ROSEMONT, Ill. - The Central States Teamsters' pension fund is considering hiring a second named fiduciary to split the $18.2 billion now directed solely by Morgan Stanley.
Trustees of the Central States, Southeast & Southwest Areas Pension Fund might make the change when the fund's contract with Morgan Stanley Dean Witter Discover Co. expires in 1999.
Concerns about fees and performance are among the reasons trustees might hire a second firm. The relationship with Morgan Stanley - strained during a rocky performance period a few years ago - is fine now.
Also, trustees would like to diversify the oversight authority to protect the fund, such as in the case of asset allocation misjudgments or in the need to have to replace quickly a named fiduciary before contract expiration.
The contract was worth $14.7 million in fees in 1996 to Morgan Stanley, which has the sole power to hire and fire the fund's investment managers and to set its asset allocation.
The fund is one of the largest covering Teamsters union members, including United Parcel Service of America Inc. workers.
Some 35 money managers - all hired by Morgan Stanley - run 60 portfolios for the pension fund.
The last time the contract expired, in 1992, trustees tried, unsuccessfully, to inject competition in the bidding process.
Let fiduciary manage assets
As a concession to Morgan Stanley and to encourage prospective bidders, the Central States fund would like the authority to permit the named fiduciaries to manage some of the fund's assets directly.
Trustees say the fund would have been served better in international investments if they could have used Morgan Stanley directly in money management.
The 1982 consent decree with the Department of Labor, which placed the fund under court supervision, has prohibited the named fiduciary from managing money for the fund.
The fund has operated under a consent decree in connection with a corruption scandal. Morgan Stanley has been named fiduciary since January 1984.
Because of the consent decree, trustees need court approval to amend the terms, which seek to distance the trustees from involvement in investment management of the fund.
In May, the trustees filed a motion in U.S. District Court in Chicago to allow trustees to hire two named fiduciaries and to allow the named fiduciary to manage up to $1 billion of the fund.
Labor Department disagrees
But because of disagreement by the Department of Labor, the fund filed a motion this month to withdraw the modification motion for now, said William J. Nellis, secretary to the board of trustees and attorney for the fund.
He said the trustees likely could file a similar request next year, nearer when they have to rebid.
"We felt there is no need to push the issue at them at this time," Mr. Nellis said. "We may come back to it next year. They (the Labor Department) may have a different perspective then."
Mr. Nellis said he and Ronald J. Kubalanza, Central States executive director, met with Labor Department officials. "We were asking to restructure the consent decree," Mr. Nellis said. "They (the Labor Department) opposed this."
William Zuckerman, senior trial attorney at the Labor Department on the case, said department officials won't discuss the reasons for its opposition.
But Mr. Nellis said, "The basis of their objection was that if you make an agreement, you live by the agreement."
Also, he noted, "The Labor Department has a historically rooted animus against the trustees picking investment managers."
Morgan Stanley executives declined to comment.
The trustees' only role in the investment of the fund - always done with court approval under presiding U.S. District Judge James B. Moran - is to hire the named fiduciary and monitor its actions. They may remove the named fiduciary only for serious cause with the court's approval.
10 asked to bid before
In 1992, when the trustees rebid for named fiduciary they asked 10 firms to bid: Capital Guardian Trust Co., Los Angeles; Fidelity Management Trust Co., Boston; Fiduciary Trust Co. International, New York; Goldman Sachs & Co., New York; Morgan Guaranty Trust Co. of New York; Miller Anderson & Sherrerd L.L.P., West Conshohocken, Pa.; Prudential Insurance Co. of America, Newark, N.J.; T. Rowe Price Associates Inc., Baltimore; Scudder Stevens & Clark Inc., New York; and Morgan Stanley.
"Eight of these potential candidates expressly declined the fund's invitation to bid," according to the motion. Only Morgan Stanley and PDI Strategies, a Prudential affiliate, submitted bids.
Mr. Nellis and the motion contend potential candidates were put off from bidding because they thought Morgan Stanley had a lock on the contract. By having two named fiduciaries, potential candidates perhaps wouldn't be scared away if they believed Morgan Stanley would be reappointed.
