Why Politics and Investment Management Don’t Mix
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What do investment managers do?
Is that a rhetorical question? Investment managers manage investments. Simple enough. End of the article.
Ah – not quite. In the investment world there are different types of investors and different types of managers.
My reason for tackling such an opaque linguistic nuance has to do with a governor (who shall remain unnamed) in a state (also unnamed) who recently disparaged pension fund managers for being too “woke” by investing in ESG companies.
What a mouthful.
So a politician, who is not an investment manager is criticizing investment managers for being to political. Do I have that right?
Thus, the need to give you a little insight into the investment management industry so you can relish the absurdity of the unnamed governors’ premise.
There are two basic investment communities. Retail investors and Institutional investors.
Retail investors are you and me. Individuals who invest . Sometimes with the help of a financial advisor.
Institutional investors represent pension funds, college endowments, and foundations established for charities. There are more but you get the idea.
An institutional investor is not one person. Institutional investing is a way to describe the very large amounts of money that need to be invested on behalf of said institution. Pension assets are overseen by a pension committee or an investment committee. Not a single person.
If you are a public employee you are familiar with public pension plans.
An example is the California Public Employees’ Retirement System also known as CalPERS.
The total current assets of the pension plan are $440 billion.
CalPERS is responsible for making sure that the $440 billion is invested to provide a specific return so current retirees and future retirees are assured of receiving benefits.
How is that investing done?
CalPERS hires institutional investment managers . Institutional investment managers are the people you rarely see or hear from. Their experience is in managing very large portfolios (assets).
An investment “assignment” could range from millions of dollars to billions of dollars. Most institutional investment managers require a minimum amount, and that amount could start at $50 million.
With larger pension plans, an investment manager might be chosen to manage billions of dollars on behalf of the plan. It is a lucrative business.
In this scenario, CalPERS works with consulting firms and investment management firms to decide on the allocations to different asset classes like equities, bonds, real estate, commodities, and hedge funds .
Then the pension fund, consultant and investment manager work together to establish guidelines.
Guidelines are a legally binding contract that specify exactly what the investment manager can and cannot invest in.
Once the guidelines are established and a contract is signed, the investment manager becomes a fiduciary to the pension plan. There are lots of regulations surrounding fiduciary responsibility.
Back to the beginning of the article.
If an investment manager has been given a mandate to invest in companies that adhere to ESG requirements, that is what the manager must do.
It is NOT the investment managers job to focus on the political or social issues of ESG.
Back to the “guv”. The guv doesn’t understand the process for the management of billions of dollars in the state pension fund.
That said, he kind of got it right , but for the wrong reason.
The primary responsibility for the investment managers ( there are many involved ) is to provide a target return over a 3–5-year period. The return is consistent with the pension plans need to use the investment returns to pay out benefits.
The way to invest in ESG is to eliminate non-compliant companies. By default that means the investable universe of securities is reduced.
When the universe of investable securities goes down, the return on the investments may go down as well.
That is the real issue. Sacrificing returns.
The sector that has had big positive returns this year is the energy sector. Year to date the energy sector is up 72%. That big return can help support a portfolio when almost every other sector is negative.
If you are restricted to ESG compliant companies, energy companies will be left out.
When an investment manager agrees, per the guidelines, to invest in companies that are only ESG compliant, the managers hands are tied.
It has nothing to do with being “woke”. It is not about threatening investment managers and Wall Street in general by saying “if you want to manage the assets in our pension plan, you cannot be woke.”
If the guv does not want the managers for the pension fund to invest in ESG, that is a matter between the guv and the pension committee.
What really irks me is that pension assets should never become a political football.
Pension assets and pension plans represent the retirement savings of millions of people.
Have some respect guv. Millions of people count on their pensions.
Your anti woke rhetoric is inappropriate. It is the pension committee that makes the decisions about what to invest in.
Time to woke up.
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