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Leading Off (2/12/13)

Councilman Sheffie Kadane Demonstrates His Cluelessness. For its current exhibit by sculptor Kenneth Price, the Nasher put up temporary glare-blocking panels on its ceiling that, yes, appease insurers but, no, do not present optimal sculpture-viewing conditions nor protect the plantings outside in the garden. Yet Councilman Kadane, who sits on the board of the Police and Fire Pension System, which owns the reflective Museum Tower, thinks the panels are awesome. “It seems like it should be permanent,” he said. I get the impression that Kadane uses a lot of duct tape at his house.

Mayor Rawlings, Emmitt Smith, Troy Aikman To Lead Rally at Klyde Warren. There will be a press conference today. At the pres conference, the aforementioned dudes will announce a rally aimed at curbing domestic violence. Said rally will likely happen at Klyde Warren Park. Stay tuned.

SMU Fraternity on Double Secret Probation. It’s not yet clear at all what happened, but an apparent hazing incident was serious enough that the Sigma Phi Epsilon fraternity has been put on temporary deferred suspension (paywall).

  • billholston

    Tim, what’s wrong with duct tape? Every successful repair project I’ve ever attempted involved duct tape. Maybe that says something about me though.

  • Wylie H Dallas

    Kadane’s presence on the board of trustees of the Dallas Police & Fire Pension System probably explains why the Fund continues to embrace pension fund “worst practices”:

    1) Failing to sufficiently diversify away Dallas-specific risk (over-weighting Dallas-based investments for a City pension fund is much like Enron’s pension fund investing in Enron stock— it represents too large a risk concentration);

    2) Failing to adequately match asset & liability maturities. Most of the pension fund’s liabilities are long term in nature– by investing in a short term development project such as Museum Tower, the Fund is unnecessarily exposed to reinvestment risk.

    3) Accepting free travel & other perks from current and prospective investment managers. This is a form of influence peddling, and would typically be prohibited.

    4) Co-locating the pension fund’s headquarters with CDK Realty Advisors. The Fund appears to be CDK’s primary client; CDK appears to manage most of the Pension Fund’s real estate assets. This close relationship creates all sorts of problems from a governance stand point.

    5) Pursuing a direct real estate investment & development strategy, notwithstanding the fact that the Fund’s staff appears to lack meaningful expertise in the area. Exposure to the real estate asset class could be obtained much more simply (inexpensively) and with less volatility by investing in real estate mutual funds, indexes, etc.

    6) Building up a huge portfolio concentration in the real estate sector, one that exceeds the Fund’s own internal guidelines and conventional wisdom.

    The net result of all this is that the Fund’s real estate performance has been absolutely disastrous in the last year; down over 6% versus a benchmark performance exceeding positive 14% return. The “delta” (how much extra the fund would have made if it had simply invested in the index instead of running around pursuing all sorts of “vanity” projects) easily exceeds $100 million.

  • mynameisbill

    Sheffie what the effie?!?!?! :) :( 😀

  • Barry

    Wylie H is out to lunch, his analysis of the Dallas Police and Fire Pension System is not only off base but dead wrong, and his personal attack on Sheffie Kadane is shameful. The Texas Association of Public Employee Pension Funds just published its yearly report and the Dallas Police and Fire Pension System out performed every other public pension system in the state of Texas in 2012.

    But, wait, there’s more. The Association also published the results of the past 20 years, and the Dallas Police and Fire Pension system ranked number one over that two decade time frame with an annualized 9.11% return.

    But, wait, there is even more. NEPC, one of the nation’s largest and most respected investment consulting firms, just published its 10 year performance analysis of Public Pension systems of $1 billion or more and the Dallas Police and Fire Pension system ranked in the top 16%, meaning it out performed 84% of all other public employee pensions nationwide.

    Wylie H, your lame analysis also ignores the fact that the Dallas Police and Fire Pension system has grown from $719 million to $3.65 billion in managed assets over the past 20 years. That metric alone demonstrates well balanced investment strategy, and the performance also demonstrates how Kadane, the other trustees and administrator Richard Tettamant have exercised careful and exhaustive fiducial responsibility.

    You are free to issue your opinion, but you are not entitled to your own set of facts. Lets take item 1, the Dallas Police and Fire Pension Fund was judged by NEPC as the 12th best in the nation for risk mitigation because of its long view approach of investing , that report issued just February 4th. The DPFP is broadly diversified with holdings around the world, not just Dallas as you suggest, and its’ investment strategy is “far vision,” not short vision as you wrongly suggest. Museum Tower is not a “short term” project and those who really know at NEPC dispute your claim with real facts.

