Illinois Teachers OKs searches for emerging markets equity managers

Illinois Teachers' Retirement System, Springfield, authorized a search for active and passive emerging markets equities managers at a board meeting Tuesday.

R. Stanley Rupnik, chief investment officer of the $37.5 billion pension fund, said in an interview that neither the size of the mandate, the number of managers nor the exact timing of the RFP posting has been determined.

The RFP will be posted on the pension fund's website.

The search was one of the recommendations made to trustees by Greg Turk, director of investments, as part of the annual review of the pension fund's $7.6 billion international equity portfolio.

Trustee Michael Busby asked why the $676 million emerging markets equity mandate managed by GMO was still in the pension fund's international equity portfolio “when for nine years it has not provided outperformance.” Mr. Turk said investment staff will “grill GMO and kick the tires harder” over the next six months to determine whether to retain the firm, which has managed the separate account since 2003.

The performance of the $366 million active international large-cap growth equity strategy managed by Trilogy Global Advisors also will be reviewed, Mr. Turk promised.

Another recommendation from Mr. Turk was the doubling to $50 million the active international large-cap core equity fund managed by Strategic Global Advisors, which was hired in March 2011 as part of TRS' $500 million emerging managers program.

On Tuesday, Sky Investment Counsel was hired as part of the emerging managers program to run a $25 million active international large-cap core equity strategy with a value slant.

As part of the annual review of the pension fund's $8.6 billion domestic equity portfolio, Herndon Capital Management was graduated out of the emerging managers program to run a full 2% allocation — about $170 million — in active U.S. large-cap value equities. Herndon previously managed $25 million in the strategy.

Mr. Turk also recommended and trustees approved increasing the active U.S. small-cap value equity strategy managed by Lombardia Capital Partners to between $250 million and $275 million, from $192 million.

Simultaneously, Lombardia was terminated from a $53 million active U.S. large-cap value equity strategy that was funded through the pension fund's emerging managers program. The rationale for the termination was performance, investment process and concern about a decline so far this year of at least $500 million in assets managed by Lombardia in the U.S. large-cap strategy, Bill Thomas, investment officer for domestic equities, told trustees.

Jorge Castro, CEO, partner and portfolio manager of Lombardia's U.S. large-cap value equity strategy, did not return a call seeking comment about the firm's termination.

The allocations from the domestic equity portfolio to other strategies were changed as follows: Boston Partners, which manages $603 million in active value 130/30 equities, to 7% from 6%; Oakbrook Investments, $198 million in an enhanced core equity index strategy, to 3% from 2%; Levin Capital Strategies, $483 million in active large-cap core equities, to 5% from 6%; Boston Co. Asset Management, $228 million in active small-cap value equities, to 2% from 3%; and RhumbLine Advisors, $1.657 billion in an S&P 500 index strategy, to 25% from 28%.

Among other actions by the board on Tuesday, R.V. Kuhns & Associates was rehired as the pension fund's general consultant for a five-year contract effective Jan. 1. R.V. Kuhns has held the contract since 2006. TRS was required by state law to conduct a full search before the existing contract expires Dec. 31. NEPC was the other finalist.

Gaw Capital Partners received a $50 million commitment to its Gateway Real Estate Fund IV, pending successful contract negotiations. The fund uses an opportunistic, value-added strategy that invests exclusively in real estate in China.

Up to $125 million was committed to MBK Partners Fund III, a private equity fund concentrating investments in northern Asian countries. TRS committed $25 million to an earlier fund in the series, MBK Partners II.

Trustees also ratified a private equity co-investment of up to $30 million made in November to Mosaic Energy with Natural Gas Partners.

TRS previously committed $150 million to Natural Gas Partners' 10th energy-focused private equity fund, Zak Doehla, senior investment officer, told board members. About $20 million of the new co-investment already has been invested in Mosaic, a Canadian oil and gas exploration and production company. The remaining $10 million of the pension fund's commitment may be drawn to partially fund acquisitions of other energy companies by Mosaic, Mr. Doehla said in an interview.

Funding for all hires comes from cash, reducing passive or enhanced index funds or rebalancing.

Finally, trustees approved the hire of Joseph J. Blake & Associates and Butler Burgher Group to provide real estate appraisal services for three years, effective Jan. 1. Incumbent U.S. Real Estate Consulting was approved to provide occasional project services. The other real estate appraisal incumbent CB Richard Ellis, also rebid.