SPRINGFIELD, Ill. - The $15 billion Teachers' Retirement System of Illinois suspended its $1.7 billion overlay program, terminating all six managers.
The moves follow a review by the fund's consultant, Callan Associates Inc., San Francisco. The review cited problems getting real-time monitoring information from The Northern Trust Co., Chicago, the plan's custodian.
The program could be reinitiated once the type of monitoring needed is put in place, fund spokesman Scott Mulford said.
Terminated for currency overlay were: A.G. Bisset & Co. Inc., Rowayton, Conn., for $416 million; Pareto Partners, New York, $120 million; and Zimmerman Investment Management Co., Chicago, $548 million.
Equity overlay managers terminated were: Acorn Derivatives Management Corp., White Plains, N.Y., for $100 million; AnalyticTSA Global Asset Management Inc., Los Angeles, $100 million; and ZIMCO, $300 million.
Bond overlay manager Lotsoff Capital Management, Chicago, also was terminated; Lotsoff oversaw $100 million.
The terminated firm with the biggest chunk of Illinois Teachers' overlay assets - ZIMCO - is headed by Thomas E. Zimmerman, the fund's former CIO.
The initial hiring of Mr. Zimmerman's firm irked some state legislators and observers largely because Mr. Zimmerman's firm was getting much more in management fees than what his salary was at Illinois Teachers.
Performance information on the managers in the program was unavailable.
Callan's report said the program appears to be meeting overall expectations, and the managers seem to have performed in line with expectations - given the market conditions. But it suggested suspension until real-time monitoring - meaning Illinois Teachers' official can monitor the portfolio and changes in the portfolio as they happen - can be obtained.
Robert W. Lapkinski, a vice president at Northern Trust, said the custodian is meeting deadlines established with Illinois Teachers when it took over as custodian this year. Among those deadlines was real-time monitoring of its overlay managers in the first quarter of 1997.
Initially, Northern had been focusing on putting in order the records it received from the previous custodian, Harris Trust and Savings Bank, Chicago.
Regarding the Callan review, he said: "We can't comment on what we haven't seen. Nobody with Northern Trust has seen that."
Kenneth Brunke, one of the Callan consultants who wrote the report, was ill and unavailable for comment.
Janet Becker-Wold, the other author, declined to comment.
Mr. Zimmerman didn't return phone calls.
William Melvin, executive vice president of Acorn Derivatives, said he doesn't blame fund officials for doing what they did. But he added: "Northern will get it straightened out because they're a first-class operation."
Seymour Lotsoff, managing director of Lotsoff Capital, would say only that Lotsoff executives were told by fund officials they could not track the positions of the overlay managers.
Officials for the other terminated managers either could not be reached, or declined comment at the request of Illinois Teachers.
Another large public pension fund client of Northern Trust is the $9.6 billion Illinois Municipal Retirement Fund, Oak Brook. Walter Koziol, director-investments, said his staff is not having any problems getting daily information on a currency overlay program, although it doesn't seek real-time monitoring abilities.
Industry experts differed in their conclusions on the move.
Maarten L. Nederlof, vice president with Capital Markets Risk Advisors Inc., a New York risk consultant, said that if Illinois Teachers was having problems getting the information it needed, it's appropriate from a risk standpoint to shut the program down.
He said it's reasonable to expect information on a daily basis, and if they require intraday availability in order to monitor the risk, then they should hold out for it.
But some questioned whether real-time monitoring is available at a realistic price.
Mathew Jensen, associate director for consultant RogersCasey, Darien, Conn., said getting real-time information on investment managers is "very difficult."
Most custodians don't have the capabilities, and "ones that do will charge (sponsors) so much, it's not worth it."
Michael Costa, practicing director with the Alliance of Fiduciary Consultants, Parsippany, N.J. said: "Are they cutting off their noses to spite their face?" There really isn't a state-of-the-art real-time monitoring system in place right now, Mr. Costa said. Bits and pieces are available, but "it's certainly nothing you get off the shelf," he said.