BOSTON - After four months of whittling and shaping, the reconstructed $18 billion Massachusetts Pension Reserves Investment Management Board has knocked out 38% of its manager roster and made a massive switch to passive domestic equity management.
The board noted, in its final report on the merger, it had:
Terminated 16 of the original 42 managers;
Cut the number of portfolios to 30 from 57;
Increased passive management to 76% of domestic equity from 51%;
Slightly increased passive fixed-income management to 25% from 24%; and
Reduced passive management of international equities to 20% from 32% of such assets.
Now, with the exception of State Street Global Advisors, Boston, each manager invests an average of $672 million, vs. about $253 million before the paring.
State Street Global has the largest allocation, managing $5.5 billion in a passive large-capitalization equity portfolio and $600 million in a Morgan Stanley Capital International Europe Australasia Far East index fund. Like State Street, certain managers - such as Putnam Investments, Boston, and Fidelity Management Trust Co., Boston - were retained to manage two different portfolios. (In its tabulations, Pensions & Investments counted these managers once, but each portfolio separately.)
Overall, the merger of the two state pension funds - the Massachusetts State Employees' & Teachers' Retirement System and the Massachusetts Pension Reserves Investment Trust - is expected to save $15 million in fiscal year 1998.
State Treasurer Joseph Malone proposed the merger in 1994, mostly to save money and improve efficiency. Although Mr. Malone is now the chairman of the board, he lost his role as sole trustee of the MASTERS fund.
"It runs counter to what you would think a politician would do," says Chief Investment Officer Collette Chilton. The merger was effective Dec. 31, 1996.
Prior to the merger, boards of the separate funds undertook studies that included a look at active vs. passive strategies, said Greg White, executive director of the combined fund.
Thomas H. Trimarco, chairman-designate and first deputy treasurer, said the studies showed actively managing large-cap stocks was costly and wasn't providing the return expected.
"Why try and beat the market" using active large-cap managers, Mr. White said. "We wanted to focus on small-cap equities" and other sectors where there were inefficiencies.
In the restructuring, the board cut the number of passive managers to three (from five) and the number of portfolios to four (from 10).
Passive managers terminated were: Bankers Trust Co., New York, $300 million core fixed income, and PanAgora Asset Management, Boston, $300 million EAFE index. Three large-cap passive portfolios managed by State Street Global were eliminated, although the firm was retained for an EAFE portfolio and another large-cap portfolio.
The board made its cuts in stages - domestic equities first, then international equities, then fixed income.
Domestic equities increased a slight $300 million to $8.6 billion with 11 managers, cutting seven managers. International equities moved up $700 million to $3 billion with seven managers, eliminating three managers. Fixed-income dropped $1.2 billion to $4.6 billion with 12 managers, terminating eight.
About $1.8 billion in real estate and alternative investments wasn't affected.
In fixed income, the board cut eight managers with eight portfolios and eliminated two sectors, mortgages and global fixed income. Now, 12 managers manage $4.6 billion. Previously, 20 managers managed $5.8 billion.
It cut the $300 million in mortgages managed by TCW Group, Los Angeles, because there no longer is a need to have specialized mortgage managers, Mr. White said.
The board eliminated its global bond managers - $200 million each with Rothschild, New York, and Baring Asset Management, Boston - because most of the value these managers were adding was coming from currency investments, he said. Mr. White said the board didn't want to be in the currency business.
It was particularly hard to cut passive manager Bankers Trust over Barclays Global Investors, San Francisco, Mr. White said. Barclays now manages $1 billion in a core fixed-income portfolio.
The board decided to stay with Barclays mostly because it had a larger commitment to fixed income, Mr. White said. Also, Bankers Trust recently went through staffing changes, he noted.
The largest cuts were in domestic equities. Among them, the board eliminated large-cap enhanced index and active growth managers (P&I, Nov. 25). Mr. White explained that with a passive strategy, it no longer was necessary to split active management between value and growth.
Mr. Trimarco said the board went against its own passive strategy and decided to keep ValueQuest Ltd., Marblehead, Mass., which manages $300 million in active large-cap value stocks, because it was performing exceptionally well.
In addition, the board retained two active large-cap opportunistic managers - Brown Capital Management Inc., Baltimore, with $40 million in large-cap growth, and Fidelity, with $600 million in large-cap growth. (Another Fidelity large-cap growth portfolio of $216 million was terminated.)
Within small-cap equities, few changes were made because this is where the board felt its managers could add value. Terminated were: State Street Global, for a $500 million passive small-cap portfolio; Target Investors Inc., Wilton, Conn., $97 million in active small-cap stocks; and Kennedy Associates Inc., Seattle, $20 million in active small-cap stocks.
Mr. White said the board hopes to hire an active small-cap value manager to run $100 million to $200 million. Assets probably would come from Dimensional Fund Advisors, Santa Monica, Calif., which is managing $800 million in passive small-cap stocks. No schedule has been set for that hiring.
Within international equities, the board eliminated the $300 million tactical asset allocation portfolio managed by Cursitor-Eaton Asset Management Co., Boston.
PRIM actually worked faster and cut more portfolios than officials predicted. The board expected the asset merger to take about six months; it was completed in about five months. The board expected to reduce the number of portfolios to about 35 or 40; it wound up with 30.