    Let’s talk about travel. First, you suggest members of the DPFP board accept free travel and other perks from prospective investment managers. That is an outright fabrication, there is no evidence of influence peddling. Do the trustees and administrators travel to perform due diligence and management of DPFP investments and companies it owns? Yes. The Pension System spent $185,000 on travel last year, divide that up among 12 trustees and 5 pension executives and that amounts to less than $1-thousand per month per person to manage $3.6 billion in assets. Translation? That travel expense represents .005% of the value of the Pension System, far lower than almost every over pension system management team in the nation. There have been few times that travel has been accommodated by Pension Fund consultants or advisors as part of due diligence, and that expense is clearly covered in the marketing fees built into contracts with the DPFP, not offered up as some perk. To the contrary, failure to travel and check out investments would be irresponsible.

    Finally, about Councilman Kadane’s statement about the sunscreen over the Nasher. I think he is spot on with the solution for the Nasher. Why attack common sense? Even WFAA’s report by Jonathan Betz on the sunscreen panels showed how well they worked and even he asked the question why this could not be a permanent solution. The problem here is the Nasher and its friends are being whipped up into a frenzy of fantasy by Jeremy Strick, who duffed his job and had to “resign” at the Museum of Contemporary Art in Los Angeles, after its endowment fund, under his direction dwindled from $40 million to $6 million. The Pension System has already demonstrated there is no damage to the garden from the reflected light, and has also demonstrated that changing the oculi on the Nasher roof will cure the reflection problem inside the galleries, plus it offered to pay to put the fix on the roof. The media constantly refuses to tell that story and takes sides with the Nasher. The problem is the ego of Strick and the Nasher who have said, until now, no change to our roof no how, no way. Now that the Nasher has done a sunscreen itself you slam anyone who uses common sense to suggest this might be a permanent solution? Please!

  • Wylie H Dallas

    Barry, thanks for your thoughtful reply. Let me respond:

    [his personal attack on Sheffie Kadane is shameful.]

    I see nothing shameful with holding pension fund trustees accountable for fund policy and performance; indeed, these trustees hold a fiduciary duty to fund beneficiaries.

    [The Texas Association of Public Employee Pension Funds just published its yearly report and the Dallas Police and Fire Pension System out performed every other public pension system in the state of Texas in 2012.]

    2012 data hasn’t been compiled yet. If you are referring to 2011, I have a few thoughts:
    1) historical returns, alone, are not a satisfactory metric. As Enron and the housing bubble taught us, one has to also look at risk mitigation… the possibility that high returns may mask large, hidden risks that can swamp prior outperformance suddenly, and without warning.
    2) the returns Dallas Police & Fire reported to TexPERS (4.05%) are greater than those reported in their 2011 annual report (0.3%). The number in the fund’s annual report is comparable to that reported by other Texas municipal funds.

    [The Association also published the results of the past 20 years, and the Dallas Police and Fire Pension system ranked number one over that two decade time frame with an annualized 9.11% return…. NEPC, one of the nation’s largest and most respected investment consulting firms, just published its 10 year performance analysis of Public Pension systems of $1 billion or more and the Dallas Police and Fire Pension system ranked in the top 16%, meaning it out performed 84% of all other public employee pensions nationwide. ]

    My concern is with the present risk position of the fund and operating strategy, NOT the past. Again, however, one needs to understand the Fund’s risk position, as well. As an example, it would be very easy to boost returns by purchasing stocks on margin, but that comes at the expense of higher risk. Generally speaking, there is no such thing as a free lunch.

    [Wylie H, your lame analysis also ignores the fact that the Dallas Police and Fire Pension system has grown from $719 million to $3.65 billion in managed assets over the past 20 years. That metric alone demonstrates well balanced investment strategy, and the performance also demonstrates how Kadane, the other trustees and administrator Richard Tettamant have exercised careful and exhaustive fiducial responsibility.]

    It does nothing of the sort. All it shows is that the fund has grown (which one would expect, given the fact that the City of Dallas has been playing “catch up” on fund contributions and the fund’s covered membership has been growing).

    Much more relevant is something called the the Fund’s “Funded Ratio,” which has declined from 89.4% on 1/1/08 to 73.9% as of 1/1/12. This is the ratio of assets to the net present value of the Fund’s liabilities. As of 1/1/12, the Fund’s “Unfunded Actuarial Accrued Liability is a whopping $1.19 BILLION! ¡No es my bueno!

