HARTFORD, Conn. - All money managers for the $11.1 billion Connecticut Trust Funds will be asked to submit letters of resignation as part of state Treasurer Christopher Burnham's review of the fund's manager roster.
Mr. Burnham said he plans to notify the managers by the end of this week, but the process could be delayed as his office finalizes more than 50 requests for proposals that also will be sent to the managers.
The managers will be able to respond to the RFPs at the same time they are asked for their resignations, Mr. Burnham said. All managers will continue to manage portfolios for Connecticut until they are notified of their termination, he said.
"I think it is prudent when you have had a change in administration to review all contracts or put out an RFP for all services that are contracted with the treasurer's office," he said.
Mr. Burnham, the sole trustee of the fund, said he would like to pare the number of managers from 69 to between 20 and 25. A review of the fund's asset allocation and risk profile is expected to be finished by May, and that will determine who stays and who goes.
But Mr. Burnham favors equity indexing, and if the review determines it is a viable option, equity managers will bear the brunt of the dismissals.
"We have 25 domestic equity managers (of which 24 are active), and we are seriously considering indexing a large part of our domestic equity portfolio," he said. "Therefore, that would mean far less domestic equity managers," Mr. Burnham said. "Obviously, the cost of running the pension fund is our No. 1 target."
According to information the pension fund provided to Pensions & Investments, the Connecticut Trust Funds also has 10 domestic fixed-income managers; seven international equity managers; four international fixed-income managers; 18 real estate managers; five commercial mortgage managers; and a venture capital manager.
The fund also has a $300 million venture capital portfolio that was created in 1993 to make investments within the state. Commitments were made to four advisers.
Many of Connecticut's money managers contacted by P&I said they had not yet been asked to submit a resignation letter.
"He (Mr. Burnham) has his agenda, but we haven't heard a thing," said Robert Kobel, president of Atalanta/Sosnoff Capital Management, New York. "It's unfortunate, but these things happen."
Atalanta/Sosnoff manages an equity portfolio for Connecticut. Mr. Kobel declined to reveal the size.
Mellody Hobson, director of marketing at Ariel Capital Management, Chicago, said she isn't surprised by the restructuring because Mr. Burnham promised to make changes to the fund during last year's campaign.
"I think we've been treated fairly," said Ms. Hobson, whose firm manages a $78 million equity portfolio for Connecticut. "He has been very outspoken and direct, so I don't think he's trying to hide anything."
Former Chief Investment Officer Frank McDermott said the fund could operate efficiently and effectively with 20 to 25 managers. Mr. McDermott said that during the campaign for treasurer, Mr. Burnham said he would index a larger portion of the fund's assets and concentrate larger amounts of money with fewer managers.
"Ninety-five percent of performance is based on asset mix," said Mr. McDermott. "We thought our diversified portfolio offered us better performance in a tough earnings environment, like we are in now."
Mr. McDermott noted the Connecticut fund is 50% underfunded and its target rate of return is 8%. An actively managed and diversified portfolio offered the best chance of meeting those goals, he said .
"Time will tell who is right," said Mr. McDermott, who retired last year. A search for a permanent CIO is under way.
Mr. Burnham said the only thing the fund's asset allocation did in the past 10 years was to make the fund last in the universe of pension funds it is measured against.
Mr. Burnham said he was elected to "clean up this office," and he has wasted no time in putting his stamp on the fund.
Prior to taking office, he withdrew Connecticut's membership in the Council of Institutional Investors. The fund had been among the most active members of the shareholders' activist group. Joseph Suggs, Mr. Burnham's predecessor, was co-chairman of the council.
Proxies will now be voted by the fund's investment managers.
Earlier this month, Mr. Burnham fired 10 investment department employees and eliminated 15 positions overall; the $800 million internal fixed-income management operation was scuttled and will be put out for external management.
Mr. Burnham also dismantled the fund's internal securities trading desk, describing it as expensive and a patronage system. Connecticut previously required its money manages to direct trades to its internal trading desk, which then farmed them out to a number of approved brokers.
When asked to elaborate about how the previous system was expensive and a source of patronage, Mr. Burnham cited a study done by a university endowment that concluded its own internal trading desk was inefficient and expensive.
P&I has learned the endowment for Duke University, Durham, N.C., conducted the study.
"After interviewing many of our domestic equity managers and other plan sponsors, we determined that no one else did (trading) like Connecticut," Mr. Burnham said.
"I think it is wrong for a treasurer to choose one of 160 brokers to execute brokerage on behalf of the state."
According to Mr. Suggs and Guy Garcia, the former head of trading for the fund, the internal securities trading desk was not expensive to operate. Indeed, they said, it saved the fund money. The fund averaged 3.6 cents per share; Mr. Garcia claims surveys he performed showed trades executed by the fund's external managers would cost between 6 cents and 8 cents a share.
But Mr. Burnham said execution, not commission, is where Connecticut lost money. "Looking at just the commission part of it ignores all economies of scale that money managers receive when they execute block trades," Mr. Burnham said. By eliminating the trading desk and terminating some of the internal staff, the fund will save $2 million annually, he said.
Mr. McDermott said Mr. Burnham's desire to save money could backfire and end up costing Connecticut taxpayers.
"If the division is less well run, the return will be lower and, ultimately, the difference is paid by the taxpayers," said Mr. McDermott. "In my opinion, he was being penny wise and pound foolish."
Patricia B. Limbacher also contributed to this story.