Public Pension Funds, IPOs: What Will Facebook Tell Us?

Public pension funds practically have the largest investment portfolios on an absolute dollar basis when compared to most investors, retail and institutional, and consequently are the largest allocators to domestic equities and other asset classes. Due to limited staff and resources, the majority of public pension funds will likely hire professional (and emerging) investment managers to act as fiduciaries and manage assets per specified mandates and investment guidelines, and on behalf of all participants per a respective plan.

With the wave of recent IPOs and the hype towards Facebook (FB) going public, knowing the interest in the following companies from a public pension fund perspective may shed light to potential winners and losers: Angie's List (ANGI); Demand Media (DMD); Groupon (GRPN); HomeAway (AWAY); Jive Software (JIVE); LinkedIn (LNKD); Pandora (P); Yelp (YELP); Zillow (Z); and Zynga (ZNGA). The following pension funds, as of March 31, 2012, had interest in these newly traded stocks:

Alaska Public Employees' and Teachers' Retirement System

• Angie's List - 49,998 shares, or $944,462
• LinkedIn - 800 shares, or $81,592
• Groupon - 4,400 shares, or $80,872
• Zillow - 400 shares, or $14,236
• Demand Media - 500 shares, or $3,625
• Jive Software - 0 shares (down from 1,100 shares as of December 31, 2011)
• HomeAway, Pandora, Yelp, and Zynga - 0 shares

Arizona State Retirement System

• HomeAway - 111,700 shares, or $2,829,361 (up from 0 shares as of December 31, 2011)
• The other nine newly traded stocks - 0 shares

Florida State Board of Administration

• Yelp - 97,691 shares, or $2,626,911 (up from 0 shares as of December 31, 2011)
• LinkedIn - 14,162 shares, or $1,444,382
• Jive Software - 15,338 shares, or $416,580 (up from 0 shares as of December 31, 2011)
• Demand Media - 10,164 shares, or $73,689
• Groupon - 1,284 shares, or $23,600
• HomeAway - 449 shares, or $11,373
• Pandora - 998 shares, or $10,190
• Angie's List, Zillow, and Zynga - 0 shares

School Employees' Retirement System of Ohio

• LinkedIn - 500 shares, or $50,995 (up from 0 shares as of December 31, 2011)
• Groupon - 2,500 shares, or $45,950
• The other eight newly traded stocks - 0 shares

Of these ten stocks, Zynga was the only one not held by the above pension funds. Elsewhere, Alaska, Arizona, and Ohio had no holdings in Yelp, yet Florida had excessive exposure to the stock relative to Groupon and LinkedIn. Arizona had no exposure to Groupon or LinkedIn but interestingly, had almost a $3 million position in HomeAway. Alaska was the only above pension fund with exposure to Angie's List, a much greater position when compared to Groupon and LinkedIn. With this said, feelings were mixed.

With Facebook going public, I am curious to see if it becomes more largely held across pension funds relative to other newly traded stocks. Over time, if more cash is allocated to Facebook per pension fund rather than to the likes of Groupon, LinkedIn, and so on, and it possibly becomes a major holding, this will reflect a vision not just from pension funds, but more so from the retained investment managers responsible for investing pension fund assets. Such managers are required to adhere to guidelines and unless hired for an alternative investment mandate, their views will likely be long-term.

I think if more capital is allocated to Facebook rather than to other newly traded stocks, this may be a sign that Facebook has a longer lasting and better business model. Also in some cases, pension plans may have owned Facebook initially via private equity investments and therefore may look at the company from a different perspective than other soon-to-be investors. In a year or so out, it will be interesting to see what kind of role Facebook has in a public pension fund's investment program, especially given the hype.