    Again, however, the Trustees need to be held accountable and explain why they are exceeding the Fund’s 2011 targeted exposure to real estate equities by such a large amount. The Fund states a target of 18%, but reports an actual allocation of 24.6%. If you run the numbers yourself from the detailed footnotes in the financial report (see page 17), the number comes out at a whopping 38%!!!

    Combine this high real estate concentration with the absolutely disastrous performance of the real estate portfolio in 2011 -6.44% versus the NCREIF benchmark of 14.3% and you have a real problem. In real dollar terms, based on the average $1.2 billion the Fund appears to have had invested in real estate during that period, and it appears they could have earned $240 million MORE by simply investing in the index. In other words, why bother with all this development stuff?

    [You are free to issue your opinion, but you are not entitled to your own set of facts.]

    Are you implying that the public financial statements and associated reports issued by the Fund are wrong? My only sources of data are those reports, what I read in the local press, and standard statistical sources.

    [the Dallas Police and Fire Pension Fund was judged by NEPC as the 12th best in the nation for risk mitigation because of its long view approach of investing , that report issued just February 4th.]

    I would be interested in seeing this; unfortunately it is not on the NEPC website.

    To be continued….

  • Wylie H Dallas

    Part II

    [The DPFP is broadly diversified with holdings around the world, not just Dallas as you suggest, and its’ investment strategy is “far vision,” not short vision as you wrongly suggest. Museum Tower is not a “short term” project and those who really know at NEPC dispute your claim with real facts.]

    I was focused on real estate, and according to the Fund’s own report, its real estate holdings are located in the U.S., France and the Bahamas. Although France and the Bahamas are admittedly cool places, that’s hardly a globally balanced portfolio of direct real estate investments.

    Further, I did not suggest that the Fund’s real estate was in “just Dallas,” I suggested that it was overly concentrated in Dallas and I see no evidence to contradict this.

    If Museum Tower is a “long-term” project, then I suspect we have real problems. A typical project like that shouldn’t take more than two to three years to sell out. How long a ride are we in for? Also, since when does NEPC weigh in on individual project timelines? I haven’t see them say ANYTHING about Museum Tower.

    [Let’s talk about travel. First, you suggest members of the DPFP board accept free travel and other perks from prospective investment managers. That is an outright fabrication…]

    From the January 28 Dallas Morning News:

    “Many of the trips by pension officials are funded by private investment managers and contractors who do business with the pension fund…” and

    “Contractor-sponsored travel is common among pension systems, and the Dallas fund’s ethics policy condones it. It is “appropriate and desirable for Trustees and Employees to attend various conferences throughout their tenure and employment, including those sponsored by contractors,” the policy says.”

    See: http://www.dallasnews.com/news/community-news/dallas/headlines/20130128-dallas-police-and-fire-pension-fund-officials-defend-world-travel.ece?action=reregister

    […there is no evidence of influence peddling.]

    Again, from the same DMN article:

    “Edward Siedle is a former SEC lawyer and president of Benchmark Financial Services, a firm that investigates pension fund abuses. He says slick money managers, unsophisticated trustees and a lack of government oversight are a formula for ethical problems.
    “The end result is what we have, which is pension funds where investment decisions are not based on who’s the best but who you know,” said Siedle. “It is a wining and dining environment.”
    [Do the trustees and administrators travel to perform due diligence and management of DPFP investments and companies it owns? Yes. The Pension System spent $185,000 on travel last year, divide that up among 12 trustees and 5 pension executives and that amounts to less than $1-thousand per month per person to manage $3.6 billion in assets. Translation? That travel expense represents .005% of the value of the Pension System, far lower than almost every over pension system management team in the nation. There have been few times that travel has been accommodated by Pension Fund consultants or advisors as part of due diligence, and that expense is clearly covered in the marketing fees built into contracts with the DPFP, not offered up as some perk. To the contrary, failure to travel and check out investments would be irresponsible. ]

    The trustees shouldn’t need to be making property due diligence trips, that is the job of investment staff (of which there are only four, according to fund documents). Trustees are responsible for governance, including setting overall fund policies. The expense figure cited only accounts for costs directly paid by the fund.

    The issue is not the overall ratio of travel expenses to fund investments (which is a meaningless metric), the appropriate questions are who is travelling and why? How does it make sense to send nine people to the same investment conference in Abu Dhabi, for example. If the Fund only has four investment professionals, who is minding the shop while the entire team and then some are out of the country for over a week?

    Finally, I note with interest that you didn’t choose to address the interesting relationship between the Fund and its real estate advisors noted in this article: http://www.dallasobserver.com/2012-07-26/news/the-dallas-police-and-fire-pension-s-big-real-estate-gamble/