SPRINGFIELD, Ill. - Trustees for the $14 billion ' Retirement System this month shifted $513 million in real estate, fixed-income and equity assets.
In a separate development, the state's auditor general raised questions about the fund's hiring of its former chief investment officer to be an external money manager.
In the asset shift, the system more than doubled the size of a futures contract-based international equity program that might be expanded to include a U.S. equity component.
At a meeting earlier this month in Chicago, trustees terminated Jones Lang Wootton Realty Advisors, New York, which managed $353 million in real estate, and Smith Barney Capital Management, which managed about $130 million in international fixed income.
In February, the fund terminated two U.S. equity managers: Cordillera Asset Management, (formerly known as Pe?a Investment Advisors Inc.), Denver, which ran $28 million in large-capitalization growth, and MPI Investment Management, Hinsdale, Ill., which managed $47 million in core equities.
Jones Lang Wootton's assets will be shifted to three incumbent managers: K/B Realty Advisors (a joint venture between Peter Bren, New York, and Koll Management Services Inc., Newport Beach, Calif.), which will manage $72 million worth of industrial and office properties; Capital Associates Realty Advisors, Chicago, which will manage $103 million in apartment properties; and Commonwealth Realty Advisors Inc., Chicago, which will manage about $178 million in retail.
The real estate changes were made mainly for performance reasons, said Don Nesbitt, chief investment officer.
Stephen Furnary, managing director for Jones Lang Wootten, declined comment as a matter of company policy.
The assets run by Smith Barney will be split between Pyrford International PLC, London, in an international equity mandate, and an in-house synthetic international equity program. Mr. Nesbitt said the fund had gotten beyond its allocation to international fixed income, hence the move to international equities.
Cordillera and MPI's terminations also were because of performance, officials said.
Michael Barela, founder and investment officer at Cordillera, didn't return repeated telephone calls seeking comment.
David Pequet, managing partner for MPI, said MPI fell victim to a pull back in technology stocks, which since have recovered, as has MPI's performance.
Mr. Pequet said Illinois Teachers used a two-quarter period of underperformance by MPI in evaluating the firm.
In addition, MPI was a relatively small manager by Illinois Teachers' standards, he said.
The addition to Illinois Teachers' synthetic EAFE program will bring its total allocation to $115 million, in a program that began in September with $50 million.
The synthetic program uses futures contracts traded in various countries to gain the returns of the Morgan Stanley Capital International Europe Australasia Far East Index.
The program invests in stock index futures contracts representing Australia, Hong Kong, Japan, France, Germany, the United Kingdom and Italy, which was just added.
At its current $50 million allocation, $7.5 million is used for good-faith margin deposits at world futures exchanges.
Of the $7.5 million margin, about $2.5 million is in local currencies where the fund trades futures, the only currency exposure in the $50 million program, Mr. Nesbitt said.
Illinois Teachers staff members invest the balance, $42.5 million, in U.S. fixed-income securities that generally carry an average maturity of about one year, said Charles Handy, investment manager and analyst.
With U.S. rates higher than many foreign rates, the retirement system gains an income advantage that has added to the fund's outperformance of the hedged EAFE index.
The program returned 10.04% since inception through Feb. 29. During the same period, the unhedged MSCI EAFE index returned 6.75%. The program returned 8.22% in the fourth quarter, compared with 6.43% for the benchmark.
At the most recent meeting, pension fund staff recommended the program add a Standard & Poor's 500 Stock Index component, creating a global program. The system's board will consider it, but no decisions have been made, Mr. Nesbitt said.
The week before the system's board meeting, Illinois Auditor General William Holland released an audit of the fund that, among other things, highlighted the differences between the annual salary paid former CIO Thomas Zimmerman - $106,653 - and the fees paid to Mr. Zimmerman's firm, Zimmerman Investment Management Co., Chicago - about $2.5 million in the 10 months ended June 30.
As a result of the audit, local media then questioned why Mr. Zimmerman was paid so much less at Illinois Teachers than what his firm was getting as an outside investment manager.
At the board meeting, Executive Director Robert Daniels said Mr. Zimmerman's hiring was proper.
"We did right. We did nothing wrong," he said. "This is a non-issue as far as I'm concerned."
He said board members realized that hiring Mr. Zimmerman would raise questions, but because he was going to resign from the Illinois Teachers' System anyway, and his internal currency overlay program was a good performer, trustees chose to hire his firm temporarily until a replacement could be found.
A search conducted by the fund's consultant, Callan Associates Inc., San Francisco, resulted in the fund retaining Zimmerman Investment Management. The fund used an outside law firm to negotiate the hiring, Mr. Daniels said.
Mr. Daniels said the fees paid to Zimmerman Investment Management, 10 basis points a year plus a performance incentive fee, are competitive.
