TOWSON, Md. - The Baltimore County Employees' Retirement System, Towson, is restructuring its $1.45 billion pension fund to beef up returns and add more diversity, said Robert Burros, investment administrator.
Last month, the system hired Institutional Capital Corp., Chicago, and Legg Mason Capital Management Inc., Baltimore, to manage $60 million each, with half of the assets coming from a $500 million passively managed portfolio and the rest from a midcap value equity portfolio managed by Alex. Brown Investment Management, Baltimore. Alex. Brown now will manage $121 million in assets, half of Baltimore's active equity allocation.
Institutional Capital will use a large-cap strategy, while Legg Mason will use a midcap to large-cap value strategy.
The changes have been evolving since May, when Ennis Knupp & Associates, Chicago, consultants to the pension fund, recommended the system raise its passively managed domestic equity portfolio to 66% from 42%. The consultant also recommended the fund lower its total U.S. equity allocation to 42% from 45% and raise its international equity component to 18% from 15% with two-thirds actively managed, one-third passive. The fund holds around $870 million in equities.
However, the firm made the opposite recommendation for Baltimore County's $551 million fixed-income portfolio, advising the pension fund to increase its active component to 66%, up from 52%, and to reduce the passively managed portion to 34% from 48%.
T. Rowe Price hired
As a result of the recommendations, Baltimore County last summer hired T. Rowe Price Associates, Baltimore, to manage $25 million in an emerging markets equity strategy. Meanwhile, it terminated INVESCO Capital Management, Atlanta, which had managed $160 million in a large-cap core portfolio and Chancellor LGT Asset Management Inc., New York, which ran $53 million in a large-cap growth portfolio, "after prolonged periods of underperformance," Mr. Burros said. "We parked the money in our Barclays U.S. equities fund, until we found new managers," he added.
INVESCO responded in a statement that the firm had been told the termination was because the consultant thought its style "was no longer a fit." The response noted that during the firm's 16 years as a money manager for Baltimore County, it exceeded the Standard & Poor's benchmark by nearly 200 basis points, with a compounded annual return of 17% for the total account vs. 15.13% for the S&P500.
But Baltimore's Mr. Burros explained that while INVESCO had performed very well from 1980 until 1992, "there was a downturn in the past five years, with INVESCO trailing its S&P benchmark by 300 points."
Alexandra Trower, Chancellor spokeswoman, said: "We are sorry to lose any client, but ironically, our performance has rebounded since then and we hope to work with Baltimore County in the future." The Select Growth strategy used for Baltimore County has gained an estimated 26.2% for the year through Sept. 30, she added.
Going with passive equities
Russ LaBarge, senior associate at Ennis Knupp, said his recommendation to increase the passively managed equity portfolio was "based on the fact that the U.S. stock market is extremely efficient and it didn't appear that active managers had added a lot of value."
He added Alex. Brown had performed well for Baltimore, but the amount with the firm was reduced to lower any possible risk.
In fixed-income, however, "We believe that active fixed-income managers have a greater capability to outperform the index than active equity managers do," Mr. LaBarge said. Barclays Global Investors, San Francisco, manages all of Baltimore County's indexed assets, using the Wilshire 5000 for stocks and the Lehman Aggregate Bond Index for fixed income.
The reshaping of the bond portfolio involved equalizing the amounts of assets under active management, explained Mr. LaBarge. Morgan Grenfell Capital Management Inc., Philadelphia and Pacific Investment Management Co., Newport Beach, Calif., were each raised to $120 million from $60 million, while Standish, Ayer & Wood Inc., Boston, is continuing to manage $130 million. All are using broad-based investment strategies, but Morgan is limited to using investment-grade bonds, while PIMCO and Standish are allowed to invest some assets in high-yield and below-investment grade bonds.
Despite all of the changes, the pension fund's overall asset allocation remains at 60% equities, 38% fixed-income, with nearly 2% in real estate and 0.1% venture capital. As real estate investments mature, they are being eliminated, said Mr. Burros.
He added that for the year through June 30, the fund is up 19.3%, compared with the Ennis Knupp public fund index, which gained 18.2% the same period.