Potential bidders also might have been turned off by less attractive remuneration - because of the prohibition against the named fiduciary also managing money for the fund.
In support of the dual named fiduciary proposal, the motion notes the fund's assets have grown almost fourfold, from less than $5 billion when Morgan Stanley took the job. Since 1994, the fund's assets increased more than 50%.
Under the proposal, trustees, with court approval, would oversee the portion of the assets the named fiduciary would manage.
The earliest the consent decree can end is 2002, although it may be extended to 2007.
Earlier performance concerns
Mark F. Angerame, Central States director-financial accounting, said the fund had concerns about performance following the 1992 reappointment of Morgan Stanley.
"There was a trend developing that we felt could be better," Mr. Angerame said.
"It started in the 1994-1995 time period," he said. International was a problem, particularly Mexico, because of its currency crisis. Some 10% of the fund is in emerging markets.
"But Morgan Stanley turned it around dramatically," he added.
The fund has "never been stronger financially," said Mr. Angerame.
The year-to-date return through July was 16.3%. It returned 18.4% for 1996, 24% for 1995, -1.8% for 1994, 10.3% for 1993 and 7.2% for 1992. For 1993 through 1995, the fund's returns trail the median performance of the Trust Universe Comparison Service.
"But for 1996, the fund ranked high in the (TUCS) first quartile," Mr. Angerame said. "That went a long way to allaying a lot of our performance concern."
The fund's 10-year rolling average return, through the end of 1996, is above the TUCS median also, he added.
Asset allocation detailed
According to Mr. Angerame, in July the fund's asset allocation, as set by Morgan Stanley, was 33% domestic stocks; 23% international stocks; 13% domestic fixed income; 9% international fixed income; 10% real estate; 8% cash; and 4% alternative investments, mainly oil and gas and gold-related investments and global tactical asset allocation.
"The domestic stocks are tilted more to small cap than large cap," Mr. Angerame said. Very little is managed passively, he added.
The current allocation is close to Morgan Stanley's target. The equity allocation has stayed pretty constant over the last couple of years, although the international portion has grown gradually since it was first introduced in 1993, causing an accompanying drop in the domestic equity allocation.
The cash allocation increased in August - to close to 10% - because of Morgan Stanley's concern about the rising stock market, Mr. Angerame said.
He said Morgan Stanley has been exploring protection measures for the fund in the event of a decline in the market. He declined to give details, but said nothing definite may come of its study.
TAA added, commodities cut
The fund has made a few manager changes in the last nine months.
Around the beginning of the year, the fund dropped a Goldman Sachs commodities index fund it had for two years and was its only foray into managed futures. Putnam Investments Inc., Boston, and Barclays Global Investors, San Francisco, managed the Goldman Sachs index, running about $900 million together.
Morgan Stanley replaced the investment with a global TAA strategy, its first venture in the area. It retained the same two managers for it, assigning them a comparable amount. The new strategy allows the managers to invest in commodities as well as global financial assets.
Also, it hired Schroder Capital Management International Inc., New York, last spring to manage emerging markets equities.
Except for the TAA assignment, the amounts its managers run was unavailable. But Mr. Angerame said the fund's four largest managers - and the only ones assigned more than $1 billion each - are Putnam; Barclays Global; Brinson Partners Inc., Chicago; and LaSalle Partners Ltd., Chicago. LaSalle is a real estate manager, while each of the other three have both domestic and international equity and fixed-income accounts.
Central States received just more than $900 million in contributions in 1996 and expects a slight increase this year, Mr. Angerame said.
He expects the new UPS contract will have no significant impact on the cash inflow in 1998 or asset allocation when its new contribution level starts. UPS contributed $210 million in 1996 to the Central States fund, the largest of any employer.
As part of the new UPS-Teamster labor contract, UPS doesn't have to make contributions to the fund for the last five months of this years, "in return for the company's commitment to continue to participate in the fund for another five years," according to a Central States news release.
The fund, which paid out $1.48 billion in benefits in 1996, expects that to rise to more than $1.5 billion this year.
Central States had a present-value unfunded vested liability of $1.9 billion as of last year, Mr. Angerame said.