Illinois Teachers OKs Silver Lake, AQR commitments among actions

The $37.5 billion Illinois Teachers' Retirement System, Springfield, approved a commitment of up to $150 million in Silver Lake Partners IV, a technology-focused private equity fund, at its board meeting Friday.

The commitment is the fund's third to Silver Lake Partners; prior commitments totaled $130 million.

Trustees also approved a $40 million investment in AQR Risk Balanced Reinsurance Fund, which provides reinsurance capital to insurance companies with diversified risks.

Funding for the mandate will come from a reduction in global macro and targeted real return strategies, which totaled $1 billion as of Sept. 30 and are managed by AQR Capital Management.

Trustees also ratified manager terminations and replacements made by investment staff in domestic and international equity portfolios between the August and September board meetings.

Two managers were terminated for performance and concerns about changes to each firm's investment process: Denali Advisors, which managed $140 million in active U.S. large-cap value equities, and Turner Investments, which managed $421 million in U.S. large-cap growth equities.

Denali's total assets under management also had deteriorated to the point that TRS' mandate accounted for 20% of Denali's assets, a level too high for investment staff's comfort, said R. Stanley Rupnik, chief investment officer, in an interview. TRS' assets invested with Denali peaked at $250 million and through a reduction in its target had been reduced to about $140 million at the time of termination.

Neither Robert Snigaroff, Denali's chief investment officer, nor Robert Turner, CIO of Turner Investments, returned calls seeking reaction by press time.

Denali has not been replaced, though J.P. Morgan Asset Management (JPM) was hired by staff during the third quarter to manage a total of about $400 million in active U.S. large-cap growth stocks. JPMAM has received $260 million so far and it's expected that TRS will invest the balance in 2013, Mr. Rupnik said in the interview.

JPMAM also manages an active U.S. equity 130/30 strategy for the fund, which had $551 million in assets as of Sept. 30.

Denali's $140 million and the $140 million earmarked for JPMAM will be invested in an S&P 500 index fund (ex-Sudan), managed by RhumbLine Investors, which managed $1.657 billion as of Sept. 30. The new assets will bring RhumbLine's domestic equity allocation to 28% of plan assets from 19%.

Brandes Investment Partners also was terminated from a $685 million active international large-cap value equity account for performance, Chuck Handy, investment officer, told trustees.

Brent V. Woods, Brandes' CIO, did not return a call seeking comment by press time.

LSV Asset Management was hired to replace Brandes and received about half of the total allocation in the third quarter. It likely will receive the remainder in 2013, Mr. Handy said. State Street Global Advisors will manage the money over the next six to nine months in an international enhanced equity index transition account, said Mr. Rupnik in the interview..

LSV already manages $291 million in active U.S. smidcap equities for the pension fund.

Putnam Investments was terminated for performance; it ran an active small-cap international equity mandate that totaled about $237 million. Mondrian Investment Partners replaced Putnam in managing the account. Mondrian runs $813 million in active international large-cap equities for TRS. Jon Goldstein, a Putnam Investments' spokesman, did not return a call seeking comment by press time.

Mr. Rupnik also announced that emerging commodities hedge fund manager Flintlock Capital Asset Management is closing in the fourth quarter and returning assets to investors. TRS invested $15 million with Flintlock in October 2011; the investment was valued at $13.5 million as of Sept. 30.

Mr. Rupnik introduced Kenneth Musick, absolute-return investment officer, to trustees. Mr. Musick joined the investment staff on Monday and will oversee the $1.9 billion hedge fund portfolio. Mr. Musick was a vice president at Northern Trust Global Investments' hedge funds-of-funds business. Information about Mr. Musick's replacement could not be learned by press time.

Mr. Musick assumes the helm of the hedge fund portfolio from Kent Custer, senior investment officer, who left in December.

Citibank was hired as the fund's first third-party securities lending agent. Deutsche Bank was a finalist; another finalist was the fund's global custodian, State Street Bank, which currently handles securities lending.

Mr. Rupnik said Citibank will assume all securities-lending activities offer the fund a 94% share of profits over the long term.

Under State Street's custodial contract, the profit split was 90% for Illinois Teachers' and 10% for the bank. Mr. Rupnik said in the interview that State Street's bid for the new securities lending contract lowered the pension' fund's share of the profits, but did not provide specifics.

Under State Street's management, securities lending profit was $19.6 million in 2012 and $17.8 million in 2011.

Mr. Rupnik said responses to a recent RFP request for a private equity co-investment adviser were not suitable. The board authorized Mr. Rupnik to start another search for a third adviser to the private equity program to replace Houlihan Lokey, which resigned over unresolved contract issues. The other co-advisers are Torrey Cove Capital Partners and LP Capital Group.

The search likely will be posted on the system's website, trs.illinois.gov, and finalists interviewed at the board's February meeting.

Based on the final actuarial valuation conducted by the fund's actuary, Buck Consultants, trustees set the Illinois state government's funding contribution to the pension fund at $3.438 billion for the fiscal year ended June 30, 2014, a 27.2% increase over the requested contribution for fiscal 2013.

Illinois TRS' funded ratio dropped to 42.1% as of June 30 from 46.5% as of June 30, 2011.