PURCHASE, N.Y. - The approximately $4 billion International Paper
Co. pension fund has abandoned active domestic large-cap equity management.
Indeed, the only domestic equity area still actively managed is small capitalization, said Robert Hunkeler, vice president and director of investments.
The fund had about $600 million in active domestic large-cap stocks.
Mr. Hunkeler wouldn't name the large-cap managers. According to Pensions & Investments' profiles of large pension funds, the large-cap managers were Avatar Associates; Sanford C. Bernstein & Co. Inc.; Geewax, Terker & Co.; Miller Anderson & Sherrerd L.P.; and Pacific Investment Management Co. He also wouldn't say which were terminated.
IP fund officials retained only those large-cap domestic equity managers that follow enhanced index or quantitative styles.
Meanwhile, International Paper is more than doubling its foreign stock and bond exposure. Proceeds from the large-cap portfolios, as well as from some domestic bonds, will finance the international expansion.
Mr. Hunkeler also said IP is putting money into small-cap and midcap domestic stocks, emerging market equities and real estate. The fund has some money invested in these areas, but had no formal allocation to them, he said.
The changes follow an asset allocation study conducted by J.P. Morgan Investment Management, New York, the fund's global balanced manager.
The asset allocation study was one of the first tasks Mr. Hunkeler undertook after moving to International Paper in January from Novartis Corp.
At the time, he said he intended to combine active investment strategies that could add value with low-cost passive investing.
The asset allocation study helped the pension fund construct a more efficient portfolio, with higher expected returns and lower anticipated risk levels than its previous targets, Mr. Hunkeler said.
He declined to give specific details of the fund's risk and return assumptions. He said to determine new target risk levels, fund officials examined the average allocation of large corporate pension funds, IP's own previous riskand return assumptions and the breakdown of all investible assets in the world.
The biggest shift
The biggest change is in large-cap stocks.
IP previously had an allocation of 57% of assets to domestic stocks, all large cap. Now, its target is 39% in domestic equities. Large-cap stocks will be reduced to 27% of total assets; small-cap stocks will represent 7%; and midcap stocks, 5%.
(Some 15% of its domestic equity allocation - under large-cap stock - is company stock, which Mr. Hunkeler said officials might examine in the future.)
The fund retained enhanced index and quantitatively oriented managers to run its trimmer large-cap stock portfolio, but Mr. Hunkeler wouldn't name them, either.
At the same time, the fund hired six small-cap managers, picking them by style.
It retained its sole existing small-cap manager, Provident Investment Counsel, Pasadena, Calif. Provident had managed large- and small-cap stocks for International Paper.
"We found they were good in small- and midcap stocks so we realigned their portfolios," Mr. Hunkeler said.
New managers are Arbor Capital, Minneapolis, and Artisan Partners, Milwaukee, for small-cap growth; Kestrel Investment Management Corp., San Mateo, Calif., and Shapiro Capital Management Co., Atlanta, for small-cap value; and Rosenberg Institutional Equity Management, Orinda, Calif., and Barclays Global Investors, San Francisco, as core small-cap enhanced index managers.
The pension fund retained Provident and Cramer Rosenthal McGlynn Inc., New York, to run its domestic midcap value stock portfolios.
More in foreign stocks
On the international side, International Paper is boosting foreign stocks to 23% of assets - including 5% for emerging markets - from 8%.
The fund is "95% of the way there" in revamping its equity portfolio and is tackling searches for active international managers - one for developed markets, one for emerging markets - next.
In the interim, it has parked roughly $433 million earmarked for the new managers with Barclays Global, which runs two Morgan Stanley Capital International Europe Australasia Far East Index portfolios for the pension fund. One is 50% hedged. Barclays previously managed about $27 million in the EAFE Index portfolios.
Its target for domestic bonds is dropping to 21% from 31%, while the international bond allocation is increasing to 7% from 4%.
No plans for bond revamping
There are no plans to revamp IP's domestic bond portfolio, the performance of which has been "just fine," Mr. Hunkeler said. The company uses two managers, Pacific Investment Management Co., Newport Beach, Calif., and J.P. Morgan, which also is a global balanced manager.
The fund will retain the strategic and global balanced components (about 20% of total assets), under three managers: Brinson Partners Inc., Chicago; Cursitor-Eaton Asset Management Co., Boston; and J.P. Morgan.
"What we have done so far is pretty aggressive," Mr. Hunkeler said.
The remaining 10% of its portfolio is real estate and cash.
Following international, the fund will look at real estate and alternative investments.
"Right now, our goal is to get to our target allocations as quickly as possible," Mr. Hunkeler said. "When you make a decision, make it quickly and implement it quickly."
The fund's new consultant RogersCasey & Associates, Darien, Conn., hired earlier this year, is helping the fund pick managers.