SACRAMENTO, Calif. - The $97 billion California Public Employees' Retirement System is reconsidering its performance targets for domestic active equity managers - generally 200 basis points over the appropriate benchmarks.
The reconsideration comes after an investment performance review by Wilshire Associates, Santa Monica, Calif., the fund's consultant, showing many managers had failed to meet their objectives over the one-, three-and five-year periods ended Dec. 31.
Many had bettered the objectives longer term.
The fund remains ahead of the public fund median performance for one and three years as measured by the Trust Universe Comparison Service because of trustee asset allocation decisions, but not for five years.
For five years, managers failing to meet their objectives based on annualized numbers were:
Three of four mainstream domestic equity managers - RCM Capital Management (performance, 16.8% vs. an objective of 19.1%); State Street Global Advisors (18.8% vs. 19.1%); and Dimensional Fund Advisors (22.1% vs. 22.2%);
All four mainstream international equity money managers - Morgan Grenfell Investment Services Ltd. (10.2% vs. 11.7%); Oechsle International Advisors (11% vs. 11.7%); Schroder Capital Management International (8.6% vs. 11.7%); and Nomura Capital Management Inc. (9.6% vs. 9.9%);
Both global asset allocators, Brinson Partners (12.8% vs. 13.5%) and TCW Group (12.9% vs. 13.5%); and
For three years, managers failing to meet their objectives were:
Two mainstream domestic equity money managers, RCM (13.4% vs. 17.2%) and State Street (15.9% vs. 17.2%);
All four international equity managers - Morgan Grenfell (14.7% vs. 19.6%); Oechsle (16.4% vs. 19.6%); Schroder (15.6% vs. 19.6%); and Nomura (17.1% vs. 19.1%);
Both global asset allocators, Brinson (11.8% vs. 15.8%) and TCW (14.5% vs. 15.8%); and
All three international fixed-income managers - Baring Asset (13.2% vs. 14.7%); Fiduciary Trust (13.3% vs. 14.7%); and Mercury Asset (12.7% vs. 14.7%).
For one year:
Three of four mainstream domestic equity managers - RCM (33.5% vs. 39.5%); State Street (32.3% vs. 39.5%); and Dimensional Fund (29.9% vs. 30.8%);
Four of five mainstream active international equity managers - Morgan Grenfell (8.4% vs. 12.5%); Oechsle (10.1% vs. 12.5%); Schroder (8.8% vs. 12.5%); and Nomura (4.4% vs. 4.9%);
One of two global asset allocation managers, TCW (14.5% vs. 23%); and
Two of four international fixed-income managers - Fiduciary Trust (16.9% vs. 21.1%) and Mercury Asset (21% vs. 21.1%).
While the California fund staff contends performance since inception is critical, some managers haven't met that objective. Those managers include:
Three mainstream domestic equity managers - Oppenheimer Capital (performance of 15.7% vs. an objective of 16.3%, inception date, June 1990); RCM Capital (15.2% vs. 16.3%, June 1990); State Street (15.6% vs. 16.3%, June 1990);
Two mainstream international equity managers - Schroder (6.5% vs. 7.8%, September 1989) and Paribas Asset Management (15.3% vs. 16.3%, June 1994); and
Two international fixed-income managers - Fiduciary Trust (12% vs. 13.2%, June 1989) and Mercury Asset (12.4% vs. 13.1%, June 1989).
Most managers aren't yet in trouble, because the fund is looking at whether its domestic equity performance objectives are too stiff and because in many cases a manager's cumulative performance with the fund is higher than its five-year performance.
But administrative concern about the inability of active managers to beat the index led the fund to move money in-house for indexing several years ago. Only in May did the pension fund decide to increase the passive component of its international equity allocation; over three years, international equity indexing will increase to 75% from 60%.
