WHITE PLAINS, N.Y. - When a CEO makes a public promise about his pension fund, things happen fast.
Indeed, only about a month after Peter I. Bijur, Texaco Inc. chairman and chief executive officer, publicly stated the oil company would increase the amount of business it does with minority investment managers, the $1.5 billion pension fund hired seven such firms. (Texaco hired an eighth minority manager to invest some corporate cash.)
The hirings increase Texaco's assets managed by minority- and women-owned firms to 13% of the pension fund from 3%.
"There was an urgency to get it done fairly quickly," said Texaco Assistant Treasurer Shelby Faber.
Mr. Bijur had made his pledge in connection with the announced $176.1 million settlement of a racial discrimination suit. He said at the time: "We will increase the amount of business we do with minority companies. This will include . . . investment management."
And that's just what happened - but in record time.
Corporate pension fund searches for multiple managers usually take several months. In this case, the time was slashed because of the urgency and because Texaco executives already were familiar with many of the minority managers, Mr. Faber said.
Texaco's consultant, Wilshire Associates, Santa Monica, Calif., generated a list of candidates from its database, which was augmented with candidates submitted by Texaco's pension staff.
By late November, Texaco officials already were visiting candidates. Selections were made by the end of the year.
Search was in-depth
The selection process "was an in-depth search, as if we had six months to do this," said Mr. Faber. The fund completed all of the necessary due diligence on the firms, including on-site visits, reviews of their performance, investment policy and style, he added.
Texaco pension executives hired Ariel Capital Management Inc., Chicago, and Brown Capital Management Inc., Baltimore, to manage equities. Payden & Rygel Investment Counsel, Los Angeles, and Smith Graham & Co., Houston, were chosen to manage global fixed income. NCM Capital Management Group Inc., Durham, N.C.; Hughes Capital Management Inc., Washington; and Utendahl Capital Management L.P., New York, were hired to manage domestic fixed income.
Texaco hasn't identified how much each manager will handle or the source of the assets. But Mr. Faber said Texaco is reallocating assets to increase fixed-income exposure and reduce equity positions, so in the process it allocated assets to the minority managers.
Older firms favored?
The results seemed to favor older, established firms, not necessarily emerging firms or top performers in their categories.
Four of the chosen managers - NCM, Payden & Rygel, Ariel and Chapman & Co., Baltimore, which was hired to run $10 million in corporate assets - are at least 10 years old, while the others have track records of at least three years.
Even 3-year-old Hughes, the youngest firm hired, is not an unknown quantity to Texaco. Its founder, Frankie Hughes, was a portfolio manager at WR Lazard, which until now was the only minority manager in Texaco's roster.
Several managers had been marketing to Texaco for years. Ariel, for example, had a three-year dialogue with oil company executives; Utendahl had been communicating with Texaco since 1993, updating the company regularly on its progress, said Dail St. Clair Simmons, marketing director.
Chapman, chosen to invest $10 million of Texaco's corporate cash in venture capital investments in minority- or women-owned businesses, had been in touch with Texaco for several years, said President Nathan Chapman.
Some minority managers not chosen complained privately the Texaco search was too short to conduct proper due diligence on such areas as investment performance.
But Mr. Faber said many factors were considered, including which firms would have the best fit and each firm's historical performance, investment philosophy and investment process.
For example, he noted Ariel has had performance problems because its value style has been out of favor, but some of its more recent numbers are better.
"We don't go only by past performance, we go by whether they have the team in place," said Stephen Nesbitt, senior vice president and principal of Wilshire.
Indeed, the Pensions & Investments Performance Evaluation Report for the quarter ended Sept. 30 - the latest data available at the time of the search - shows several minority firms among the top performers that did not make the Texaco roster, and some poorer performers that did get hired.
For instance, the emerging growth portfolio managed by Amerindo Investment Advisors, San Francisco, was one of PIPER's top performers, with a 51.1% one-year return for the period ended Sept. 30, and a 28.1% annualized five-year return.
Ariel's small/midcap value composite returned 18.3% for the one-year period, 11.6% compound annualized for three years and 11.4% annualized for five years. The median for the PIPER small-cap value universe was 17.2% for one year, an annualized 15.5% for three years and an annualized 17.4% for five years.
(Brown couldn't be compared because it did not submit its numbers in time to be compared for the third-quarter report.)
On the fixed-income side, one can make the case for Utendahl, Hughes and Payden & Rygel, but not so much for Smith Graham and NCM, who underperformed across several time periods. There were better performing minority-and women-owned firms.
For example, for the one-year period, Llama Asset Management, a Fayetteville, Ark., woman-owned firm, had a return of 5.3% for its core long duration portfolio and 5% for its value long duration portfolio. That put both portfolios in the third decile.
Bradford & Marzec, Los Angeles, another minority-owned fixed-income manager, had third decile performance for five years, with a compound annual 9.4%. And, LM Capital Management, La Jolla, Calif., made the top decile performance for intermediate-term portfolios with a compound annual return of 8.3% for five years.
Smith Graham's proactive fixed-income composite returned 4.6% for the one-year period and a compound annual 7.5% for five years. NCM's core fixed-income composite - also in the same universe - returned 4.1% of the year and a compound annual 7.6% for the five years.
Smith Graham's long duration composite returned 1.7% for the one-year period and an annualized 3.1% for three years. The median for the PIPER long duration fixed income universe is 3.8% for the one-year period and an annualized 4.8% for the three-year period.
Much of the search was carried out in-house, with Texaco officials conducting site visits and interviews.
More manager hires coming?
Some managers who made presentations during the search said they got strong indications there may be more opportunities for minority firms.
"I got indications that this is not the end of it," said P. Wayne Moore, president and chief investment officer of Greystone Capital Management, Inc. a Hartford, Conn., fixed-income manager reviewed by Texaco. "They may continue to look and shake things up," he said.
Texaco is adding to its manager database to include more minority- and women-owned firms, Mr. Faber noted.
He also said Texaco is looking at opportunities to expand business with minority- and women-owned firms in other areas, such as commission recapture programs.
A Texaco spokesman stressed the decision to increase the minority participation in investment management was a voluntary effort by Texaco, not part of the settlement.
This is part of the company's commitment to take specific steps to increase minority participation in its business, he said.