Last August, we called out the San Diego County retirement fund for paying way too much in fees to Salient Partners, its outside pension-fund manager. Based on reporting by Dan McSwain, the San Diego Union-Tribune alerted readers to a dramatic increase in the use of leverage once Salient took the reins.
On July 16, the county fired Houston-based Salient, according to the Union-Tribune.
Last year’s events made for a great local comparison between San Diego County and the City of San Diego. The two local municipal regions each have a separate retirement system for employees.
The county system was highly leveraged, expensive and performed poorly. According to Wilshire Trust Universe Comparison Service, San Diego County’s returns ranked in the 84th percentile among public pension funds during the three years to Dec. 31, 2014, and in the 54 percentile for the five-year period.
The county had hired Salient to goose returns; it increased leverage threefold to 100 percent of the assets in the fund. For this high-risk strategy, Salient Partners was paid $8 million a year.
As we noted last year, contrast this with the local competition, the City of San Diego, which had its own pension problems a decade ago. After fraud and conspiracy indictments in 2006, and Securities and Exchange Commission charges in 2008, it cleaned up its act.
The City of San Diego simplified its pension plans. It barred the use of leverage in favor of a low-risk, asset-allocation approach. As we discussed last year, it is reaping the rewards. The city’s fund has outperformed the county’s, earning about 13.6 percent a year versus Salient’s returns of 10.1 percent since it was hired in October 2009 through June 2014. That’s before fees; the city’s net returns with its lower cost-basis, look even better after fees.
By contrast, San Diego County spent $103.7 million in investment and administrative fees in 2013. The $10 billion pension fund is one of the highest-cost plans in the country as a percentage of assets.