RICHMOND, Va. - The Virginia Retirement System will undertake a major restructuring of its $16.1 billion pension fund as a result of its surprise scrapping of its managed futures portfolio, searches for new chief executive and chief investment officers, and a newly effective statute making available many more investment classes.
James C. Wheat III, chairman of the system's board of trustees, said J.P. Morgan Investment Management Inc., New York, did an asset allocation study for the trustees, which served as the basic outline to invest more aggressively by boosting equities and new asset classes.
Overall, the board is considering increasing its equity allocation to 70% of its total assets. New pension legislation that took effect in July eliminated investment restrictions on the system, including the 60% limit on equities, which the fund reached with its current allocation. International stocks and managed futures are included in that category.
The board might raise its allocation to international equities, now totaling 8% of the fund, and make its first allocation to emerging markets. Targets for the areas haven't been decided.
In addition, the board might double its exposure to private, or non-publicly traded equities, including leveraged buy-outs, venture capital, distressed securities and direct investments in private equities. The fund now has 5% there.
In addition, Mr. Wheat said trustees are considering moving the fund to its first use of tactical asset allocation for an amount yet to be determined.
He said the board is not considering re-entering managed futures, although its investment policy will remain open to such investments as a separate asset class. He said it might take several years before the board is willing to consider the area again.
But he said the system's other managers will continue to use futures and other derivatives as part of their broader portfolio applications.
"The board hasn't made a final recommendation on the new policy," said Mr. Wheat, who is a partner at Riverfront Partners, a private investment firm based in Richmond.
"The board will probably vote on the policy in the next 60 days. We anticipate a two-year period to implement that new policy."
Among other major moves, the board is searching for a replacement to O. Kemp Dozier, chief investment officer. Mr. Dozier, who was hired in January, resigned in August because of his wife's illness.
In addition, it is searching for a director, the system's chief executive officer. Herbert B. Alcox Jr. resigned as director in May.
Mr. Wheat said the board hopes to hire a director in the next 90 days. "But it will take longer to fill the position (of chief investment officer), because there is so much competition in the private section."
The system had left the position vacant for three or four years before the hiring of Mr. Dozier, who left Universal Leaf Tobacco Co., Richmond, where he was vice president and treasurer.
Erwin H. Will Jr. is serving as both acting director and acting chief investment officer until the positions are filled.
The sweeping changes include reallocating the $640 million the system has invested in managed futures.
The nine-person board of trustees, all new, were appointed in March. The new trustees voted unanimously to end what had been the largest publicized managed futures program by any pension fund.
The board accepted the recommendation of its six-person outside investment advisory committee, which in a divided vote called for the termination of the investment because of its high fees and mediocre performance since its inception in 1991.
Mr. Dozier said the system is in the process of cashing out its managed futures. Well more than 90% of the portfolio was to be liquidated before the end of August, he added.
Mr. Wheat said the proceeds will be moved to equities until they are permanently reallocated.
Mr. Dozier, who had been on the board's advisory committee for "several years" before becoming chief investment officer, said he was in favor of the managed futures program, but against moving it from a pilot to full asset allocation. Last December, the system added $460 million to the program, raising its allocation to 4% of the total fund from $180 million, or 1%.
As a result of the elimination, the fund will drop RP Consulting Group Inc., St. Petersburg, Fla., and its five managers of managed futures. RP Consulting monitored the program and assisted the system in the selection of the managers, which are: Glenwood Trust Co./Centurion Trust Co., Chicago; Hart-Bornhoft Group Inc., Denver; Kenmar Investment Adviser Corp., New York; Kidder Peabody & Co.'s managed futures department, Manakin-Sabot, Va.; and Ramsey Financial Inc., Louisville, Ky.
Each manager oversaw about $128 million, which they in turn allocated to commodity trading advisers, which invest the money in various managed futures strategies. In all, the five managers used 60 CTAs.
Mr. Dozier said the board was concerned about the cost the system spent to administer the program. "The amount of time spent on the program far exceeded its allocation," in percentage terms, he added.
"They're not afraid of futures as such," Mr. Dozier said referring to the trustees. But he said annual return over three years was only 6% after fees.
"One of the problems is trying to decide what's a meaningful benchmark," Mr. Dozier added.
"You honestly have a hard time saying we're going to expect X percent of returns."
John McLaren, who quit as the system's managing director-alternative investments earlier this year to become managing director specializing in the placement of alternative investments for institutional investors at Monument Group, Boston, said the new investment statute opened up entire new areas to the pension fund.
One of the major reasons the system entered managed futures was to diversify because so many other avenues were then closed to the fund, Mr. McLaren said. "Managed futures was a very needed diversifier," he added. "Now when you have an entire free hand to invest, it's more understandable the board" would eliminate managed futures and look to other areas to diversify, he said.
"When you take the reins off the fund, one could argue it wasn't necessary to use managed futures, because you could diversify with other assets," he added.
"The new law prompted a new look at asset allocation from ground zero," Mr. McLaren said. "This was not an attack on managed futures. It was done for some very intelligent reasons."
"The rules changed," he said. "It's a new game. You get to play with all the tools now (instead of only some)."
He acknowledged the managed futures "fees in general were high, compared to other asset classes," although he said it's possible the total costs might rival that of active domestic small-capitalization stock management or emerging market portfolios.
"The (managed futures) cost in my opinion was still too high," Mr. McLaren said. "That is something that will hurt managed futures."
But he noted the system was continuing to reduce the cost of the program and "paved a lot of the way" for a lowering of the costs throughout the industry.
Mr. Dozier said Mr. McLaren's leaving didn't have anything to do with the board's decision to abandon managed futures.