J.P. Morgan Key Shareholders; Wal-Mart

As of March 31, 2012, the following pension plans, to name a few, owned the corresponding number of shares in J.P. Morgan (JPM):

• 1,446,509 shares - Alaska Public Employees' and Teachers' Retirement System
• 709,950 shares - New Mexico Educational Retirement Board
• 1,907,146 shares - Mississippi Public Employees' Retirement System

Given the latest news regarding J.P. Morgan, it is debatable whether or not this company, and other financials, will be reduced as an overall part to an institutional investment program. Wal-Mart (WMT) may also be trimmed as it too made recent headlines. However, J.P. Morgan and Wal-Mart positions will not potentially be reduced solely as a result of recent headlines, but also from pension plans reducing exposure to domestic equities.

Of the three pension plans above, New Mexico Educational Retirement Board is in early discussions about its asset allocation. Like the Arizona State Retirement System and San Francisco Employees' Retirement System, New Mexico may also plan to reduce exposure to domestic equities.

An Asset Allocation Shift - SFERS

On August 17, 2011, the Investment Committee from the San Francisco Employees' Retirement System (SFERS) agreed to move for Retirement Board consent a new asset allocation - this asset allocation was approved by the Retirement Board on September 14, 2011.

Exposure to domestic equities will be reduced from 26.0% to 23.5%. Accordingly, exposure to international equities and alternative investments will rise by 0.5% and 2.0% to 23.5% and 16.0%, respectively.

Although the actions took place roughly eight months ago, these targets are strategic and will be met over a longer-term horizon.

Pension Funds on Wal-Mart - Why They Care

As per Wal-Mart's latest, we see why public pension funds care - Various New York City pension funds, collectively, own roughly 4.7 million shares and will vote against five Wal-Mart directors up for re-election next month at an annual shareholder meeting.

Presumably, other pension funds care given such ownership positions: Florida State Board of Administration - 3,655,664 shares, Ohio Public Employees' Retirement System - 2,234,947 shares, and the North Carolina Retirement Systems - 1,336,382 shares, as of December 31, 2011, to name a few.

If these Wal-Mart directors stay, how will the "smart money" respond?

An Asset Allocation Shift - ASRS

Approved by the Board on October 16, 2009, the Arizona State Retirement System (ASRS) adopted a 40% target (30-50% allowable range) to domestic equities - Large, mid, and small cap stocks accounting for 28%, 6%, and 6%, respectively.

On April 30, 2012, the ASRS Investment Committee will consider recommending a new asset allocation to the Board for final approval (as per recommendation by ASRS' Investment Staff and Consultant). Domestic equities as an asset class will be reduced by 7% to 33% (26-38% allowable range) of the investment program - Large, mid, and small cap stocks shall make up 23%, 5%, and 5%, respectively.

Elsewhere, target exposure to international equities will rise from 18% to 23% (16-28% allowable range). Emerging markets, as a sub-asset class, will rise from 3% to 6% of the investment program.

Investment Guidelines - Domestic Equity Investing

To the individual investor, do you have investment guidelines per domestic equity investing? Below are some examples (and thoughts). Pension funds, due to sophisticated asset allocations, can require their domestic equity managers to be virtually fully invested; these managers do monitor their largest holdings prudently.

Cash Exposure

• LASERS domestic equity portfolios are expected to be fully invested; No more than 10% of a manager’s domestic equity portfolio may consist of cash or cash equivalents - Louisiana State Employees' Retirement System (LASERS), 8/25/11

• The amount of cash and cash equivalents held in the domestic equity portfolio generally shall not exceed 5 percent of the total portfolio except during periods of cash contributions or withdrawals - Illinois Municipal Retirement Fund (IMRF), 2/24/12

Largest Holding(s)

• No single holding shall account for more than 6% of the allowable equity portion of the portfolio at market value, or 150% of a stock’s weighting in the style benchmark against which the manager is measured, whichever is larger - LASERS, 8/25/11

• No individual security shall comprise more than 15 percent of a manager’s portfolio market value without Fund approval; Generally, no individual security shall comprise more than 5 percent of the total domestic equity portfolio - IMRF, 2/24/12