For the first time in years, internally managed domestic fixed-income assets dropped nearly 20% on a market-adjusted basis, and took a back seat to domestic equities, the new highest internally managed asset class.
Even though internally managed domestic equities reported by the top 200 pension funds went down 12.5% on a market-adjusted basis as of Sept. 30, they still finished as the highest asset class at $285.2 billion, while domestic bonds went down a market-adjusted 19.5% to $263.7 billion. Since Pensions & Investments started breaking down internally managed asset categories in 1990, in-house domestic equities hasn't even come close to internally managed domestic fixed-income numbers.
Internally managed foreign equities went up an impressive 16.9% on a market-adjusted basis, to $25.6 billion, while foreign bonds increased 7.7% to $12.6 billion.
"You've got a roaring equity market, and there may have been a large move toward indexing," said Robert F. Hill Jr., director of equities for the Virginia Retirement System, Richmond.
"There has been a trend toward indexing and a cost-conscience world out there, and I think a lot of people paid attention to it."
Overall, internally managed assets climbed to $692.85 billion from $647.64 billion one year ago, according to P&I's survey of the top 200 pension plans. What's more, at least 52 large pension funds increased their internal management while 21 decreased it.
Several funds had whopping increases, such as Missouri State Employees' Retirement System, Jefferson City, which boosted its internal management by 368% to $440 million from $94 million last year, mostly because it brought 40% of its fixed-income portfolio in-house to mirror the Lehman Aggregate Index.
"It looked like we had a gigantic increase," said Gary W. Findlay, Missouri's executive director. "As a part of your portfolio, if you have a part that is pretty mechanical in nature, it makes pretty good sense to bring that in internally. Ours is more a mechanical matter. Our previous (externally managed) portfolio had a lot of risk in it .*.*. What we wanted was to have stability in income."
Other funds with large increases in internal management included the Virginia Retirement System, up 79.7%, to $1.6 billion from $896 million, and TRW Inc., Cleveland, up 155% to $270 million from $106 million.
For the 1995 survey, one of the nation's largest internal managers, the California State Teachers' Retirement System, Sacramento, did not fill out the internal management part of the Pensions & Investments survey. As of Sept. 30, 1994, California Teachers was the ninth biggest, with $23.7 billion under internal management.
But some funds, like the Massachusetts State Teachers' and Employees' Retirement System, Boston, saw significant decreases in internal management. MASTERS slowly has been dropping its entire internal management program, because it only has a four-person pension investment team.
Funds that decreased their internal management programs include: the Southern California UFCW & Food Employers, Cypress, Calif., an 86% drop to $10 million from $69 million; Shell Oil Co., Houston, a 46% decrease to $667 million from $1.24 billion; and Southern California Edison, Rosemead, Calif., dropping 37% to $135 million from $216 million.
The California Public Employees' Retirement System, Sacramento, leads the way again, with $60.2 billion internally managed. The fund's total internal management dropped slightly from last year's total of $60.3 billion.
The New York State and Local Retirement Systems, Albany, followed at $50.243 billion, an 8.9% increase from the previous survey's total of $46.1 billion. Other top finishers with high percentage increases include the Teacher Retirement System of Texas, Austin, a 26.4% gain to $46.05 billion from $36.4 billion; the New Jersey Division of Investment, Trenton, a 15.7% increase to $40.5 billion from $35 billion; and the New York State Teachers' Retirement System, Albany, a 13% gain to $37.99 billion from $33.6 billion a year ago.
Meanwhile, Virginia Retirement System has been slowly whittling off 15 to 20 of its outside money managers during the past 18 months, and has added more staff - a total of 15 - to manage its new internal assets, Mr. Hill said. Now, the fund has more than doubled its internal management in domestic equities, to $1.6 billion from $700 million. And since Sept. 30, the fund reinstituted its internal fixed-income portfolio with $1 billion. So far, the change has been a huge cost savings; while outside managers that were terminated charged the fund anywhere between 50 and 100 basis points, net of transactions, internal management costs about 5 basis points, net of transactions, Mr. Hill said.
"It's only been a year, but everyone seems to be happy with it," Mr. Hill said. "We have our overall program right where we want it." He noted the fund internally manages about 15% of total assets.
Missouri also saved money, about $400,000, Mr. Findlay said.
But at MASTERS, Collette Chilton, chief investment officer, said the fund would have a tough time matching salaries portfolio managers receive at money management firms in the Boston area.
Still, Ms. Chilton does not think external management is unreasonable. "We pay State Street (Bank & Trust Co.) less than one basis point" for managing $1 billion in equities, Ms. Chilton said.