The Politically Correct Pension Fund

In 1989, when Xcylur R. Stoakley was running a $650 million venture portfolio for Ameritech Corp., he decided to throw a few bucks into businesses generally shunned by mainstream institutional investors. He found a Silver Spring (Md.) venture fund called Syncom that specialized in financing minority-owned communications companies and invested $3 million. Two years later, when Stoakley left Ameritech to start a private equity-fund management company that puts money in concerns owned by minorities or women, Syncom was just an average performer. But Stoakley hasn't given up on what has come to be known as economically targeted investing (ETI). "These businesses create jobs," says Stoakley.

The Clinton Administration would love more investors like Stoakley. Having already begun to push banks to hike lending in the inner city, it's now making a major push to steer more of the $2.1 trillion in private pension funds into inner cities, minority-owned businesses, road and bridge projects, and companies that train their workers. "This is the beginning of a turning point," says Assistant Labor Secretary Olena Berg, the nation's top pension regulator.

LEGAL PITFALLS. But private-pension managers are a long way from embracing ETI. They shrink from investments aimed at anything other than making the best return. They worry that they would run afoul of the Employee Retirement Income Security Act (ERISA), which requires "prudent" investment of pension funds. ETIs, they say, could open the door to both government enforcement actions and pensioner lawsuits. And they fear that ETI may politicize investments as local officials lean on fund managers to prop up ailing businesses. "If they're such great investments, why aren't ETIs happening naturally?" asks one financial executive. Even some of the people who would presumably benefit from the White House initiative reject it. "We don't want anything to do with government programs," says Herbert P. Wilkins, general managing partner of the Syncom funds. "All we're interested in is targeting profits."

But Berg isn't deterred. "We have to invest the dollars now held by pension funds in ways that create more jobs and better jobs over the long term," Berg told big investors in February. As for ERISA, she says it's no problem if the return is commensurate with the risk. She plans to publicize Labor Dept. rulings that support ETI and to set up a data base tracking targeted investments.

One of the few private pension funds that have made these kinds of investments for years says they're not incompatible with earning good returns. TIAA-CREF, the nation's largest private pension fund with assets of $130 billion, has set aside equity capital to invest in affordable housing for low- and middle-income city residents.

While corporate-pension managers have stuck mainly to traditional investments, union-run and public employee funds have been more adventurous. The California Public Employees Retirement System (CalPERS), on whose board former Deputy State Treasurer Berg sat for two years, has been one of the most aggressive ETI investors. In 1992, CalPERS put $375 million into single-family affordable housing and nonentry-level housing throughout California. CalPERS' annual rate of return, which is derived largely from construction financing, is projected to average somewhere between 15% and 25%. Berg also argues that such programs create jobs and affordable housing while enriching the state's tax base.

KANSAS DISASTER. Union pension fund investors like ETI. Since the early 1980s, more than 90 funds have bought into the Multi-Employer Property Trust, a real estate equity fund that targets areas where participating pension funds are located. Its one stipulation: The new construction projects must be union-built. MEPT has had an average annual return of 7.11% over 10 years, compared with an average annualized return of 3.55% for similar funds, as measured by the Frank Russell Investment Management Co.

Kansas, however, offers a sad tale of social investing. To spur the state economy in the late 1980s, the $5.4 billion Kansas Public Employees Retirement System invested $7.8 million in a troubled Wichita steel mill that closed just two years later; state auditors think most of the money is lost. KPERS also invested $65 million in the Home Savings Assn. of Kansas City, Mo., then the state's largest thrift, which was shut down by federal regulators in 1991.

The White House has a long way to go to convince investors of the merits of ETI. "It's a radical notion," Berg concedes. That may just be the problem.

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