LOS ANGELES - The $18.8 billion Los Angeles County Employees Retirement Association is undergoing a massive restructuring, involving as many as 20 money managers and billions in assets.
Among the key changes:
Capital Guardian Trust Co., Los Angeles, which manages about 25% of the fund's assets, will lose $1.65 billion in domestic equity assets of the $4.7 billion total it is managing for the big county fund - although it will gain some international equity and emerging markets assets. It's unclear whether the firm will lose any of the estimated $1.2 billion it manages in fixed-income assets.
L.A. County is abandoning a global multiasset class strategy, run by Capital Guardian, at a time when many big corporate pension funds are jumping onto the global multiasset bandwagon.
The fund's domestic equity allocation is being cut to a target of 31% of assets from the current 38%. Nine domestic equity portfolios, eight of them active, held by six different money managers will lose $2.95 billion.
About 30% of domestic equity assets will go into passive management vs. 14% now, although the total amount in domestic equity will be lessened. Bankers Trust Co., New York, is the fund's current domestic equity passive manager, but the fund might conduct a search among the largest passive managers for a potential replacement.
About 15% of the fund's fixed-income assets eventually will be invested in high-yield bonds, a new asset class for the pension fund. Some $790 million initially will be allocated, either to an existing manager or a new one.
Its international equity allocation will increase to 18% of fund assets from 14%. Some of the roughly $750 million in assets moved to international investment could go to Capital Guardian or the five other international equity managers. No decision has been made on whether to hire new international managers.
The pension fund expects to allocate about $400 million to a new domestic growth equity manager and $150 million to a new domestic equity small-capitalization manager.
The fund's intention to remove Capital Guardian's global balanced mandate appears to have triggered some of the pension fund's planned changes.
Under a global balanced or multiasset mandate, a large money manager uses several different accounts and is able to enhance returns by making slight changes as it sees market conditions change. The pension fund's staff and its previous consultant - Callan Associates Inc. - thought the mandate would augment performance, reduce fees and provide diversification in 1992.
The Capital Guardian move is contrary to what some investors see as an important new trend in institutional investment.
IBM Corp., Armonk, N.Y., and NYNEX Corp, New York, reportedly are considering the multiasset method of investment (Pensions & Investments, Oct. 30). The multiasset concept is being used by GTE Corp.
Tom Larkin, president of Trust Company of the West, Los Angeles, said TCW supports the multiasset approach as a valuable tool. He said it is becoming "more and more common."
Multiasset portfolios, he said, are drawing the interest of institutional investors who might have small investment staffs and want to move some of the asset allocation decision to larger money managers with asset allocation capability who are more attuned to "what is going on" in individual markets.
With pension funds trying to reduce the number of money managers they monitor, some large managers see themselves in a perfect position to become strategic partners of pension funds and conduct multiasset strategies.
But Kenneth Shaffer, chief investment officer of the L.A. County fund, said the global mandate isn't working as anticipated.
Capital Guardian, he said, had been giving the fund "very superior performance" across the board, but is no longer "outstanding overall in all areas."
Capital Guardian is doing extremely well for the county fund in international and emerging markets investments, but fund officials are less happy about some of its domestic equity performance.
Mr. Shaffer said the fund has had a very long relationship with Capital Guardian and has very high regard for the firm.
John Lawrence, vice president for communications at Capital Guardian, declined to comment on the changes, saying the firm doesn't talk about clients.
Supporting Mr. Shaffer's view, Gloria Reeg, a consultant from the fund's new consulting firm, Frank Russell Co., Tacoma, Wash., told the board a global balanced mandate is not in the best interest of the pension fund.
She said such a mandate creates a potential for lower returns if the different products in the different asset classes underperform, board records show.
Another problem, she said, is that one manager is responsible for a large amount of assets, and global balanced managers don't have a very long performance track record.
Ms. Reeg recommended the fund remove the mandate and evaluate each Capital Guardian portfolio separately. That is being done.
Mr. Shaffer, who said a consultant at Frank Russell told him the firm is not seeing a significant move to multiasset accounts, contends lower fees and asset diversification can be accomplished without global mandates.
Ms. Reeg couldn't be reached for comment.
Mr. Shaffer said backing away from the global mandate is part of the fund's plan to "take back" more of the asset allocation decision internally.
Besides removing the global mandate, the county fund will cut some $1.3 billion from Capital Guardian's $1.9 billion large-cap portfolio; eliminate the entire $189 million Capital Guardian convertible securities portfolio; and slice $116 million from Capital Guardian's $366 million small-cap portfolio.
Mr. Shaffer said the fund is taking that money partly because the fund staff believes there is too much money with one manager and partly because of the need to fund other investments like passive management.
In addition, the fund is taking about $1.2 billion from five other equity managers:
A $530 million Russell 1000 Growth Index Fund run by Bankers Trust Co., New York, will be cut entirely.
An $834 million active domestic equity large-cap value portfolio managed by Loomis, Sayles & Co., Pasadena, Calif., will lose $284 million.
Delta Asset Management, Los Angeles, will see its $731 million active core style domestic equity portfolio cut by $108 million.
A $404 million active domestic equity midcap growth portfolio run by Pilgrim Baxter & Associates, Wayne, Pa., will be reduced by $104 million.
Weiss Peck & Greer, New York, will lose $167 million from a $317 million active small-cap growth portfolio.
Morgan Stanley Asset Management, New York, will lose about $150 million from a $312 million small-cap growth equity portfolio.
The domestic equity changes were made for several reasons.
Pension fund officials felt Capital Guardian's large-cap domestic equity performance, while satisfactory, didn't merit such a huge allocation to one manager.
The pension fund also decided to eliminate convertible securities as part of its domestic equity structure. Fund officials also were disappointed by the long-term performance record of Morgan Stanley and Weiss Peck & Greer's small-cap growth accounts.
Officials at the two firms were not available for immediate comment.
Some changes were made in spite of outstanding performance because of the fund's decision to cut the overall size of its domestic equity portfolio.
Loomis Sayles will take a cut even though it has been the fund's best-performing large-cap manager for the past three- and five-year periods.
Delta has been the fund's best-performing large-cap manager for the past 11.5 years, beating its Standard & Poor's 500 benchmark by 102 basis points.
However, Delta's more recent five-year performance has been lagging, fund officials said.
Pilgrim Baxter has the fund's best-performing small- to midcap portfolio for the three-year period.
Existing fixed-income money managers could also expect major cuts through the creation of the high-yield fixed-income allocation.
The fund will begin investing in bonds with ratings no lower than B-, but the ratings might be adjusted downward later.
High-yield bonds have been a problem for some public funds. The California Public Employees' Retirement System, Sacramento, decided to drop the asset class in 1991 after its $500 million portfolio declined in value to an estimated $380 million and the fund was hurt by adverse publicity.
Some money managers think high-yield bonds are starting to shake off the stigma of the meltdown of the 1980s.
But, Mr. Shaffer said, "there is political risk" to high-yield bonds. The fund's board has been considering a recommendation to invest in junk bonds for about two years. The fund's total allocation to fixed income should be around 28% of total assets, and the high-yield allocation would be only 4.2% of total assets, normal for pension funds that invest in such bonds.
But the fund wants to overweight the higher yielding sectors of the fixed-income market.
According to a staff report, the $245 billion high-yield bond market has consistently outperformed all other fixed-income asset classes. From January 1981 to December 1994, the high-yield bond market had a compound average annual return of 14.2% and was exceeded only during the period by foreign stocks, which returned 17.1%.
However, the report said, the standard deviation, as a measure of risk, was 24.21% for the foreign stocks but only 11.31% for high-yield bonds.