NEW YORK - The $800 million pension fund for Sandoz Corp., New York, indexed its remaining portfolio of large-capitalization domestic stocks, taking a total of $210 million from its active managers, said Robert Hunkeler, associate director, management and financing.
The fund now has $280 million - 35% of its total assets - in a Standard & Poor's 500 Stock Index fund managed by State Street Bank & Trust Co., Boston. The bank already managed a $70 million S&P 500 index account for Sandoz.
Market neutral and overlay strategies will be added to get "an active complement," said Todd Tibbetts, manager, trust investments and foreign exchange at Sandoz.
Terminated managers are BEA Associates, New York; Delaware Management Co., Philadelphia; and Neuberger & Berman, New York. Mr. Hunkeler said the separations were amicable.
According to Mr. Hunkeler, BEA was a growth manager; Delaware's style focused on yield; and Neuberger & Berman used a value style. The money was "fairly equally divided" among the three managers, said Mr. Hunkeler.
Sandoz's move to 100% indexing of its domestic large-cap stocks follows decisions by other pension funds to go passive:
An official with the $1.2 billion Montgomery County Employees' Retirement System, Rockville, Md., last week said the fund would put more money into its $150 million S&P index fund managed by State Street.
The fund went to indexing in July following an across-the-board cut of the allocations of their active managers.
Kimberly-Clark Corp. last month terminated eight money managers and invested about $990 million in core and enhanced indexed portfolios. The money came from the Scott Paper Co., Boca Raton, Fla., which Kimberly-Clark, Irving Texas, recently acquired.
Connecticut Treasurer Christopher Burnham has scheduled a press conference Jan. 10 in which he is expected to announce the termination of several equity managers and an increase in the money indexed by the $12.6 billion Connecticut Trust Funds.
A strong stock market has proven to be the best of times and worst of times for active large-cap domestic equity managers. Money managers like a robust market, but most can't beat one as strong as 1995's. Firms that outperform are also at risk because pension fund directors are skeptical about the money managers' ability to beat the index cost-effectively.
The Sandoz decision was driven, in part, by that premise, but the decision to index large-cap stocks was part of broad strategic move.
The fund's investment committee has implemented a broad plan - Mr. Hunkeler likens it to building a four-legged stool - that it hopes will increase returns by investing in inefficient markets but reduce risk through greater diversification.
The first leg of the stool, said Mr. Tibbetts, "is the search for alpha: inefficient markets to be exploited." As a result, the decision to index large-cap domestic equities was made because of the difficulty of adding value in an efficient asset class. No other assets are indexed.
Diversification is the second leg of the plan, and the first recommendation will be to hire an active emerging markets equity manager, said Mr. Hunkeler. The commitment to emerging market stocks, if implemented, will be funded through reducing the State Street index fund by 5% over time, he said.
Mr. Hunkeler expects to make a presentation to Sandoz's investment committee in March, and if approved, an emerging markets manager could be hired by midyear, he said.
Messrs. Hunkeler and Tibbetts declined to discuss the third part of the plan, saying it is proprietary and that they wanted to first discuss it with their investment committee.
The fourth leg is to focus on the fees paid to managers and service providers, said Mr. Tibbetts.
"We want to place the issue of fees on the same level as the other three legs," said Mr. Hunkeler. "It's strategically important to control fees and seek the lowest fees for the service provided."
"We want to be more aggressive going forward in negotiating fees with our current managers as well as future managers," said Mr. Hunkeler. "We will focus on performance-based fees where applicable.
"And we will focus on and control other fees associated with the trust."
Sandoz isn't turning its back on active management, although the largest single portion of its assets will be passively managed. The investment staff's philosophy is active management is best used in inefficient markets.
"We are believers in active management," said Mr. Tibbetts. "We want to do it in places where we can add value. Domestic large-cap equities don't add a lot of value, net-net. It (large-cap domestic equities) is not the best asset class to go digging for value.
"We would rather concentrate on battles we can win. We want to locate and extract the alpha from the less efficient markets."
Other investment classes Messrs. Hunkeler and Tibbetts consider inefficient are small-cap stocks, high-yield bonds and timber.
"The typical pension fund is looking to add returns by turning up the risk level on the efficient frontier," said Mr. Hunkeler. "We believe we can move back risk and increase returns by moving down the efficient frontier.
"We want a better risk/return tradeoff," said Mr. Hunkeler. "If investors continue to go for the gusto, they could get a nasty shock."