US – CalPERS has earned $98.4m from lending out about two-thirds of its securities in one year and is moving further into enhanced index strategies and away from index funds and active managers.
For the 12 months to March 31, CalPERS lent more than $110bn in global fixed income and global equities out of its $162bn fund. The fund earned $98.4m as a result, more than 9 basis points.
Will Duff Gordon at Data Explorers, which provides independent validation of our client’s securities lending programs using cusip level analysis, said: “In absolute terms, $98m seems a large amount of money to be earning from securities lending. But CalPERS is well known to focus on maximising alpha of which securities lending income is a component so it comes as little surprise.
“That said, in relative terms, a return of $98m on a pool of assets worth $110bn means that sec lending contributes around 9 basis points. In very general terms, this would be higher than the average levels that we see but not the highest.
“What is interesting is to delve beneath the headline figure to understand whether this income figure is net of all costs and the level of risk that was deemed acceptable.
“Without knowing the exact details as to the make up of the securities they allow to be lent and the lending guidelines in place, however, it is extremely difficult to make any more meaningful comment on this figure. As ever, the truth is always more complicated.”
Securities lending by pension funds, usually to hedge funds shorting stock or trying to add votes at company meetings, has come under increased scrutiny recently. The International Corporate Governance Network (ICGN) last month published its report on ‘Share lending vis-à-vis voting’ following a survey of its members it had commissioned in January.
The report, which CalPERS contributed to, found two-thirds of the 39 respondents (of which 31 had lent stock) lend, on average, more than 10% of their portfolio even though just more than half have a set of written guidelines to help decisions on whether to recall shares. Seventy per cent of respondents rarely, if ever, recall shares for the sole purpose of voting them. The ICGN is to debate next month whether more formal rules on stock lending are required.
An ICGN panel next month in Rio will consider a code of best practice for securities lenders with regards to upholding corporate governance standards.
Duff Gordon said there were two issues to address from a beneficial owners perspective: “Will lending impact the value of my portfolio? Will lending affect my corporate governance policy? We are working with primary source data and academics in a factual approach to these issues. In a preliminary analysis of the 3 stocks (P&O Princess, BSkyB and Air France) cited in the report (as being examples of where market liquidity or price levels were actually affected by the recall of lent shares) we found no evidence of extraordinary securities lending levels.”
Separately, CalPERS has selected 10 investment managers from 40 proposals to form part of a pool to invest up to $6bn in US equity enhanced index strategies. The 10 managers are: Atlantic Asset Management, Barclays Global Investors, Enhanced Investment Technologies, Franklin Portfolio Associates, Goldman Sachs Asset Management, Pacific Investment Management Company, Prudential Investment Management Company, Smith Breedon Associates, State Street Global Advisors and Western Asset Management Company.
Sean Harrigan, president of the CalPERS board, said: “Enhanced indexing will help us squeeze a little more active return out of our investment portfolio and round out our equity investment strategy opportunity set.”
CAlPERS uses fundamental, qualitative and synthetic enhanced cash strategies in this pool, which already has $600m in it, to provide a higher return per unit of risk. The fund will take equally from its index and active equity managers to fund the enlarged pool.