Kimberly-Clark Corp. has fired all of Scott Paper Co.'s eight active money managers and is moving the assets into indexed portfolios with State Street Global Advisors and Wells Fargo Nikko Investment Advisors.
Excluded from the shift are the 14% of Scott Paper's $1.15 billion pension assets in real estate and alternative investments.
Kimberly-Clark officials hired Wells Fargo and State Street; each will manage half of Scott Paper's pension assets in core indexed and enhanced index portfolios. Kimberly-Clark officials will review the move after a year. It could not be learned if the new indexed assets will be invested in domestic stocks, or if the company will retain the fund's international exposure.
The switch, which took some money managers by surprise, occurred days after shareholders of both companies approved the marriage of the Irving, Texas, paper company with Boca Raton, Fla.-based Scott Paper.
It comes at a time when the stock market's phenomenal rise has been led by large-capitalization stocks that make up the Dow Jones industrial average and the Standard & Poor's 500 Stock Index, leaving most active money managers in the dust.
Kimberly-Clark is the second company in recent months to put pension assets on autopilot. Intel Corp., the semiconductor manufacturer, dismissed its five active money managers and plunged headlong into indexing last summer for its $1.3 billion in pension assets.
But Kimberly-Clark's decision also mirrors its own heavily indexed fund management structure and a desire to keep costs - as well as its slim pension staff and small stable of active money managers - from multiplying.
L. Robert Frazier, Kimberly-Clark's assistant treasurer of asset management, declined to comment, but the company reportedly had only four active money managers at last count for its $2.012 billion in pension assets. Kimberly-Clark already has notified Andrew H. Yost, Scott's pension director, that he will not be needed after Feb. 14.
"Kimberly-Clark has moved quickly to assume the reins of the fund. The merger was yesterday and today they're in charge," Mr. Yost noted in an interview.
A Kimberly-Clark letter faxed to all of the Scott money managers noted the termination was effective Dec. 15.
The terminated managers are Alliance Capital Management; The Chase Manhattan Bank; Grantham, Mayo, Van Otterloo & Co.; Independence Investment Associates Inc.; Marvin & Palmer Associates Inc.; J.P. Morgan Investment Management Inc.; and Spears, Benzak, Salomon & Farrell. Mellon Capital Management, which ran a domestic indexed portfolio for Scott Paper's pension fund, also is history.
Because real estate and alternative investments are hard to unwind at short notice, Scott Paper's two real estate managers, T. A. Associates and TCW Realty Advisors, have been retained for now. Strategic Investment Partners, which manages Scott Paper's alternative investment portfolio, also has been retained, but Carol Grefenstette, managing director, declined to comment.
The one real winner is State Street, which managed $90 million in a domestic index stock portfolio for Scott. State Street, along with Wells Fargo Nikko, which runs an indexed bond portfolio for Kimberly-Clark, has been chosen to manage the bulk of Scott Paper's pension assets in an indexed portfolio.
"We are delighted with a long-term relationship with Scott and happy to be part of the ongoing relationship," said John Serhant, managing director, State Street Global Advisors.
John Stiklorius, senior vice president at Marvin & Palmer who received the news from Kimberly-Clark Dec. 15, said the company made its preference for indexing over active money management very clear. "They said it was more cost-effective. We pointed out we had outperformed the index since inception but it didn't seem to matter," Mr. Stiklorius said.
The firm, which managed about $63 million in international equities for Scott Paper, has logged a 48.5% increase in returns through the end of October - from a base of 100 in December 1992 - compared with a 40.5% increase in the Morgan Stanley Capital International Europe Australasia Far East Index for the same period.
Eyk Van Otterloo, partner at Grantham, Mayo, Van Otterloo, Boston, which managed $130 million for Scott Paper in international equities, said the letter noted Kimberly-Clark "wants a structure more compatible with the risk, return and management cost objectives of the trust."
What Mr. Van Otterloo found perplexing was "even managers that could stand the test of the most critical analysis of their performance were fired." Grantham Mayo, he noted, had beaten the EAFE index handily by 350 basis points after fees, over the 13 years it had managed money for Scott. The firm is ahead of the EAFE index by 500 basis points so far this year, he said.
But William G. Spears, chairman and chief executive officer of Spears Benzak, was not surprised. Mr. Spears wouldn't say how much his firm managed for Scott.
"The truth is that the major corporations have probably not benefited from active management" since the early 1980s, he said. During that period, the S&P 500 "has been quite competitive with active management," although active managers outperformed the broad market benchmark in the two decades leading up to the early 1980s. Mr. Spears also said he expects active managers to outperform broad market benchmarks in future.
What is not clear in all of this is how the allocation for Scott Paper's pension assets will change. Until it was acquired by Kimberly-Clark two weeks ago, Scott Paper had 38% of its pension assets in domestic equities, 24% in international equities, 22% in fixed-income investments, 9% in real estate, 5% in alternative investments and 2% in cash.
For now, Scott Paper employees retained by Kimberly-Clark won't see any changes in their retirement benefits package. As with all other union workers, Scott Paper's union employees have a separate pension package negotiated as part of an employment contract and subject to changes only as part of contract negotiations.
Scott Paper moved its 5,000 or so salaried employees out of its traditional pension plan into a defined contribution plan in January. As part of an effort to slow down the growth of future pension liabilities, Scott Paper executives and other salaried employees will not receive any additional credits for working longer at the company. However, they will not lose the pension benefits they have already accumulated in the company's traditional pension plan and will continue to run up increases in benefits linked to salary hikes and age.
Kimberly-Clark also is not expected to integrate Scott Paper's $457 million-plus defined contribution plan with its own before January 1997 because of the enormous differences in the two plans. For one thing, Scott Paper's 401(k) defined contribution plan offers employees and other participants a menu of 10 different investment options and the ability to get a daily value of their assets. Kimberly-Clark offers only four investment options; it doesn't offer daily valuation.
