SALEM, Ore. - The Oregon Investment Council allocated $50 million to HSBC Private Equity Fund 2 Ltd., a projected $500 million fund being raised by a unit of Hongkong Shanghai Banking Corp. Holdings.
The placement is Oregon's first direct investment in private equity in the Far East, said Jay Fewel, equities manager.
HSBC now has $350 million committed to its new fund. Other funds and their commitments include: Colorado Public Employees' Retirement Association, Denver, $100 million; the pension fund of BellSouth Corp., Atlanta, $75 million; the Weyerhaeuser Co. pension fund, Tacoma, Wash., $50 million; and the pension fund of Pacific Telesis Group, San Francisco, $25 million.
At the same time, the council ended one of its longest running money manager relationships June 25, taking more than $738 million from Los Angeles-based Hotchkis and Wiley.
The council also put two other managers for the Oregon Public Employes' Retirement Fund on a watch list. The council oversees the investment management of the $25 billion Oregon fund.
The termination of Hotchkis and Wiley ended a 15-year relationship. The firm was the state's second largest manager of active domestic equities.
A recent history of sharp underperformance against the Standard & Poor's 500 Stock Index hurt the firm's relationship with the state, and one of Oregon's consultants was troubled by the sale of Hotchkis and Wiley to Merrill Lynch Asset Management.
Although value managers like Hotchkis and Wiley generally have struggled to keep up with the soaring returns of the broad market, consultants at Wilshire Associates, Santa Monica, Calif., said the firm also has lagged the S&P 500 on a net return basis since the state first entrusted money to it 15 years ago.
According to Wilshire's data, the Hotchkis and Wiley portfolio returned an annualized 15.7% for the five years ended March 31, compared with 16.4% for the S&P 500. Since the portfolio's inception on June 30, 1982, the portfolio returned 17.7% compared with 17.9% for the S&P 500, Wilshire data show.
The RogersCasey Large Value Index returned 19.19% for the five years ended March 31.
While Wilshire had soured on Hotchkis and Wiley, officials from the state's other consultant, Frank Russell Co., Tacoma, recommended Oregon retain the firm. The Oregon treasury staff also voted for retention.
Nevertheless, members of the five-person council decided 15 years was long enough to pay fees for performance they found to be subpar.
"They have benefited from that relationship," observed council member Randy Pozdena, a private-sector economist. "We have not benefited as much as we should have."
Hotchkis and Wiley officials referred questions to a Merrill Lynch spokesman in New York, and the spokesman said Merrill Lynch wouldn't comment on Oregon's action.
The money Oregon's pension fund took from Hotchkis and Wiley will be placed in a Barclays Global Investors indexed portfolio managed to match a value-oriented benchmark.
But that transfer boosts Oregon's fund - at least temporarily - to about 45% passively managed equities, well above the state's target of 25% to 35%.
The council expects to decide soon whether to reallocate the money to other money managers, said Dan Smith, Oregon's director of investments.
Hotchkis and Wiley has been on Oregon's watch list since last July.
At their June 25 meeting, members of the state's investment council voted to put two more firms on the watch list -Columbia Management Co., Portland, Ore., and Nicholas-Applegate Capital Management, San Diego.
Columbia Management is Oregon's largest active domestic equity manager, with more than $740 million from the fund. Nicholas-Applegate manages about $441 million for Oregon.
Such a move signals dissatisfaction with the firms' recent performance and concerns about their direction, council members said.
Both firms will be asked to give written responses to the state's concerns.
Staff from the Oregon treasury department and the consultants cited continuing concerns about the potential sale of Columbia, which retained Merrill Lynch last July to advise it on acquisition offers. Alan Folkman, Columbia's chief investment officer, said in an interview later that "nothing has changed" in the status of the company.
Wilshire said recent organizational changes at Nicholas-Applegate have heightened its concerns the money manager is "losing its focus" on equity management.
Wilshire also said Nicholas-Applegate has been "very inconsistent" in picking stocks.
"We really value the relationship that we have with Oregon," said Rick Shaughnessy, director of public relations for Nicholas-Applegate. "We have delivered good long-term performance for the client. It's been tough for our style for the last year and a half.
"We are taking steps to resolve the issues that have been raised by the council. We plan to work with them very closely," he added.
Meanwhile, materials submitted to the council on the HSBC private equity fund show HSBC Group had gross assets at year-end 1996 of $402 billion, and a one-year profit of $4.86 billion.
HSBC said it has realized net (of carried interest) returns of 28%, 39% and 81% on three earlier funds, based on calculations as of March 31.
The new fund will invest in a diversified portfolio of private companies in China, Hong Kong, Indonesia, Taiwan and Thailand. It seeks businesses that will benefit from cheap labor and rising levels of disposable income.
David Paterson, managing director, who was away from his base in Hong Kong at a time when the world's attention was focused on the transition in government there, said he is "very optimistic" about prospects for business under Chinese rule.
Hong Kong is too important for China to destabilize, he said.
"At the very top, the Chinese see Hong Kong as their most important window to the rest of the world," Mr. Paterson said.
He said he has had to issue numerous assurances to American pension fund executives the handover of Hong Kong won't disrupt the economy, but he said he welcomes Chinese rule.
The British have, in recent years, "concentrated too much on politics and not enough on the economy," he said.
