Chicago Teachers explores search for passive core fixed-income managers

Chicago Public School Teachers' Pension & Retirement Fund issued an RFI for managers to run up to $400 million total in passive core fixed income, Angela Miller-May, director of investments, said in an interview.The search is part of a move by the $10.2 billion pension fund to diversify its $2.3 billion fixed-income allocation, including reducing the $984.8 million managed by Northern Trust Asset Management in an index fund that tracks the Barclays Capital U.S. Government/Credit Bond index.

The board cut its target allocation to passive fixed income to 20% from 50%, while also changing its passive benchmark to the Bloomberg Barclays U.S. Aggregate Bond index, Ms. Miller-May said. Northern Trust manages 48% of the pension fund's fixed-income allocation.

The changes are part of an overall new fixed-income asset allocation. Under it, the other allocation changes raise core-plus and core active to 40% each of the fixed-income portfolio, from 30% and 20%, respectively. The new allocation will result in “adding to return without adding to risk,” Ms. Miller-May said.

“The RFI was issued to obtain more information before we embark on a full-scale RFP,” Ms. Miller-May said in a follow-up e-mail. “The thought was that there are only a limited amount of providers, and the differences between returns and fees would be minimal. However, we wanted the opportunity to make a well-informed decision on whether we needed to issue an RFP or whether it would be more prudent to take other actions.”

The board changed the passive benchmark to the aggregate index to broaden exposure in the fixed-income market, Ms. Miller-May said in the interview.

As part of the allocation changes, the board plans to increase funding to the new allocation levels to its core active managers — Pugh Capital Management, which manages $175 million; Taplin Canida & Habacht, $125.8 million; and Garcia Hamilton & Associates, $107.3 million — and its core-plus managers — Western Asset Management, $427.5 million; and LM Capital Group, $218.3 million.

Funding for the changes will come from rebalancing among fixed-income managers, including Northern Trust, Ms. Miller-May said in the interview. Under the new core-plus allocation, Western Asset Management and LM Capital would maintain their proportionate share of the assets they now have, while Pugh Capital, Taplin Canida and Garcia Hamilton would be equally weighted under the new core-active allocation. The new allocations are subject to due diligence the pension fund's board is undertaking on each manager, Ms. Miller-May said. The board expects to carry out the rebalancing and fund the existing managers by April.

The core passive RFI is available at the pension fund's website. Proposals are due Jan. 27. The board plans to review the RFI responses on Feb. 16 and discuss possible action, including issuing an RFP for a passive core fixed-income manager.

Callan Associates, the pension fund's investment consultant, is assisting in the search.