I Finance The Current Thing

Link: https://allenfarrington.medium.com/i-finance-the-current-thing-7ea204230315

Excerpt:

Passive investing is most often celebrated as a marvel of risk/reward packaging for the retail investor, who surely doesn’t have the time or energy to do the job of a professional capital allocator. It’s a fair assumption that they have their own job doing something productive in the real economy. Is this arrangement worth sacrificing? Would sacrificing it be ESG-friendly? Yes, absolutely it would, but we will return to this further down.

Passive investing relies on the notion of an index, or, a numerical weighting of every publicly listed company in a given geography, above a certain size, etc. which is determined by relative size and expressed as a percentage of the whole. If the value of all shares outstanding multiplied by their current market price (or, “market capitalization”) of Company A is 1% of the total of all the companies in an index, then it makes up 1% of that index, and its shares are 1% of those held by a passive investment instrument.

The existence of indices is the bane of the lived experience of investment professionals who take Schumpeter a little more seriously and do not allocate by algorithm but by analysis of business fundamentals. “Performance” is measured relative to an index, on the understandable but perverse realization that index investing, which relies only on an algorithm, is much cheaper for the client. If your non-passive (or “active”) manager returned you 50%, you might think that is fantastic, but if the index went up 60% then you paid for nothing. In fact, technically they underperformed by 10%. No performance fees — even on 50%! — and probably also fired.

….

When SEC Commissioner Hester Peirce voiced the lone dissent against the inclusion of “climate risks” in company prospectuses recently, her argument was basically my own above: these are risks. Although the concept is incredibly technically involved, real investors know how to deal with risks and do not need to be condescended to about which deserve their attention more than others. “We are not the securities and environment commission,” Peirce warned, adding, “at least not yet.” Quite right. I would hope not ever if the rule of law is to be taken seriously, and exactly this kind of regulatory capture via backdoor-compliance enforcement of virtue signaling is to stop.

But could we probe deeper still? ESG is an attack vector, but what is the attack surface? Without intending to be flippant, I think it is centralization. Capital markets are centralized institutions and they are being attacked. So far, so bleak. Can we do anything about it? And what was that Thiel talk actually about, again?

Author(s): Allen Farrington

Publication Date: 21 April 2022

Publication Site: Medium

Opinion: A Slow But Accelerating Crisis—Preserving Affordable Housing for Up to 1.4 Million NYers

Link:https://citylimits.org/2022/02/08/opinion-a-slow-but-accelerating-crisis-preserving-affordable-housing-for-up-to-1-4-million-nyers/

Graphic:

Excerpt:

The recent op-ed in Crain’s New York Business by former City Comptrollers Jay Goldin and Elizabeth Holtzman (“Affordable housing initiative worked in the past and can work again today”) recalled a city pension fund program, initiated in 1983, that was specifically designed to finance the renovation of deteriorated rental apartment buildings in lower income neighborhoods. Supported by New York State mortgage insurance, the pension investments financed the restoration of a wide range of apartment buildings and worked uniquely well for small buildings with owners of limited resources. Two percent of the pension funds’ assets were committed for long-term, fixed-rate mortgages, with an interest rate priced at the market, with a two-year rate lock while the capital improvements were made.

Recognizing that these buildings would need some public subsidy—and that many owners lacked the experience to deal with complex government processing—a system evolved whereby these investments were coupled with streamlined city subsidy programs. The program’s goal: to restore a building’s physical and economic health while keeping its apartments affordable. 

The pension funds filled a critical gap as most conventional long-term lenders viewed this market as too complicated and too unprofitable. For many years after its inception, the Community Preservation Corporation was the primary user of the program, using its “one-stop-shop” to originate construction loans for predominantly small properties. Upon construction completion, the long-term mortgage was provided by the pension funds. Over time, other banks were approved to originate loans for the funds, with their focus mainly on financing the renovation of larger buildings. 

….

Fourth, the pension funds should recommit to investing up to 2 percent of their assets (now $5 billion) for long-term financing at a market rate, insured by the State Mortgage Insurance Fund. In the long history of the program, the funds have experienced no losses, the state insurance fund covering the few losses that had occurred. 

