Salient may manage pension for months

The San Diego County Employees Retirement Association board voted to keep their controversial independent pension advisor, Lee Partridge, shown here. — John Gibbins

Salient Partners, the embattled outside investment strategist for San Diego County’s pension fund, may continue managing much of the $10.3 billion fund through November.

The timeline, which was presented at a meeting Thursday by the pension system’s independent consultant, surprised some trustees who’ve been pressing to fire Salient since late summer.

Two months ago the board voted 8-1 to hire an in-house chief investment officer to assume some of the firm’s duties. Officials expect to fill the position in March.

“I also thought I understood, at the end of the year (2014), it was stated that we would be terminating the Salient contract after we hired the CIO,” said trustee and county supervisor Dianne Jacob, who moved in September to terminate the contract and begin a transition. The board rejected the motion.

Under its contract, the Houston-based investment firm is paid 0.08 percent of the fund’s assets, or about $8.2 million per year at recent valuations. Keeping Salient involved for most of 2015 was the recommendation of Scott Whalen of Wurtz and Associates, an independent consultant advising the board on revising its investment policy.

Along with overseeing the portfolio, Salient directly manages 45 percent of the fund’s investments, or roughly $4.6 billion. The firm uses derivatives, swaps and futures to control Treasuries, global stocks, commodities and other investments for the pension system. Unrelated managers invest the rest of the portfolio.

Whalen advised the board to let Salient continue managing its portions of the portfolio until a new CIO was in place and trustees had settled on a new strategy.

He said the board could fire the firm and shift the investments into index funds, but that would amount to two major portfolio transitions in a brief period.

Salient executive Lee Partridge has been the fund’s investment strategist since 2009, after the in-house chief investment officer resigned and the board outsourced the function.

Partridge promoted a strategy variously dubbed “risk parity” or “risk-balancing” that eschewed large stock holdings in favor of broad diversification into alternative asset classes. Key to strategy is use of leverage, a form of borrowing.

Partridge said leverage, if properly allocated, could boost returns with less risk than traditional strategies.

In April, the board approved a dramatic increase in leverage, giving Partridge authority by June to place $20.5 billion at risk using as collateral the fund’s assets, which totalled about $10 billion at the time.

But by September trustees became concerned that market turmoil could wipe out the entire fund, leaving taxpayers billions of dollars in debt. Partridge said the risk of catastrophe was vanishingly small, but in September the board ordered him to reduce leverage to 20 percent, or about $12 billion in market exposure.