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Inside a Pension Fund’s Search for a Risk Management System

The LACERA investment team recommended MSCI’s risk analytics over competitors including BlackRock’s Aladdin system and FactSet.

After a lengthy search, the investment team at the Los Angeles County Employees’ Retirement Association has settled on a new risk analytics provider.

The investment team has recommended that its board hire MSCI Analytics to provide total fund analytics for the $59.6 billion pension fund, according to the agenda from a LACERA investment board meeting held on Wednesday. MSCI beat out rivals including FactSet and BlackRock Solutions, the division of BlackRock which encompasses the asset manager’s Aladdin platform.

The agenda reveals how LACERA’s investment team decided upon MSCI Analytics, as well as what it found attractive about other risk management candidates that the pension fund considered during the search process. According to the document, MSCI’s advantages included the firm’s experience with public pension funds, suite of indices, and focus on analytics. MSCI proposed charging fees between $478,000 and $730,000, according to LACERA.

The hunt for a new risk system began in December 2018, when LACERA received board approval to initiate a search. After putting out a request for proposals, LACERA received seven responses, including six total fund risk management platforms, according to the agenda. The pension fund then narrowed the field by eliminating three potential candidates: Bank of New York Mellon, State Street, and Wilshire Associates.

According to the document, Bank of New York Mellon was dismissed in part because its product team had been formed within the last five years. State Street — LACERA’s previous provider — was dinged for its “heavy use of proxies, imprecise analytical output, [and] analyst/client service turnover.” Wilshire Associates didn’t pass muster, according to LACERA, because of the firm’s lack of audit review process, small product team, and limited client support hours.  

A spokesperson for State Street did not immediately respond to emails seeking comment. Spokespeople for Wilshire and BNY Mellon declined to comment.  

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After eliminating these candidates, LACERA met with semi-finalists MSCI, BlackRock, and FactSet for interviews, which were structured in two rounds, the document shows. In the first interview, each organization provided an in-depth demonstration of its product. In the second round, LACERA asked each of semi-finalists to provide working versions of their systems to evaluate a mock portfolio that mimicked LACERA’s total fund structure. LACERA then tested each system over a period of four months, using them to perform tasks such as exposure reporting and portfolio simulation exercises. 

BlackRock, for its part, was attractive to LACERA in part due to its easy-to-use platform, ESG data integration, and “strong fixed income pedigrees” of its employees, among other factors.

However, LACERA raised concerns about BlackRock’s potential for “groupthink,” given that “the firm’s asset management teams use the identical platform in their investment process.” 

In addition, “unlike MSCI, BlackRock has limited on-going data management services,” the pension agenda stated. “After implementation, LACERA would have to dedicate an analyst to load, reconcile, and monitor alternative assets data.”

According to the fund document, BlackRock had proposed charging LACERA between $675,000 and $865,000 for its services. A spokesperson for the firm declined to comment.  

Meanwhile, the document shows that FactSet’s longstanding relationship with LACERA, its “superior” equity analytics, and transparent pricing schedule were part of what made it an attractive candidate. However, “although that platform is very strong in equity markets and economic information, FactSet’s proposed risk system is not as robust as the other semi-finalists,” according to the agenda.

FactSet had proposed charging LACERA between $780,000 and $910,000, the fund document said. A spokesperson for the firm declined to comment.  

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