The number of public pension systems with a sole trustee might shrink to two from three, as North Carolina Treasurer Janet Cowell launches a wholesale review of the pros and cons of the approach.

On Jan. 16, Ms. Cowell named an independent group of 11 pension system representatives, legislators and industry experts to develop recommendations for the General Assembly to act on this spring. The new Investment Fiduciary Governance Commission’s assignment is a broad mandate to assess North Carolina’s current governance structure for all of the pension funds that make up the $83.1 billion North Carolina Retirement Systems, Raleigh. Commission members will evaluate best practices in public, private and non-profit investment sectors before advising Ms. Cowell on possible changes to suggest to the General Assembly.

If North Carolina moves away from a sole trustee arrangement, it would leave New York and Connecticut operating that way, rather than through boards of trustees. (In Michigan, the treasurer is the sole fiduciary.)…

Read the rest of the article at Pensions & Investments (free subscription site)

With pension fund allocations to hedge funds increasing over the past two years, institutional investors are refining asset allocation investment philosophies into risk-based approaches. A risk-based approach, however, is only as good as its methodology. For an investor considering private equity and hedge funds, this raises two questions: What is an appropriate risk-based approach; and what risks does it consider?

Until recently, issues other than investment performance of alternatives played a secondary role for institutional investors and their consultants. With the 2008 financial crisis and resulting scandals, investors shifted to back-office risks in areas such as custody, valuation and audit. Today, operational due diligence teams are just as important in vetting managers as investment teams.

Despite these changes, due diligence efforts still minimize legal and regulatory risks. In many cases, regulatory risks are weighed only after a scandal erupts. This backward-looking mindset leaves significant risks unrecognized — until the next scandal breaks — and creates risks for pension fund investors.

Alternatives investment managers have gone from being relatively unregulated to heavily regulated. Additionally, the glare of regulatory scrutiny has only intensified. Indeed, activity by one regulator will typically draw the focus of others both in the U.S. and international markets…

Read the rest of the article at Pensions & Investments (free subscription site)

National and local philanthropic foundations have committed $330 million toward a deal to avoid cuts to Detroit retirees’ pensions and to save the Detroit Institute of Arts’ renowned collection, federal mediators involved in the city’s bankruptcy proceedings announced on Monday.

The plan was a first both in the foundation world, which has not been a source of money to shore up public-sector pensions in the past, and in municipal bankruptcy cases, experts said. It also offered the first indication of progress in the intense mediation with Detroit’s creditors to resolve the city’s financial crisis. Those talks have been proceeding under strict secrecy guidelines.

Nine foundations, many with ties to Michigan — including the Ford Foundation, the Kresge Foundation and the John S. and James L. Knight Foundation — have pledged to pool the $330 million, which would essentially relieve the city-owned Detroit Institute of Arts museum of its responsibility to sell some of its collection to help Detroit pay its $18 billion in debts. In particular, the foundation money would help reduce a portion of the city’s obligations to retirees, whose pensions are at risk of being reduced in the bankruptcy proceedings. By some estimates, the city’s pensions are underfunded by $3.5 billion.

As part of the plan, which negotiators have been working on quietly for more than two months, the museum would be transferred from city ownership to the control of a nonprofit, which would protect it from future municipal financial threats…

Read the rest of the article at the New York Times.

Uncertainties about what to do in rebalancing and the uncharted waters of central bank accommodation are among the things that’ll bring sleepless nights to investment executives and money managers in the coming year.

“The scary thing is the thing you don’t expect,” said James Keohane, president and CEO of the C$47.4 billion (US$44.6 billion) Healthcare of Ontario Pension Plan, Toronto. “It’s hard to know what there is in store.”

“Everything keeps me up at night,” said David Cooper, chief investment officer of the $28.3 billion Indiana Public Retirement System, Indianapolis.

“Asset allocations are probably out of whack right now,” generally overweight stocks and underweight fixed income, added Tim Barron, CIO at investment consultant Segal Rogerscasey in Darien, Conn. But given the 2013 jump in stock prices and the ongoing concern over core fixed income, he added, “how do you feel about selling stock and buying fixed income? That’s a struggle.”

What’s expected is the continued tapering of the Federal Reserve’s quantitative easing strategy, and that equities will continue to see growth, but not at a breakneck pace…

Read the rest of the article at Pensions & Investments (free subscription site)

The industrial conglomerate DuPont is splitting in two.

DuPont produces products like solar panel components and Kevlar, and has a market value of nearly $57 billion. But in recent years, even as it increased its focus on higher-growth areas like agriculture and nutrition, a large portion of its revenue still came from the more volatile sale of conventional industrial products.

On Thursday, DuPont said it would spin off its performance chemicals segment into a new publicly traded company. The unit — which makes a pigment that turns paints, paper and plastics white, as well as refrigerants and polymers for cables — generated about $7 billion in revenue in 2012. But prices for its pigment products plunged in the second quarter, sending operating profits for the unit down 56 percent.

DuPont announced in July that it would explore “strategic alternatives” for the unit.

Soon after, the activist investor Nelson Peltz revealed that his fund, Trian Partners, had previously acquired a stake in DuPont. His holding of nearly six million shares was worth about $345 million at the time of the investment, but represented less than 1 percent of the company. Mr. Peltz was later reported to have increased his stake to 2.2 percent, owning more than 21 million shares, according to The Wall Street Journal…..

Read the rest of the article at the NY Times.

Today’s low-interest-rate environment has made the hunt for investment income tougher than ever. Many overseers of public pension funds, desperate to bolster returns and meet ballooning retiree obligations, have turned from traditional investments like stocks and bonds to hedge funds and private equity.

