Investor base: Levered out

In January, EFL Associates quietly sent around a three-line email saying that the San Diego County Employees Retirement Association (SDCERA) was in the market for a new chief investment officer. At press time, the position was still open for anyone who is looking. EFL is slated to present a possible list of candidates in early February.
The email, which amounted to barely a paragraph, left out the pension’s tumultuous internal shuffling over how to handle its investment strategy.

Texas-based Salient Partners had been managing the portfolio on the order of SDCERA CEO Brian White. But it hasn’t been a tenure without controversy. Rumblings from within the pension board, aimed at pushing for a new CIO, first started in September. Then in October, after an often heated five-hour-plus debate, the board voted 5-4 to keep Salient in. That meeting, which was video-taped and available for public viewing, highlighted deep divisions within the board about investment strategy, fees and complexity.

CEO White has said that Salient invested the pension’s assets as asked and that the portfolio was performing within acceptable ranges. Yet dissenters on the board said fees being paid to Salient were too high, and also noted a generous use of leverage. Salient has managed the portfolio since 2009, when it replaced an in-house CIO that was making just over $200,000 per year. Salient’s fees handily top that figure, extending into the millions and has grown as more pension positions are privatized and come from Salient.

The pension fund itself was also levered to the fullest extent – at one point all $10 billion of assets were put up as collateral to build out some $22 billion in total market exposure. This figure has now been cut in half, but factions of the board still contend that such high gearing was never approved, despite pension lawyers saying Salient had the authority to go ahead.

Still, for all the uproar SDCERA’s performance has held out. Reaching $10 billion in AUM in July was a milestone for the fund, and according to the pension’s just released annual report, performance in the private equity sleeve of the portfolio has been strong, with returns in excess of 12 percent through the fourth quarter, and over 15 percent for the past three years. On a total portfolio basis, the fund exceeded the actuarial rate of return of 7.75 percent having generated a 13.44 percent net investment return for the fiscal year with record assets of $10.3 billion. A July decision by the pension to ramp up allocations to private credit also signalled a renewed interest in alternative investments and the capital markets.

The backstory leading to EFL’s three-line email is a surprising one in the normally conservative pension sphere, and it wouldn’t be surprising if the public fight among the board members hampered hiring. Despite that, reports suggest that as many as 10 firms have called about the position.