Poor performance, combined with personnel turnover at several top international/global bond managers, is giving pension funds heartburn.
Among the managers afflicted with both performance and personnel woes are Putnam Investments, Prudential Global Advisors and Scudder, Stevens and Clark. Putnam and Prudential have either been terminated or are being re-evaluated by several clients.
Indeed, the past 18 months have been treacherous for many global/international bond managers. Unexpected gains in the U.S. dollar combined in some cases with market misjudgments to restrain or hurt performance.
Illustrating the generally poor showing by managers, in 1994, the median manager in the Pensions & Investments Performance Evaluation Report global bond universe posted a return of -2.7%, vs. a 2.3% gain in the Salomon Brothers World Government Bond Index. In comparison, in the two-, three- and five-year periods ended 1994, the median manager's return never deviated more than 110 basis points from the Salomon index.
"The last 18 months were tough," said Tim O'Grady, senior vice president, Evaluation Associates, Norwalk, Conn.
And that's just the time some pension funds began reviewing their global bond manager performance, when their portfolios finally had accumulated significant three- to five-year track records.
That's when they noticed some managers had been lagging - and not just for one bad year. So some decided to act.
"There has been a significant amount of switching" this year, Mr. O'Grady said.
Among the institutional investors that have terminated Putnam Investments, Boston, for global bond management have been the Army & Air Force Exchange Service, Dallas; the Vermont State Teachers' Retirement System, Montpelier; and, reportedly, The Common Fund, Westport, Conn. A fund official refused to comment.
The Louisiana State Employees' Retirement System, Baton Rouge, put Putnam on its probation list this spring; Putnam manages about $220 million of global bonds for the $3.5 billion fund.
Prudential Global Advisors, Short Hills, N.J., lost two global fixed-income clients - the Boston City Retirement System and the Army & Air Force Exchange Service - according to Tim Biggs, a spokesman for Prudential Asset Management.
Eleanor Mascheroni, a spokeswoman for Scudder, Stevens & Clark, New York, said she was not aware of any pension funds terminating the firm this year for global/international fixed income management.
According to PIPER, Putnam's global fixed-income returns ranked in the ninth decile for both this year's first quarter and for all of 1994; in the 1990-'93 period, its decile rankings respectively were: second, sixth, seventh and fourth.
Global bond returns of Prudential Global Advisors ranked in the eighth decile in 1994 (first quarter returns were not published in PIPER); in calendar year 1990 and 1991, it earned a fourth decile ranking, followed by eighth in 1992 and third in 1993.
"We were disappointed by last year's underperformance (in global bonds), but we're pleased that the firm placed in the first quartile of the Frank
Russell universe of global fixed-income portfolios, unhedged, in this year's first quarter," Mr. Biggs said.
Scudder's global bond returns ranked in the 10th decile for 1994 (first quarter results were not published in PIPER); and in calendar years
1990-'93, its decile rankings were, respectively, first, first, seventh and sixth.
Personnel departures hurt
On top of their disappointing performance, several firms experienced key personnel losses.
Putnam's Mark Turner, chief investment officer of global fixed income, left this spring by "mutual agreement." In a statement, Gary N. Coburn,
Putnam's fixed-income chief, said in part that "our underperformance in
(global fixed income) over the last year, and philosophical differences, have led us to this parting." Mr. Coburn is handling global/international fixed-income management until Mr. Turner's replacement is found.
Global Advisors, now known as Prudential Global Advisors, lost two key people late last year: Chief Investment Officer Nicholas Sargen and Chief
Executive Officer Ruth Putney. Mr. Sargen is now a managing director with
J.P. Morgan Investment Management Inc., New York; Ms. Putney took a sabbatical from money management, said Mr. Biggs.
Prudential Global Advisors was created this year after Prudential combined three units - Prudential Fixed Income Advisors, Global Advisors and a money market group - into one group. John Werring is the chief executive; Leonard Santoro is CIO.
Pensions & Investments reported earlier this year that Larry Teitelbaum had left Scudder under some duress, according to rumors. Ms. Mascheroni only acknowledged that "he left."
Adam Greshin, who had been a member of Scudder's global bond group since
1986, in March became lead manager of the Scudder International Bond Fund.
Taking over from Mr. Teitelbaum, he is also a product leader for Scudder's global and international fixed-income investing and is a portfolio manager of Scudder's short-term global income fund.
Fiduciary Trust Co. International, New York, lost a key member of its global bond team this month when Cheng-Hock Lau, a senior bond manager in the global/international bond section, joined Chancellor Capital
Management, New York.
Although one observer expressed concern about the effect of the departure, Daniel Kelly, a Fiduciary vice president, refuted notions the firm's popularity would suffer.
"Although Hock will be missed, our team approach (to management) survives, and we are proceeding normally," he said.
Mr. Kelly said all pension clients were notified of the move. "I believe they are all comfortable with what we are doing."
In terms of performance, Fiduciary's global fixed-income returns ranked in the second decile for this year's first quarter; in 1994, it ranked in the fourth. In years 1990 through 1993, its decile rankings, respectively, were seventh, fourth, eighth and fourth, according to PIPER.)
Pension funds don't give up
For pension executives, disappointing experiences aren't causing them to give up on global bond investments.
After a recent search for a global bond manager to replace Prudential
Global, the roughly $2 billion pension fund of the Army & Air Force
Exchange Service chose CS First Boston for an $80 million portfolio, said
Jerry Justus, treasurer and administrator. Other finalists were Paribas
Asset Management, Morgan Grenfell Investment Services Ltd. and Schroder
Capital Management International.
The fund last fall also terminated Putnam for global bonds, and gave the money to Strategic Fixed Income L.P., Arlington, Va. - which already was managing global bonds for trusts of the AAFES. Strategic now manages global bonds for three different AAFES trusts for a total of $174 million.
The more than $6 billion Louisiana Teachers' Retirement System in
December dropped Kemper Asset Management, Chicago, as manager of $250 million of global bonds. The fund then raised its allocation to global bonds and hired Strategic and Rogge Global Partners, London. Both received
$300 million, said Jennifer Netterville, investment director.
Scudder, which manages almost $600 million of global bonds for the fund, is not under scrutiny, she said. "We know the reason for (Mr.
Teitlebaum's) dismissal, and we know that Scudder's short-term performance wasn't good. But over the longer term, its (global bond) performance has been excellent," Ms. Netterville said.
But some firms that lost clients are still seeing overall growth in global or international bond assets. According to P&I's survey of international/global money managers, as of March 31 Putnam Investments managed $3.824 billion of global fixed-income assets in U.S. tax-exempt institutional assets, up from $3.401 billion the year before.
Prudential Global and Scudder enjoyed some growth in international bond assets. Although Prudential's global bond assets under management declined by $105 million to $597 million, its international bond assets rose $285 million to $1.06 billion. And while Scudder lost $68 million in global assets under management - to $982 million - it gained $90 million to a total of $376 million in international bonds assets, according to P&I data.