the Board. Stepstone recently became BOI’s Private Equity Consultant and this presentation was their first annual report. Stepstone Group’s report had two parts: Private Equity as an investment class; and, LACERA’s Private Equity Program and staffing pattern.

First, they discussed the Private equity as an investment class and results. In the fifteen years from 2000 until 2015, private equity investments have performed well. The Private Equity funds that are in the top quartile exceeded the Russell 3000 during each of the past 15 years. The Private Equity funds in the second quartile performed better than the Russell 3000 in eleven of the past fifteen years. The Russell 3000 Index is a measure of the total return of the stock market. Thus, Private Equity did better than stock market during the past fifteen years.

Second, Stepstone Group also evaluated the Private Equity team. LACERA’s team consists of a supervisor and five line staff. They organize their work by geographic areas and investment type. Over 77% of LACERA’s Private equity portfolio is invested in North America, mostly in the United States and a modest amount in Canada. Sixteen percent of the assets are invested in Britain and Europe. The balance is invested in Asia and the rest of the world. Most of the staff time is committed to assets in Canada and the United States. Two staff members manage the North American Portfolio, one is responsible for Europe and another managed Asia and the rest of the world. The fifth team member managed the compliance issues. Stepstone expressed confidence in the staffing pattern and the staff. They think that they do a fine job because over half of the PE assets are in the two top quartiles.

Stepstone made several recommendations. They believe that LACERA should invest more of its PE portfolio in Europe, Asia, and the rest of the world. By growing LACERA’s investment in foreign markets, the commitment to North America will be reduced to 55% of the total PE portfolio. Only one staff person is assigned to Europe, and one to Asia and the rest of the world. During 2016, BOI expected to invest $1.5 Billion in PE in fifteen investments but only invested $1.1 Billion in 14 ventures. The BOI’s goal has been to increase the total investment in PE to 10% of their assets from 9.5%. Although BOI has focused on PE throughout the six years that I have followed their work and invested large sums of money in that segment of the investment universe, they have not grown the PE pie beyond 9.5%. The stock market has done very well over the last seven or eight years and made it difficult grow the Private Equity portion of the pie to outperform the stock market.

Stepstone’s presentation invited some discussion about the PE Program. Two Board Members and some staff had just returned from a conference in Europe. They had an opportunity to meet with general partner who invest in Europe. Some GP meet with LACERA for the first time after failing to meet before.

LACERA’s CEO, Gregg Rademacher, recommended that the Board accept a new pay schedule for the Chief Investment Officer (CIO) position. LACERA has located someone for the CIO job. The new hire will come to work in the next 45 to 60 days. Some months ago the Board heard from a compensation specialist who recommended a pay schedule of $410,000 per year.

Michael Herrera, Senior Staff Attorney submitted a request that BOI participate as a named party on an amicus curiae brief in support of CalPERS petition for a writ of certiorari in California Public Employees’ Retirement System v. ANZ Securities, Inc to the United States Supreme Court. Amicus Briefs are commonly referred to as friend of the court briefs. They are used in appellate cases. This case involves the rights of plaintiff and consumers to initiate lawsuits when they believe they have been injured. Conservative justices on appellate courts have tended to reduce plaintiffs access to the courts.

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