STUMP » Articles » Public Pensions Followup: San Diego Asset Managers Still In... For Now » 4 October 2014, 07:45

In my series on alternative asset classes, I noted San Diego County has a particularly risky investment strategy for its pension fund.

There recently was a vote, and the asset managers who suggested the risky strategy are still in:

The board of the San Diego County Employees Retirement Association (SDCERA) declined to terminate its contract with outsourced-CIO Salient Partners at a meeting on Thursday.

As predicted by those close to the $10 billion fund, the vote came down to the wire. After nearly five hours of discussion, a motion brought by trustee Dianne Jacobs to fire Salient was blocked by five trustees, including Chairman Skip Murphy, and backed by four.

Several stakeholders presented formal recommendations about the action before the board’s vote. The majority of these representatives urged the fiduciaries not to reverse their course—a risk-parity oriented portfolio overseen and invested by Salient.

“We believe your board is at a serious juncture,” said Susan Mallett, president of the county’s retired employee association. “You are suddenly and unexpectedly considering a reversal from an investment strategy you had agreed on after years of considered discussion. As a representative of thousands of members who absolutely depend on their pensions, I have received as many worried letters about leverage as I have about the actions of this board.”

Mallett, who opened the meeting, expressed a position later echoed by the fund’s chief legal counsel, primary consultant, and several other stakeholders. Speaking on behalf of retirees, she said: “We don’t think you’re prepared to make major changes, and we urge you not to cancel the Salient contract… Please return to cohesive, mutually respectful conversation. If you ultimately decide to cancel the contract, please direct your staff to come up with a well thought out plan for transitioning.”

Well, we’ll see how much longer Salient will be around. Will San Diego end up like Dallas, with these ‘alternative strategies’ coming undone?

If it does, the four trustees will be shouting “WE TOLD YOU SO”. I think these trustees need to think hard about what they’re doing. Leverage is a very dangerous thing to play with, because when it fails, it fails catastrophically.