Efficient implementation can minimize the use of public funds and provide a large pool of fixed-rate, long-term financing for these properties. Doing so is within the purview of the city’s comptroller and the pension fund trustees.

Author(s):Michael D. Lappin

Publication Date: 8 Feb 2022

Publication Site: City Limits

How Much Is ‘Enough’?

Link:https://www.asppa-net.org/news/how-much-%E2%80%98enough%E2%80%99

Excerpt:

Looks like those hoping for some clarity on a threshold issue involving ERISA fee litigation will have to wait for another day.

I’m referring, of course, to last week’s ruling by the Supreme Court on the case of Hughes v. Northwestern University et al.—a case that the law firm of Schlichter Bogard & Denton—which seems to have “invented” this class of excessive fee litigation—said was having a “chilling effect” on this type of lawsuit, more precisely their ability to proceed to trial (or settlement). Consequently, ERISA fiduciaries were waiting anxiously for a ruling on the case, which involved allegations that Northwestern University had failed to comply with its fiduciary responsibilities with regard to the options available to plan participants. 

Indeed, the allegations in this case weren’t all that different from the litany transgressions outlined in any number of such cases over the years—but in making their case to be heard by the nation’s highest court the plaintiffs’ attorneys (the aforementioned law firm)—had noted (complained?) that suits “with virtually identical” claims were being dismissed out of hand, while other courts were allowing them to go to trial. This they claimed was “…not a factual disagreement about whether the specific allegations at issue clear the pleading hurdle,” but rather “a legal disagreement about where that hurdle should be set.” 

….

Consequently. some clarity as to how, and how much, must be established by those who file the suits before they get to take the issue(s) to trial is timely, to say the least. Or, said another way, how much is “enough.” 

….

Rather, the court had merely determined that there were some prudent alternatives on the menu, and that the participants could choose them if they had an issue with those that (allegedly) weren’t as expensive and that, for that district court, was enough.

Author(s): Nevin E Adams, JD

Publication Date: 3 Feb 2022

Publication Site: ASPPA

Fossil Fuel Investments Are Burning California Pensioners

Link: https://www.dailyposter.com/fossil-fuel-investments-are-burning-california-pensioners/

Graphic:

Excerpt:

California’s two biggest pension funds have invested a staggering $43 billion in fossil fuel companies, and their opposition to divesting from the industry — including fighting legislation that would have stopped them investing in firms involved with the controversial Dakota Access Pipeline (DAPL) — has cost retirees and taxpayers billions, research shows.

The findings hammer home the fact that the divestment movement isn’t just about protecting the planet from the worst effects of climate change. With the oil, gas, and coal industries all on the decline, pension funds’ refusal to divest from fossil fuels is also endangering the retirement savings of teachers, government employees, and other rank-and-file public workers who have paid into these funds.

….

While it is common knowledge that fossil fuel stocks have underperformed the broader stock market, large bank stocks have been lackluster as well — including the banks that helped finance DAPL.

If CalPERS and CalSTRS had not opposed the original DAPL divestment legislation, they could have instead put pressure on the companies involved not to move forward with the pipeline, and such efforts might have been enough to stop the project, given the pipeline project’s turbulent history.

Author(s): MATTHEW CUNNINGHAM-COOK, ANDREW PEREZ

Publication Date: 11 Jan 2022

Publication Site: The Daily Poster

Your New Woke 401(k)

Link:https://www.wsj.com/articles/your-new-woke-401-k-retirement-savings-esg-erisa-biden-administration-department-of-labor-proposal-11634753095

Excerpt:

While Democrats in Congress negotiate over trillions of dollars in new spending, the Biden Administration is quietly advancing its agenda through regulation. Witness a little-noticed proposed rule last week by the Labor Department that will add new political directives to your retirement savings.

The Administration says the rule will make it easier for retirement plans to offer 401(k) funds focused on ESG (environmental, social and governance) objectives. In fact, the rule will coerce workers and businesses into supporting progressive policies.