These so-called alternative investments now account for almost one-quarter of the roughly $2.6 trillion in public pension assets under management nationwide, up from 10 percent in 2006, according to Cliffwater, an adviser to institutional investors. Investments in public companies’ shares, by contrast, fell to 49 percent from 61 percent in the period.

Fans of alternative investments argue that they can generate higher returns. But the increased risks, higher fees and lack of transparency associated with such investments make them problematic. A 2007 paper by Fiona Stewart at the Organization for Economic Cooperation and Development in Paris said that “lack of transparency makes the level of risk and type of exposure hard to gauge” in hedge funds.

Last week, an investigation of the Rhode Island pension system’s recent foray into alternative investments raised fresh questions about the high costs and considerable risks of investing in hedge funds and whether their returns are indeed worth it.

The investigation, by Benchmark Financial Services, a forensic firm hired by a Rhode Island council of the American Federation of State, County and Municipal Employees, concluded that the $7.7 billion Employees’ Retirement System of Rhode Island was at risk because of its increased concentration in high-cost and opaque alternative investments. The union represents workers whose pensions are invested by the state.

In less than two years, the Rhode Island pension system has ramped up its investments in hedge funds, private equity and venture capital from zero to almost $2 billion, or more than one-quarter of its assets under management. But this mix of investments hasn’t outperformed the fund’s peers, the Benchmark report said. For the year ended June 30, 2013, the fund returned 11.07 percent, versus 12.43 percent earned by the median public pension fund.

Read the rest of the article at the NY Times.

What do you call the man who is trying to sabotage Chrysler’s initial public offering by threatening to harm the company, perhaps fatally, if the offering is completed?

You call him Chrysler’s chief executive.

There has never been a proposed I.P.O. like Chrysler’s.

How is it different?

First, the preliminary prospectus filed by the company this week has only one underwriter listed, JPMorgan Chase. A typical offering by a large company will have at least a few underwriters. Every investment bank wants some of the profits, and the company wants maximum distribution. When General Motors, out of bankruptcy and newly profitable, went public in 2010, 10 underwriters were listed on the first prospectus, including all the big ones. Many more were added before the offering took place.

Here, it is quite likely that the rest of Wall Street stayed away because they feared alienating the very company whose stock was being sold.

Second, the G.M. prospectus, as with every other I.P.O. prospectus I have ever seen, tried to put its best foot forward. Within the bounds of securities laws, the prospectus writers did their best to attract investors. Chrysler’s, within the same bounds, is clearly aimed at alienating investors….

Read the rest of the article at the NY Times.

In early trading, the three main indexes — Standard & Poor’s 500-stock index, the Dow Jones industrial average and the Nasdaq composite — were 0.1 percent lower.

The government will reach its borrowing limit, or debt ceiling, by Tuesday. If Congress does not raise that limit, the government will not be able to pay all its bills, possibly shaking confidence in the economy, the world’s biggest.

That leaves just days for the White House and Republican lawmakers, who disagree on spending cuts and other important budget issues, to reach a compromise. Republicans are demanding that any increase must result in expenditure cuts of an equal amount. President Obama is demanding a debt-limit increase with no conditions attached….

Read the rest of the article at the NY Times.

Hilton Worldwide Holdings Inc., the hotel operator owned by Blackstone Group LP (BX), filed to raise $1.25 billion in a U.S. initial public offering as lodging shares trade at close to their highest level in six years.

The world’s largest hotel chain plans to use proceeds from the offering to pay down debt, according to a regulatory filing today. New York-based Blackstone, the world’s largest manager of alternative assets, will own a majority of the voting power in Hilton following the IPO, the filing shows.

At $1.25 billion, the IPO would be the largest for a lodging company and would move Blackstone closer to realizing gains from its biggest single investment, with more than $6 billion of equity invested from its real estate and other funds. The offering coincides with increases in industry revenue and income that have spurred stock gains for hoteliers such as Starwood Hotels & Resorts Worldwide Inc. (HOT) and Marriott International Inc. Both are trading close to their highest levels since 2007.

“For Blackstone, it doesn’t make sense to keep something this valuable on the books,” said Jeffrey Sica, who oversees about $1 billion as chief investment officer of Morristown, New Jersey-based Sica Wealth Management LLC. “Hilton’s business has been doing well, so it makes very good sense for them to do it now.”

The McLean, Virginia-based hotel operator didn’t say how many shares it will offer or at what price. The offering amount is a placeholder used to calculate fees and may change. Deutsche Bank AG, Goldman Sachs Group Inc., Bank of America Corp. and Morgan Stanley will arrange Hilton’s IPO, the filing shows…

Read the rest of the article at Bloomberg.

Class-action lawsuits are the bane of most financial firms, and many recoil at the prospect of paying out millions to groups of clients if investments go sour. Now, the discount brokerage firm Charles Schwab & Company finds itself at odds with regulators as it seeks to eliminate the option of such suits for its clients.

For Wall Street, the skirmish has inadvertently brought fresh and unwelcome attention to the investor arbitration process and its flaws, and could severely curtail efforts by investors hurt by widespread problems, including claims of being marketed unsuitable investments by brokers who gave a deceptive sales pitch.

Investors generally have not been able to use the public court system for their disputes with their stockbrokers since 1987, when the Supreme Court ruled in Shearson v. McMahon that a brokerage firm could force customers to agree to arbitration. Since then, virtually every firm has added a so-called mandatory arbitration agreement to its new-account documents.

One exception was for issues that were pervasive enough to warrant class-action status, that way allowing groups of investors to sue a firm or firms.

But in 2011, Schwab added a clause to its customer agreement that required clients to agree not to pursue or participate in class-action suits….

Read the rest of the article at the NY Times.