The Chicago Teachers Pension Fund (CTPF) is cutting back on its investments in international equity because of the volatility of the markets, which means less money for Ariel Investments and Lazard, two money managers who have been on the CTPF watchlist for the last two years.
The Pension Fund cut about 7 percent of its international portfolio and allocated it to its private equity portfolio. The Fund has increased its fixed income investments now that interest rates are high. They say 3 percent will be allocated to private credit and the rest to fixed income and private credit.
The CTPF has been doing well in real estate, infrastructure and private equity. For the past year, real estate investing performed the best (22.46%) and infrastructure (9.4%), while the other sectors lost between 13 and 19 percent of the pension’s investment. For the past ten years, private equity has been the biggest winner at 15.76%, although it dropped to almost 0 percent the past year.
That meant the Teachers Pension Fund paid millions in fees and earned no investment return.
CTPF said its private equity target is temporarily set at 8 percent because it is illiquid, meaning the funds sometimes cannot be touched for up to a decade even if its value drops considerably.
Some public pension funds have been ditching private equity due to its high and hidden costs (usually a whopping 2 percent cut of the investment plus 20 percent of the profits) and its poor performance as the stock market has taken a nose dive over an increasingly shaky economy. Maryland’s $65 billion retirement system is investing less new money in private equity and the Mendocino County, California Pension Fund decided to not add private equity to its investment mix, according to The Wall Street Journal.
“We think you can get to the same destination with just public market assets and your real estate and infrastructure portfolios,” said a senior vice president of the investment consultant Callan, who also consults for the Chicago Teachers Pension Fund. “Without private equity, you don’t have to deal with the costs, the fees, the administrative headache and the reporting headache, associated with it.”
So why would Callan tell the Chicago Teachers Pension Fund something completely different?
“It’s important to remember that each pension fund has its own characteristics, and it’s difficult to make blanket statements or generalizations about any single asset class or pension fund,” CTPF Spokesperson Michelle Holleman wrote in an email to Second City Teachers. “The statement above was made specific to a presentation related to a much smaller fund, the $615 million Mendocino County, California, Pension Fund and the appropriateness of an investment for such a small fund would be very different from our own.”
Over the past decade state and local funds have put more money into the risky and costly private equity market to make up for budget shortfalls after pension holidays such as in Chicago when the City stopped putting money into the Chicago Teachers Pension Fund when it was fully funded. However, today the Teachers Pension Fund is only about 46 percent funded even though the Pension Levy was restored to prevent the government from skipping payments into the Fund.
According to the Wall Street Journal, private equity portfolios make up about 10.8 percent of pension funds. The CTPF has about 8 percent of its money in private equity. The $444 billion California Public Employees Retirement System (CALPRS) is increasing its private equity from 8 percent to 13 percent.
“CTPF’s private equity portfolio was initiated in 1996 and has provided attractive and competitive returns for the Fund,” CTPF Holleman wrote. “Each year, a commitment pacing study is conducted as part of a disciplined implementation process, which is based on refreshed total plan and private equity portfolio cash flows and valuations. The annual update allows for fine-tuning allocations toward targets, or taking corrective action in periods of capital markets volatility.”
Holleman said the CTPF Board of Trustees approved 2023 commitments up to $50 million for private equity.
The CTPF watch list currently lists money managers who have performed poorly on investing our pension money, including Ariel International Equity ($62 million), Lazard ($494 million), Strategic Global ($61 million), State Street Global Advisors ($394 million), DFA ($135 million), and Leading Edge International Equity ($106 million). Ariel, whose director is on the board of union-busting Starbucks, was the only money manager who was cited for both poor performance and high staff turnover.
Ariel lost the Fund about $7 million over the past year, while Lazard lost $100 million in teacher pension money, dipping from an initial $664 million investment to $564 million. The reallocation of pension money from the international markets to fixed income will lessen the exposure in some of these money losers.
Trustees lashed out at the money manager losers at a board meeting last fall, especially those that are not minority owned.
The Fund’s spokesperson said no decision has been made yet regarding manager allocations. Those decisions will be reviewed and considered by Trustees at future meetings.