An important Trump Labor rule last fall reinforced that the Employee Retirement Income Security Act (Erisa) requires retirement plan fiduciaries to act “solely in the interest” of participants. The rule prevented pension plans and asset managers from considering ESG factors like climate, workforce diversity and political donations unless they had a “material effect on the return and risk of an investment.”

The Biden DOL plans to scrap the Trump rule while putting retirement sponsors and asset managers on notice that they have a fiduciary duty to include ESG in investment decisions. The proposed rule “makes clear that climate change and other ESG factors are often material” and thus in many instances should be considered “in the assessment of investment risks and returns.”

Author(s): WSJ editorial board

Publication Date: 20 Oct 2021

Publication Site: WSJ

As Comptroller, Lander Would Use ‘Environmental, Social and Governance’ Factors to Inform Pension Investment

Link: https://www.gothamgazette.com/city/10773-comptroller-lander-environmental-social-governance-esg-pension-investment?mc_cid=234d7207fb&mc_eid=1a5d3a1f3d

Excerpt:

The New York City Comptroller is an investment advisor and fiduciary for New York City’s $266 billion public pension system that serves 700,000 current and former teachers, firefighters, health care workers, police officers, and other retired city employees.

Brad Lander, the Democratic nominee for Comptroller, is all but certain to win the general election this fall in the overwhelmingly Democratic city after prevailing in a competitive primary earlier this year. If successful, Lander would be inaugurated in January and soon be able to make recommendations to the Boards of Trustees of the city’s five public pension funds on how their many billions should be invested, while also voting directly on four of the five pension boards, making him the key figure in almost all investment decisions.

The implications are significant given that city workers’ pensions are on the line, and because the city guarantees those pensions, billions are spent each year to make up for what the pensions themselves don’t produce in returns. Better returns from pension fund investments can save city government a significant amount of money that could be used for other priorities or put aside for a crisis.

Those investment decisions can also be made to further other goals than simply the funds’ bottom lines, though the returns and overall financial health of the pension funds are the comptroller’s main city charter-mandated responsibility.

Author(s): Carmen Vintro

Publication Date: 17 Sept 2021

Publication Site: Gotham Gazette

U.S. Supreme Court to Hear University Pension Case

Link: https://www.insidehighered.com/quicktakes/2021/07/06/us-supreme-court-hear-university-pension-case

Excerpt:

The U.S. Supreme Court on Friday agreed to consider the appeal of Northwestern University employees who say the university mismanaged their 403(b) pension investments. The lawsuit against Northwestern was one of roughly 20 filed in 2016 charging that wealthy and prestigious universities failed to fulfill their fiduciary duty by charging unreasonable fees and offering too many investment options.

Lower federal courts sided with Northwestern in dismissing the employees’ claims, but in their appeal to the Supreme Court, lawyers for the plaintiffs argued that the federal appeals courts had issued divided rulings on key questions in similar lawsuits.

Author(s): Doug Lederman

Publication Date: 6 July 2021

Publication Site: Inside Higher Ed

GOP senators press TSP managers on fiduciary duty vs. ESG

Link: https://www.pionline.com/washington/gop-senators-press-tsp-managers-fiduciary-duty-vs-esg?utm_source=p-i-editor-s-pick&utm_medium=email&utm_campaign=20210702&utm_content=article3-headline&CSAuthResp=1625616942174%3A0%3A73393%3A0%3A24%3Asuccess%3AFEA86842B20E7441526766BAA1004F10#cci_r=

Excerpt:

Two Republican senators expressed concern that Thrift Savings Plan asset managers BlackRock and State Street Global Advisors are putting ESG and their CEOs’ “left-leaning” priorities ahead of their fiduciary duties when it comes to proxy voting.

In a letter Thursday to Federal Retirement Thrift Investment Board Acting Chairman David A. Jones, Sens. Pat Toomey of Pennsylvania and Ron Johnson of Wisconsin questioned the priorities of BlackRock and State Street Global Advisors, who between them manage nearly $500 billion for the $762.3 billion Thrift Savings Plan’s 6.2 million federal employees and members of the uniformed services. Of that, roughly $57 billion is managed by SSGA.

