PHILADELPHIA - The $2.6 billion Philadelphia Municipal Pension Fund hired its first international bond and emerging markets equity managers, moves that help boost its international allocation to 28% of total assets from 20%.
The allocation is high for any pension fund and unusual for a public fund.
"We have made a large international bet relative to other public pension funds," said Joseph J. Herkness, executive director.
The fund assumes its assets will earn 9% over the long term, and an asset allocation study conducted by its consultant last year recommended hiking international investments to attain that goal, Mr. Herkness said.
Trustees hired three managers for the new, $125 million allocation to emerging markets: Montgomery Asset Management Inc., San Francisco, and City of London Investment Management Co. Ltd., London,, received $57.5 million each; CIGNA Retirement & Investment Services, Hartford, Conn., got $10 million.
Julius Baer Investment Management and Morgan Grenfell Capital Management, both in New York, were hired to run $100 million each in international bonds.
The fund also terminated WorldInvest, New York, which had run $100 million in international stocks. That money will be redeployed elsewhere in international.
The fund will retain its three active international stock managers and one international index manager, which follows the Morgan Stanley Capital International Europe Australasia Far East Index; the four together run about 15% of assets.
Because of the increased international exposure, Philadelphia hired State Street Bank & Trust Co., Boston, as its new global and domestic custodian. State Street replaces longtime domestic custodian CoreStates Financial Corp., Philadelphia, and global custodian Mellon Bank, Pittsburgh. CoreStates, however, continues to manage the fund's short-term cash.
The international changes - and others - follow recommendations of an asset allocation study by Mercer Investment Consulting, Los Angeles. "As a fund, we've had a bumpy history, especially in the early 1990s, especially due to real estate. But now we are well positioned for the future," said David A. Volpe, Philadelphia's first deputy controller.
Among other changes the fund made:
Three firms were hired to run a total of 11% of assets in intermediate domestic bonds, a new investment area for the fund. Smith Graham & Co., Houston, and Western Asset Management Co., Pasadena, Calif., will get $90 million each, and Miller Anderson & Sherrerd, West Conshohocken, Pa., $89 million. Earlier, the fund had terminated Wedgewood Capital Management Inc., Washington.
Mellon Capital Management San Francisco, was hired to run $200 million in a tactical asset allocation strategy. Philadelphia already has $50 million in TAA with RTE Asset Management, Rydal, Pa.
Two domestic large-capitalization stock managers were terminated because of performance, and because the fund is cutting back its exposure by six percentage points to meet its new lower target of 24% of assets. Terminated were NCM Capital Management Group, Durham, N.C., which managed between $85 million and $90 million, and The Swarthmore Group, New York, which handled slightly less than $50 million.
Clifford N. Mpare, NCM executive vice president, said he couldn't discuss the reason for the termination. Paula Mandle, assistant to the president of Swarthmore, said the termination was mutually agreed upon.
Trustees also are considering hiring a second domestic large-capitalization value manager and a second growth manager to run a Russell 2000 index fund.
The fund also will decide at the August investment committee meeting whether to drop its real estate and alternative investments. The fund has "taken quite a hit" on real estate investments made at the top of the market in the 1980s, said Mr. Volpe. The fund has a 5% allocation, but less than 3% of assets invested, that category.
Its real estate consultant, Pension Consulting Alliance, Portland, Ore., recommended Philadelphia invest up to $30 million in real estate investment trusts, along with up to $25 million in two or three core pooled funds. The investment committee has not acted on those recommendations.
Meanwhile, officials might also look at why the fund's commission recapture program netted less than the 30% target for the quarter ended June 30, Mr. Herkness said. The fund's money managers are asked to direct trades to a list of 40 brokers, but only if they can produce best execution. "The managers' managers' hands are not tied at all," he said.
Since the program's inception in the 1980s, the fund has recaptured more than $3 million in trading commissions, which are used to pay for software, hardware and training programs for trustees.
And the pension fund has taken responsibility for the city's $163 million 457 deferred compensation plan from the city's finance department, as recommended by legislators. As a result, trustees are studying whether to issue requests for proposals to hire new managers for up to six new investment options. About 80% of the deferred compensation plan's assets now are invested in guaranteed investment contracts.
Also under study is whether to give participants access to "window plans" - one-stop shops that let investors direct their money into a vast array of mutual funds through a single account - or even to allow them to buy individual securities, Mr. Herkness said. The fund hopes to pick the new options by the end of September.