PRETORIA, South Africa - Iscor Pension Fund has revamped its fledgling international investment program, switching to a core-satellite approach.
The restructuring represents the second step in the 12 billion rand ($2.57 billion) fund's international investment program. The steel company pension fund was the first South African pension fund to invest overseas through use of asset swaps.
Since the end of 1995, the fund has hired 16 managers to invest 8% of assets in "a shotgun approach," said Hans Nel, chief executive officer of the Pretoria-based pension fund.
Now, officials are focusing their sights with the fund's new core-satellite approach. Plans are to reduce the fund's roster of international managers to nine over time. (Another four managers run an additional 8% of assets; the remaining 84% is managed internally.)
First permitted by the South African Reserve Bank in July 1995, asset swaps enable South African institutional investors to invest abroad as long as an equal amount of money is invested domestically. But the need to engineer asset swaps limits fund officials' ability to move money abroad because counterparties must be found to invest in South African securities.
Iscor fund officials had set three goals in investing abroad: spreading pension fund risk; educating pension fund officials and trustees on international investments; and boosting fund returns.
The fund's overseas component raked in 31% on an annualized basis for the 18 months ended June 30, compared with 16.1% for the fund's domestic portfolio - in large part because of the rand depreciated 20% against the U.S. dollar last year.
Mr. Nel said officials were disappointed in what they could learn from their managers, some of whom merely sent quarterly reports, he said.
After using TriStar International Consulting Ltd., Constantia, in its first manager selections, Mr. Nel said fund officials had decided to go on their own. With help of Montreal-based consultant Brockhouse & Cooper's database, officials decided to overhaul their international strategy.
The fund is shifting about half of its $215 million international allocation to a core approach. Initially, about $50 million will be managed by State Street Global Advisors, Boston, in an index fund tracking the MSCI World Index (ex-South Africa), enlarging an existing $22 million portfolio.
New managers, Wellington Management Co., Boston, and Capital International Ltd., London, each will run $20 million to $25 million in international portfolios. Wellington will run value stocks and Capital International, a growth-oriented portfolio.
In addition, regional mandates of $20 million to $25 million are being doled out. For U.S. equities, Oppenheimer Capital Ltd., London; for European equities, Mercury Asset Management PLC, London.
Either SEI Investments, Oaks, Pa., or Frank Russell Co., London, will manage Far Eastern equities in a fund-of-funds approach. SEI now manages $16 million in U.S. equities and $3 million in emerging markets equities for the fund. If Russell is picked for the Far Eastern mandate, the fund might continue using SEI for U.S. equities, Mr. Nel said.
Incumbent manager WP Emerging Markets Asset Management L.P., New York, will continue managing a $28 million emerging markets debt portfolio.
Another $5 million will be handed to Union Bank of Switzerland's Zurich office to invest in international bonds, but the Iscor fund needs to swap more assets first. Officials from UBS and SSgA also will serve on the fund's asset allocation committee.
It will take time to reduce the Iscor fund's existing stable of managers. Mr. Nel declined to name managers who will be terminated. According to published reports, Iscor's other managers include LGT Asset Management PLC, London; Prudential Portfolio Managers Ltd., London; Polaris Capital Management Inc., Boston; and New Africa Advisers, an affiliate of Sloan Financial Group, Durham, N.C. (Pensions & Investments, Nov. 25, 1996).
Some of Iscor's external managers participated in asset swaps with the fund.
While fund officials could terminate the managers if they so desired, there is "a gentlemen's agreement" to retain the managers for a set period of time, Mr. Nel explained.
For the future, Mr. Nel said the fund might consider smaller allocations to specialist areas, perhaps on a style basis or to small-cap mandates.
Also, fund officials might make active country bets on the passive portfolio run by SSgA, making use of the manager's 53 country funds. However, Mr. Nel does not rule out use of a TAA overlay manager in the future.
The most important lesson Iscor fund officials learned was that "you can't deal with everybody in the world," Mr. Nel said. "You have to pick the best fund managers" initially because it's "costly to change," he explained.
Fund officials have "to pay a bit of money to get the best advice and stick with the guys through bad quarters," Mr. Nel said.