“We are concerned that BlackRock and SSGA may be prioritizing their CEOs’ personal policy views over retirees’ financial security,” the letter said.

Author(s): Hazel Bradford

Publication Date: 1 July 2021

Publication Site: Pensions & Investments

About That Pension Check… A Miscalculation Case With Broader Implications

Link: https://www.natlawreview.com/article/about-pension-check-miscalculation-case-broader-implications

Excerpt:

The Ninth Circuit Court of Appeals recently addressed several issues of first impression in Bafford v. Northrop Grumman (9th Cir. April 15, 2021), a lawsuit involving retirees who received vastly overstated pension benefit estimates from the plan’s recordkeeper reminds employers of the importance of careful administration.   The case highlights the need to ensure that electronic recordkeeping systems and tools align with the plan terms.  Participant requests for plan or benefit information using online portals or other electronic means still demand timely and accurate responses as required by ERISA’s disclosure requirements.

…..

On appeal from the district court, the Ninth Circuit agreed that the participants’ ERISA fiduciary claims should have been dismissed, aligning with the First and the Fourth Circuit’s view that a named fiduciary is only liable for a fiduciary breach if they are performing a fiduciary function.  The court said that calculating pension benefits using a pre-set formula is a ministerial function, not a fiduciary function.  So a miscalculation error would not create a breach of fiduciary duty claim.

Author(s): Craig A. Day, Suzanne G. Odom

Publication Date: 25 April 2021

Publication Site: The National Law Review

Australia gets a $156 billion pension merger as new laws spur consolidation

Link: https://www.reuters.com/article/us-australia-pensions/australia-gets-a-156-billion-pension-merger-as-new-laws-spur-consolidation-idUSKBN2B70QC

Excerpt:

The mega-merger reflects the rapid consolidation of Australia’s A$3 trillion pension industry after a 2018 inquiry found fees charged by some managers were unjustified and eroded workers’ savings, and that many funds were not putting customers’ interests ahead of their own.

The government has since made it mandatory for funds to put member interests first, triggering a wave of mergers as fund boards determine that scaling up results in a better deal for people’s savings.

“The due diligence process we have undertaken demonstrates a strong business case for merging with achievable efficiencies and savings,” said QSuper Chair Don Luke and Sunsuper Chair Andrew Fraser in a statement.

Author(s): Reuters staff

Publication Date: 15 March 2021

Publication Site: Reuters

Wall Street wants to end Trump-era ESG fund rule for 401(k) plans

Link: https://www.cnbc.com/2021/03/04/wall-street-wants-to-end-trump-era-esg-fund-rule-for-401k-plans.html

Excerpt:

The Labor Department issued a rule in October, during the Trump administration, that experts say would curb use of ESG funds in 401(k) plans.

Money managers and other stakeholders are pushing the Biden administration to scrap the rule or agree not to enforce it, according to a report in The Wall Street Journal.

Investor demand for ESG funds has grown significantly. 401(k) plans represent a big untapped growth source.

Author(s): Greg Iacurci

Publication Date: 4 March 2021

Publication Site: CNBC

Wall Street Lobbies to Bring More ESG Funds Into 401(k)s

Link: https://www.wsj.com/articles/wall-street-lobbies-to-bring-more-esg-funds-into-401-k-s-11614767400?mod=djemwhatsnews

Excerpt:

Money managers are lobbying to scrap a Trump-era rule that makes it difficult for 401(k) plans to invest in socially focused funds.

The Labor Department ruleannounced in October, imposed restrictions on what can and can’t be offered as company 401(k) funds. One result is that plans can’t use funds with nonfinancial goals as default investments for employees.

That means 401(k) overseers and managers need to show that environmental, social and governance strategies can boost financial returns—a challenge for the nascent industry. ESG-focused funds are a growing profit center for asset managers.

Lobbyists representing managers, pensions and retirees began making calls to the Biden transition team in the weeks after the rule was announced. Some lobbyists urged the incoming administration to agree not to enforce the rule and place it under review, said people familiar with the matter.

Author(s): Dawn Lim

Publication Date: 2 March 2021

Publication Site: Wall Street Journal