INDEPENDENCE, Ohio - The $385 million Centerior Energy Corp. defined benefit fund is undertaking a major restructuring, significantly boosting its equity allocation, said Gregory A. Tropf, senior investment analyst.
Among the changes, the fund plans to make its first moves to:
Equity indexing, replacing its use of active managers for domestic large-capitalization stocks;
Enhanced indexing;
Market-neutral investing; and
Emerging markets and international small-cap stocks, in a move to raise its total international equity allocation to 25% of the fund.
Centerior also will more than double its allocation to domestic small-cap stocks to about $60 million.
And, it will drop completely its allocation to real estate and venture capital, whose investments now total 13% of fund assets.
In all, the fund will move to an asset mix of 70% equities and 30% bonds from its current 50-50 mix.
The added allocation to equities "will increase risk, but we hope to reduce the risk by diversifying," Mr. Tropf said. "We're going to get into asset classes we haven't been in before."
The moves are the result of a major asset allocation study that was approved by Centerior's pension committee at the end of June. The study was prepared with the assistance of Summit Strategies Group, which recently split off from Asset Consulting Group, both of St. Louis.
Mr. Tropf said the fund will review all existing domestic and international equity and fixed-income managers, and then the committee will decide which managers it will retain, drop or consider for a change of assignment.
"We haven't set a date yet," he said. "But we will ask all the managers to come in person for the review, sometime in August, most likely in the early part of the month."
"Everybody is up for review," he said, except the real estate and venture capital managers. "Some managers won't be in the final mix." But he added, "We'll ask some managers what other strategies they can offer."
The fund is working on requests for proposals for searches it hopes to begin shortly afterward.
Among the changes, the fund plans to move its large-cap equities, now all run actively, to passive and passive-like vehicles, its first use of any of these approaches.
Under the new allocation, it will put a total of 50% of the fund, or almost $200 million, in large-cap stocks. Almost $100 million will be in conventional, Standard & Poor's 500-type index funds; about $50 million will be in enhanced index funds, and about $50 million will be in market neutral funds.
Because the fund's current large-cap allocation is scattered among several managers in different styles, Mr. Tropf couldn't say how much the fund now has in large-cap stocks.
The fund's managers now running all or part of their existing assignments in domestic large-cap stocks are: American Asset Management Co., Cleveland; Independence Investment Associates, Boston; Jundt Associates Inc., Minneapolis (which also runs midcap equities); Templeton Worldwide, Fort Lauderdale, Fla. (which manages a global portfolio of about 30% U.S. stocks and 70% international stocks); and Wells Fargo Nikko Investment Advisors, San Francisco (which manages mostly large-cap stocks in a tactical asset allocation strategy).
Searches could take the rest of the year to complete, although Mr. Tropf said the search for an equity index manager could "optimistically" be completed by the end of August.
"The large-cap market is pretty efficient," he said, explaining the shift away from active management.
"You're not going to get a large-cap manager that will outperform the market."
He said the fund would consider Wells Fargo Nikko in the index search, along with others, although the search process hasn't begun yet.
He said the recent acquisition of Wells Fargo Nikko by London-based Barclays PLC would enhance its prospects because of its additional international capabilities.
In addition, he said the fund will search for managers in enhanced indexing, which seeks to add value without jeopardizing the equity index fund return.
In addition, it will search for managers for market neutral investing, which seeks to generate returns regardless of the direction of the market.
The fund plans to boost its small-cap stock allocation to 15% of the total fund. Currently it has $23 million invested with Quest Advisory Corp., New York, which runs a small-cap value fund. Mr. Tropf said the fund will search for small-cap managers in both the growth and value styles.
The fund plans to raise its non-U.S. equity allocation to 25% from 20%, adding for the first time emerging markets and international small-cap equities.
"Searches for managers in these new areas will take longer," he said. "My personal preference is to complete them by year end."
Morgan Stanley Asset Management Inc., New York, and Templeton now divide about evenly the fund's nearly $80 million total allocation to international stocks.
Funding for the increased equity allocation will come largely from fixed income.
Miller Anderson & Sherrerd, West Conshohocken, Pa., and Pacific Investment Management Co., Newport Beach, Calif., now split about evenly the fund's nearly $200 million allocation to domestic fixed income.
In real estate and venture capital, the fund's new investment policy guidelines "have a zero allocation" to those asset classes, Mr. Tropf said.
Currently it has 10% of its total fund invested in real estate and 3% in venture capital, all through funds. "We're going to let those liquidate," he said.
The fund will close its positions as they mature or liquidate according to provisions of the partnerships or fund agreements.
Complete liquidation may take several years, although some funds are beginning the liquidation stage now, he said.
One of two real estate funds it has with TCW Realty Advisors is in liquidation, while one of two funds it has with The RREEF Funds will begin liquidation later this year.
Its other real estate managers are Copley Real Estate Advisors and JMB Institutional Realty Corp.
Its venture capital managers are Morgenthaler Venture Partners, Northwest Ohio Venture Fund, Orien Ventures, Oxford Partners and Primus Venture Partners.
The fund prefers to redeploy the proceeds to stocks and bonds.
Real estate and venture capital comprise 13% of the fund's total portfolio, yet "they take 60% of my time" to monitor, Mr. Tropf said.
As diversification tools, he said, the assets don't make sense for a fund of its size and resources.
The new zero allocation policy won't preclude the fund from making new investments in the areas.
But he said the fund would consider them only opportunistically.
