What’s Happening with the Pension Fund? -- Part 23

by Charles Schwartz, Professor Emeritus, University of California, Berkeley
schwartz@physics.berkeley.edu                           July 6, 2004

>> This series is available on the Internet at http://ocf.berkeley.edu/~schwrtz

Updates

1. A new Investment Consultant for the Regents
2. Some experts’ comments about pension fund management
3. A surprising mis-statement by Mr. Parsky
4. UC’s continuing hangover from the lawsuit


1. A new Investment Consultant for the Regents

     According to the announced schedule for their July 14, 2004 meeting, the UC Regents are about to hire somebody new - the Chicago-based firm of Richards & Tierney, Inc. - as their investment consultant. Wilshire Associates is out.

     At the May 4, 2004, meeting of the Regents’ Committee on Investments, UC’s Senior Vice President Joseph Mullinix gave a report on the search in progress. (The excerpts that follow are transcribed from the Secretary’s tape recording of that meeting.)

Mullinix: As most of you know the contract with Wilshire Associates expired at the end of March. We did solicit through an RFP, proposals for a successor consultant. We received fifteen responses to that RFP. We have screened them. We have interviewed a number of consultants and we are now in the process of doing some additional due diligence work. In this current environment that is a little more important than it used to be and a little bit harder because the standards have changed. I should point out that in this case we are not really relying so much on the consultant to make specific decisions regarding managers. So it’s not really quite the same level of concern as in other areas; but certainly we would not want to select a consultant who had subsequently problems in this area. We hope to be able to get this resolved within the next couple of weeks and we will report back to the chairman of the committee with a recommendation.
     Mullinix’s comments about “this current environment” where “the standards have changed” appear to be in reference to the recent scandals revealed in the mutual funds industry and related continuing investigations by the SEC into investment consultant firms, most notably Wilshire Associates, where serious allegations of improprieties have surfaced. The two week schedule that Mullinix voiced was further delayed.

     While we learned that Wilshire Associates was one of the 15 firms that submitted proposals, the latest report from Mullinix’s review committee tells that four other firms were chosen as finalists for interviews and further scrutiny; then they unanimously chose Richards & Tierney as their recommendation to the Regents.

     For what they are worth, I found some statistics ranking investment consulting firms (from Nelson Information in 2001; data for pension funds with over $100 million): ranked by total sponsor assets, 10 of the top 15 firms were among those competing for the UC job; Richards & Tierney ranked #1 in average assets per client ($28 Billion among 17 clients), indicating an exclusive, rather than mass, marketing strategy.

2. Some experts’ comments about pension fund management

     My few years of writing critiques about how the regents handle their investments, and about Wilshire Associates’ questionable conduct as their expert consultant, have elicited a few responses from other professionals in that industry.

• An email received from a well-placed officer at a major investment consulting firm:

*Love* your site, especially as a competitor of Wilshire's!!

to which I replied:
I wonder if you would care to comment on the following opinion, which I have received from some local people who are supposedly knowledgable about investment consultants (I paraphrase): Yes, Wilshire did do a number of things which you can criticize but their level of performance is standard (even "best practice") for that industry. And the asset allocation plan which they presented is as professionally good as it gets.
and he responded:
Well, I think Wilshire certainly could have done a better job of explaining things in their report(s) - the difficulties you had in replicating their numbers makes that clear.
Their asset/liability modeling does not rise to what I consider 'best practice.' But I wouldn't call their performance 'substandard.' (The cynics among us might point out that 'standard' does not equate to 'good.')
• The following is excerpted from a lengthy email I received from someone else working as an investment analyst:
I came across your website, ... Here are some comments that I can offer, derived from experience I have had, and from industry knowledge I have attained:
... The vast majority of pension boards are incompetant when it comes to knowledge of investments and investment allocation decision making. Boards are often volunteers (with other jobs), who spend very little time on the investment process. The vast majority simply rely on consultants who may, or may not give good advice. ... Remember, the investment world is build around money (some would say greed), and good investment professionals definitely chase salaries (not unlike pension boards chasing yesterdays good returns). ...
     Here are some recently published observations by industry experts.

• From “Where the Jobs Are”, published on the NY Times Op-Ed page May 13, 2004:
Over the period 1994-2004, the greatest percentage increase (78%) was in the job category “Financial Services Sales.”
• From a July 2, 2004, article in the NY Times business section (page C2) about a lawsuit by the state of Connecticut, on behalf of its pension fund, against a prominent private equity firm; they quote from an editorial in Private Equity Online’s weekly newsletter:
“Connnecticut’s treasurer, Denise Nappier, is an elected official who wants to move on to higher office within Connecticut,” the editorial said. “Most other professionals managing private equity programs do not aspire to higher office, but to higher-paying jobs within the private equity industry. Suing investment partners is not the way forward in this regard, no matter how much said partners might deserve it.”
     Such insider skepticism about competence and integrity throughout the investment industry suggests that there is good need for independent watchdogs (whistleblowers), although those in charge (The Regents here) usually are inclined to ignore such critics.

