Staff members of the approximately $4.5 billion Fire & Police Pension Association of Colorado (FPPA) are feeling pretty good about themselves currently.
Why? In 2009, an informal level of questioning, second-guessing and hypothesizing among board and staff members regarding the fund’s longstanding, heavily-consultant-driven asset manager hiring process coalesced into formal action to change that process in the pursuit of more efficient investment decision making and a reduction in service provider fees. A decade later, the fund generated a 14.95% return for the year ending December 31, 2017, against a 13.64% internal benchmark, and spent some $1.2 – $1.5 million on staffing costs versus the estimated $4 – $5 million it would have paid in service providers fees last year, absent its governance changes, according to senior officials at the fund
“Overall, the board identified with the improved risk/return profile with increasing exposure to alternatives (private markets and hedge funds). The board also recognized that manager approval at the board level and ultimately at the Board Investment Committee level was no longer appropriate given the time and expertise needed to evaluate these investments. While FPPA historically utilized consultants and fund-of-funds for these strategies, additional fees and lack of customization led FPPA to an internal oversight model,” Dan Slack, executive director, explained.
“Ten years ago, the board first wanted to move in a different direction from the investment-consultant-driven manager hiring process we had then—we’ve gone from basically a process where there wasn’t really an investment staff to now where we have staff do manager research and make manager choices themselves without involvement from the board,” Slack said. FPPA’s efforts in this area culminated in January 2017 when hire/fire decisions concerning investment managers were delegated to the investment staff by the fund’s nine-member board.
It’s been very successful; it’s been driven by our fund’s desire to increase investment diversification,” Simon said. He added that “considering complexity that came along with that the fund could have outsourced. But we quickly saw the lack of flexibility and synergy that that approach created. So really having an internal staff gave us more flexibility in our portfolio to create just what we wanted–and you also get that fee savings!”
FPPA’s governance evolution
Slack joined FPPA as executive director in 2008 from the Illinois State Universities Retirement System, where he held the same title. When he landed at FPPA, the fund had three investment officers—one chief investment officer and two investment analysts. It now boasts a 12-person investment staff. The fund’s current CIO, Scott Simon, joined in August 2007 from the University of Colorado Foundation, where he held the same title.
The fund’s investment staff is now is responsible for all investment classes, which currently include global equity, long/short equity, private market assets, fixed income, absolute return, managed futures and cash.
According to Slack, one of the catalysts that initiated the fund’s move on investment governance was that, “Scott [Simon] and I felt it was an appropriate way to manage the portfolio. And we were fortunate that we had on our board a few investment professionals that shared that view. So there was a meeting of the minds that this made sense, and we took it slow.” He continued that the board was very conscious of large increases in staff cost that can pose headline risks. “The board understood that, but felt like it was the right thing to do.”
Prior to 2009, FPPA maintained a roster of three consultants: general investment consultant Pension Consulting Alliance, private equity consultant Hamilton Lane, and real estate consultant Townsend; it also worked with various fund-of funds for hedge fund investments. The fund now has one retainer consultant on its roster, Cambridge Associates.
In May 2010, the fund’s board authorized the creation of a Board Investment Committee to comprise at least three board members (it currently seats five members). The committee assists the board in monitoring the implementation of the investment program and ensuring compliance with the investment policies and objectives of the fund, Slack explained. The committee reviews the appropriateness of portfolio construction recommendations made by investment staff.
Most recently, last year the FPPA’s board authorized the formation of an Internal Investment Committee (IIC), composed of seven members of staff, namely the Executive Director (the committee’s chair), the General Counsel, the Chief Investment Officer, the Risk Officer, the Director of Private Markets, the Director of Liquid Strategies, and the Director of Asset Allocation and Research. “The IIC must concur in all investment manager hires and terminations. In addition, the IIC will generally review staff investment-related recommendations to the Board or its Investment Committee,” according to Slack.
The “whole adventure” began in 2009, Slack said. He credits its success to a good collaborative working relationship with Simon and to a supportive and pragmatic board. “It was a very evolutionary process. Working together [with Scott] was important in implementing these changes. Further credit needs to go to leadership on the board and support from a quality investment staff.