Some managers have had very strong performance for the fund when tracked from inception of the account - Dimensional Fund (15.3% vs. 14.8%, June 1990); Nomura (6.05% vs. 1.41%, June 1989); Pareto Partners (12.1% vs. 10.6%, September 1992); Brinson (12.5% vs. 11.7%, June 1989); TCW (12.3% vs. 11.7%, June 1989); Baring Asset (14.8% vs. 13.7%, December 1989); and Julius Baer Investment Management (15.5% vs. 14.8%, June 1994).
Additionally, many managers have outperformed their index benchmark, even though they haven't met their objectives. Objectives vary because their benchmarks vary.
Other managers have had strong recent performance, exceeding their required objectives.
The fund has been outperforming the TUCS median since Sheryl Pressler became chief investment officer in early 1994.
"The board's decision, adopted in December 1994, to increase the fund's allocation to equities could not have come at a better time," the Wilshire report said.
The fund now has 57% of its assets in equities, 36% in fixed income, 6% in real estate, and 1% in cash equivalents.
The pension fund also has been doing well in real estate. In 1995, real estate performance matched the 8.2% return of the Russell NCREIF Index. For three and five years, the fund outperformed the index 5.9% vs. 3.6% and 2.9% vs. 0.4%, respectively. Timber investments in particular did well.
While many public funds have no international fixed-income managers, the California fund has four - a good choice, because "the international bond segment has outperformed its U.S. counterpart over the three- and five-year periods," the Wilshire report said.
Some small and emerging managers bettered their performance objectives over various periods. However, they have much less money under management than mainstream managers.
Amerindo Investment Advisors Inc., San Francisco, an equity manager, has virtually crushed its objectives: for the five years, Amerindo returned 26.7% vs. a projected 17.1%; 24.9% vs. 15.2% for three years; and 64.3% vs. 37.5% for one year.
Oak Associates, Englewood, Colo., returned 28.2% vs. a 17.1% goal for the five years; 21.3% vs. 15.2% for three years; and 59.4% vs. 37.5% for one year.
Brown Capital Management, Baltimore, also scored big - 23.4% vs. 17.1% for one year; 17.4% vs. 15.2% for three years; and 41.9% vs. 37.5% for one year.
Trustees could consider moving some small and emerging managers to its mainstream lineup. As a group, they did better than mainstream domestic equity managers.
However, the fund and Wilshire are examining whether the required performance objective for the pension fund's domestic equity money managers is too steep, said Mary Cotrill, a principal investment officer at the fund.
Because the domestic equity market is much more efficient than the international market, the objective might be too steep, she said.
Objectives vary. For international fixed-income managers, the required objective is 1.5 percentage points over an index or customized benchmark, Ms. Cotrill said.
Inception dates are important to the fund, she said, because "that is the criteria we use for placing managers on a watch list and probation."
But if there is a sharp decline in more recent performance, or a change in personnel, the fund "will certainly take that into consideration," she said.
Overall, Ms. Cotrill said, fund officials are "pretty happy" with the current manager lineup.
However, in November, a staff report on the pension fund's mainstream international equity money managers stated: "Despite the fair overall record of these managers since inception, performance in recent years has not been good. Each of the mainstream mangers underperformed its benchmark over" the last 18 months. The main source of difficulties, the report said, was currency hedging.
What the so-called mainstream managers do is important because they hold most of the active money. For international equity, 66% of assets was indexed, 33% was with mainstream managers and 1% was with small and emerging money managers as of last June 30, 1995. Total international equity assets at that time, excluding the assets of the global asset allocation managers was $10.4 billion.
"Performance numbers change from month to month and we do monitor them continually, If some managers who look a little borderline now don't improve, there can be some actions taken," Ms. Cotrill said.
Nomura's investment performance numbers are under their objective for one, three and five years.
However, Nomura is about 600 basis points over its objective since inception, said Brian X. Fitzgibbon, a senior vice president with Nomura who spoke from Tokyo. Mr. Fitzgibbon said he hasn't seen the Wilshire performance report.