ST. PAUL, Minn. - The $26 billion Minnesota State Board of Investment is increasing its long-term allocation to international stock by 50% - or about $1 billion - and has hired a currency overlay manager, said Howard Bicker, executive director.
As a result, the allocation to international equities will increase to 15% of total assets from 10%. The bulk of the new money will be invested in emerging markets, an area of minimal exposure for the board, said Mr. Bicker.
Some of the board's international managers own stocks of companies in emerging markets, but none is dedicated to investing in those countries. Mr. Bicker estimates 2% of the board's total assets are now in emerging markets.
A search for emerging managers will begin in about six months, he said.
"We don't do RFPs (request for proposals)," said Mr. Bicker. "We get information on managers, bring them in for an interview and hire them."
The board is moving into emerging markets because of the opportunity for higher returns offered by companies in rapidly growing countries.
The $1 billion that will go to emerging markets will come from existing managers, said Mr. Bicker. A $300 million chunk is coming from New York-based Lynch & Mayer Inc., which the trustees voted to terminate in October. It has not been determined which other managers will have their allocations reduced.
Mr. Bicker said Lynch & Mayer had underperformed its benchmark during its three-year tenure as a domestic equity manager with the board. Representatives of Lynch & Mayer could not be reached for comment.
Hubert Humphrey III, a trustee and state attorney general, voted against increasing the international equities allocation to 15%. Mr. Humphrey said he preferred an allocation of 12% of total assets.
The investment board made its initial investment in international equities in 1992.
In a related matter, the board hired Record Treasury Management, Windsor, England, as its currency overlay manager for a two-year term. The firm began managing currencies for the board Dec. 1.
The proposal passed unanimously, but some trustees were reluctant to approve it because of the high cost of the program. Other trustees said they were concerned about fluctuations in the currency markets and that the board needed to take steps to protect its investment.
The currency overlay program could cost as much as $24 million to protect the board's $800 million investment in international equities.
Consultant Alan Emkin of Pension Consulting Alliance, Glendale, Calif., told the board that if it has a long-term horizon for investing in international equities, the insurance was unnecessary.
According to the minutes of the October meeting, the board would use a systematic approach to the currency management for its Morgan Stanley Capital International Europe Australasia Far East Index fund.
The program will be limited to currencies that comprise 5% or more of the exposure in the EAFE index: the yen, the pound, the deutsche mark, the French franc and the Swiss franc.
The benchmark for the program is the unhedged return of the five currencies. The weights given each currency will be based on the proportionate weight in the underlying EAFE index and rebalanced quarterly.
Hedging the EAFE currency exposures back to the dollar will be the only authorized strategy. Cross-hedging and proxy hedging are not allowed.
Currency positions will be implemented using currency forwards, options or futures. The manager will have the flexibility to use over-the-counter as well as listed/exchange-traded instruments.
