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March 31, 1997 12:00 AM

CORRALLING STRAY ALLOCATIONS: CLIFTON GROUP USES FUTURES TO KEEP DRIFT FROM PORTFOLIO

Paul G. Barr
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    Three tax-exempt fund managers hired The Clifton Group in recent months to keep asset allocations in line with targets.

    Dayton Hudson Corp., Minneapolis, the New Orleans Firemen's Retirement System and the University of St. Thomas, St. Paul, Minn., hired Minneapolis-based Clifton to rebalance assets or keep idle cash invested using exchange-traded futures contracts.

    Dayton Hudson, with $600 million in pension assets, uses Clifton to keep its liquid security allocations in line with long-term policy targets, said Jeffrey Bailey, director, employee benefit investments.

    When portfolios deviate more than two percentage points from its long-term target for its major asset classes, Clifton will buy and sell futures contracts to get the allocation back in line.

    Dayton Hudson's U.S. equity target is 35%, its U.S. fixed-income target is 25% and its non-U.S. equity target is 20%. Its alternative investments target is 20%, but not a part of the overlay program.

    The strategy includes its international allocation, with Clifton using futures contracts for seven markets to seek to replicate the Morgan Stanley Capital International Europe Australasia Far East Index. The seven countries used are: Australia, Germany, Hong Kong, Italy, France, Japan and the United Kingdom.

    Moreover, Clifton will use currency futures contracts to add currency exposure to the overlay portfolios. Jack Hansen, principal and director of equity investments for Clifton, said long positions in non-U.S. equity index futures won't provide the currency exposure that is a part of some investors' international allocation, which creates the need to use currency futures.

    Mr. Bailey said Clifton's work removes the need for constant monitoring for potential rebalancing, leaving Clifton free to rebalance cash portfolios about once a year.

    Dayton Hudson pays Clifton a flat fee to perform the service, but declined to say what it was.

    The $150 million New Orleans Firemen's fund uses Clifton to invest idle cash being held by the fund's money managers, said Richard Hampton, secretary, treasurer and fund administrator.

    "Even the best of money managers can't keep 100% invested," Mr. Hampton said.

    From inception of the program, Sept. 30, through February, Clifton has outperformed what cash would have earned by $1.1 million, he said.

    "We've been real pleased with the program," Mr. Hampton said.

    Clifton deals with the fund's custodian to get cash balances, and uses stock and fixed-income futures to keep its total asset allocation at 55% U.S. equities, and 45% fixed income. The fund's roughly 8% exposure to non-U.S. equities is not a part of the program, because its international exposure is through commingled funds, and getting the daily cash balance isn't possible, he said.

    Full investment for the New Orleans fund is particularly important, because state law limits its maximum exposure to equities to 55%, Mr. Hampton said. Fund officials are working to get a bill introduced in the state Legislature that would raise that cap, he said.

    The University of St. Thomas, with $170 million in mostly endowment assets, also uses Clifton's derivatives strategy to keep idle cash invested, said Carol Peterfeso, assistant treasurer.

    Clifton executives uses futures contracts on the Standard & Poor's 500 Index, the Russell 2000 Index and five-, 10-and 20-year U.S. Treasury securities to equitize St. Thomas' cash.

    The system is working well in the short time it has been in place, Ms. Peterfeso said.

    "Obviously, I wish we would have done it two years ago," when the S&P 500 index was skyrocketing, she said.

    St. Thomas pays Clifton 20 basis points of the amount overlaid, Ms. Peterfeso said. St. Thomas could have paid 1.5 basis points of total assets under management, but their option should be less expensive, she said.

    Mr. Hansen of Clifton said assets overlaid in the strategy grew to $1.65 billion as of year-end, from $250 million a year earlier.

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