3. A surprising mis-statement by Mr. Parsky

     During that discussion at the May 4 meeting, Regent Gerald Parsky, Chair of the Committee on Investments, made the following remarks:

Parsky: This is obviously a very important area for the regents as a whole. When we did our revisions in the overall program we determined that it was important to have, outside of the Treasurer’s Office, a consultant that was available to The Regents, for asset allocation issues and other related matters, rebalancing issues, all those kinds of things. It was never contemplated that that consultant would be engaged in managing any money or in the selection of managers. ... [emphasis added.]
     That last, underlined, part of Parsky’s statement is absolutely false. At the first hiring of Wilshire Associates (1999) and in their later (2001) 3-year contract with the University, explicit language included, among Wilshire’s consulting duties, giving advice on the selection of external managers. In UC’s published plans (August 2003) for the hiring of external equity investment managers, Wilshire was given a key role in the selection process; and their involvement is also written into the two RFPs that UC has issued this past year for external equity managers. (“Also send two copies ... of your proposal ... to ... Wilshire Associates ... [who] will be assisting the Treasurer in the RFP process.”) Parsky cannot be unaware of those facts since he was The Regents’ leading actor in all those situations. It is true that the recent RFP for future investment consultants does explicitly state that they will not be involved in such activity; but that is a distinctly new condition - obviously following from the recent scandal revelations. Note, however, that Parsky’s remarks, quoted above, are clearly directed at past relationships. In a recent paper of this series (Part 20) I gave accounts of the violation of conflict of interest conditions, committed by Wilshire Associates, based upon these earlier documented facts of their role as an advisor on external manager selections. One must wonder how Parsky came to make such a blatantly false statement, especially since he has always appeared very careful, even didactic, in his public remarks as chair of the Committee on Investments. What makes this tangled web noteworthy, of course, is that these very same issues are central to ongoing investigations of Wilshire Associates, at both the federal and state levels of government.

PERSONNEL Update: Regent Gerald Parsky is now Chairman of the whole UC Board of Regents, with Regent David Lee set to chair the Committee on Investments.

4. UC’s continuing hangover from the lawsuit

     The May 4 meeting featured more handwringing about the Public Records lawsuit which they lost (see elsewhere on my website) and a “worst case” presentation by Treasurer David Russ on how much money UC might lose in the future, imagining that it could be excluded from investment partnerships with the top tier venture capital firms.  Here is the thinking of one other regent who was present at that meeting.

Regent Peter Preuss: ... I was wondering, looking at these numbers and looking at the impact of [the court ruling]. Are we satisfied with the ... PR, with the public knowledge about this with regard to our constituency, namely our faculty and our recipients of the pension monies? I hear still a lot of rumbling here and there ... The people involved putting us into this quagmire are being looked at as heroes and the guardians of their interest, where it is so clear that that inded is not the case. And I think that point, it would be useful for us - not looking back because who cares - but with regard to the confidence in us in the future with the decisions which we are struggling with right now, for this to be better known to our constituencies than it is at this point. The question of what could we do to make that happen.
     I would say that throughout the experience of that lawsuit there was only one area in which UC prevailed: that was in the PR department, getting good media coverage for their predictions of terrible consequences from the judge’s ruling on disclosure of private equity performance data. Their PR offensive was further rewarded in a May 11 front page article in the Wall Street Journal, which featured the complaints of UC’s Treasurer David Russ. Most recently, however, an article in The Chronicle of Higher Education (“Some Venture Capitalists Shun Public Universities’ Money”, in the July 2 issue) presented a much more balanced picture. Here are some excerpts.
[UC Treasurer David] Russ says that, since the court decision, about 20 venture-capital funds that the university had sought as partners have rejected the university’s money, although he also acknowledges that none of the university’s other venture capital partnerships [other than Sequoia’s latest fund] have been affected. ...
Mr Russ says he has heard of several instances in which some wealthy private universities, which face no disclosure threats, have used the situation to snag positions in partnerships at the expense of the University of California and other public institutions. But he declined to provide specifics. ...
Mr Russ declined to comment on whether the University of California would follow [some other states] and seek a change in state law [on public records]. “I don’t want to discuss that,” he said. ...
But apparently, plenty of other [other than Sequoia] top tier venture-capital funds aren’t getting scared away. ...
The [court] decision requires the university to release data known as IRR’s or “internal rates of return.” ... Disclosing the IRR of a fund “doesn’t hurt us,” says W. Stephen Holmes, vice president for finance and administration at InterWest, a fund that has raised more than $1.6-billion over its 25-year lifetime. He says venture-fund partners would be disturbed if more-detailed financial information about portfolio companies were revealed. ...
Mr. Schwartz, the retired professsor of physics from the University of California at Berkeley who was a plaintiff in the 2003 lawsuit against the university, says the majority of statements from venture-capital funds presented in court showed that the funds were chiefly concerned about disclosure of portfolio-company information, not general IRR information. That suggests, he says, that the university system is more interested in “posturing” than in dealing with the potential problem.
He and his fellow plaintiffs have twice written to the Board of Regents offering to discuss ways in which they could collaborate on a legally binding solution that would help assuage fears of venture-capital funds that this lawsuit was just the beginning. But so far the university has not responded. ...
“This is a seasonal thing [the ups and downs of venture capital financing],” adds Mr. Olson [the plaintiffs’ lawyer.] “In our view, one thing that is not seasonal is the public’s right to know.”


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