BERKELEY HEIGHTS, N.J. -- AT&T Corp. plans a major asset-liability study sometime next summer, said S. Lawrence Prendergast, chairman and chief executive officer of ATTIMCO, which oversees the company's $83 billion in retirement assets.
The study will be conducted after ATTIMCO's contract to manage Lucent Technologies Inc.'s pension fund ends.
Lucent, which was split off from AT&T at the end of 1995, gave AT&T notice in August that it wanted to assume management of its pension fund, Mr. Prendergast said during a recent interview in his Berkeley Heights headquarters.
Executives at ATTIMCO -- AT&T Investment Management Corp. -- also could re-evaluate the fund's real estate portfolios in light of an industry trend toward more liquidity and consolidation in REITs.
Mr. Prendergast, who became chairman of ATTIMCO in May, has no other major changes in mind for the pension fund at this point, he said.
In his short tenure, the new chairman already made a radical management change by spinning off the pension fund's $3.8 billion private equity investment program to J.P. Morgan Investment Management Inc.
Mr. Prendergast, 56, who likes to be called Larry, said he chose this novel approach because it was a way both to retain top professionals and to keep the seven-person team that ran the program intact.
After serving as treasurer at AT&T for 14 years, he now oversees $83 billion in retirement assets for AT&T and Lucent. Mr. Prendergast said one of his priorities has been to further develop a culture at ATTIMCO that will help attract and retain top-quality professionals.
Structure won't change
ATTIMCO has a staff of 26, down from 33 as of Nov. 1, when the equity portfolio team moved over to J.P. Morgan in New York. The ATTIMCO staff consists of 16 investment professionals, 10 administrative professionals.
"We still manage some direct real estate investments internally, but everything else is managed outside," Mr. Prendergast said. Currently there are 56 outside managers, who invest money across all asset classes.
Assets overseen by ATTIMCO will shrink to $30 billion when it no longer manages the Lucent pension assets."It takes about a year to complete such a transition," explained Mr. Prendergast, noting it also took about a year to distribute the pension fund assets after the company spun off the seven regional Bell companies in 1984.
Mr. Prendergast said he has no plans to change the current investment structure.
"It takes the same amount of time and people to manage $30 billion as it does to manage $83 billion," he said.
"Our basic (investment) philosophy is in place, and I don't see any need to change it.
"But we are watching what others are doing in the industry, such as GTE's strategic partnership arrangement, to see how it works out, and the consolidation in real estate REITS.'
But he does not intend to set up any strategic partnership agreements at this point. Nor are there plans to invest for other pension funds, he said.
"Our objective is to secure our promise to our employees: to provide benefits at a minimum cost with a maximum return on investment, consistent with a prudent investment style."
As of June 30, AT&T had $20 billion in defined benefit assets and $10 billion in defined contribution assets; Lucent had $33 billion in defined benefit assets and $20 billion in defined contribution assets.
Asset allocation explained
The combined defined benefit assets are now invested 70% in equities, 21% fixed income, 9% real estate and other assets, which primarily are natural resources such as oil, gas and timber.
The equity portion is evenly split between passive and active. Some 75% of equities are invested in the United States, 25% abroad, with 3.7% of the international component in emerging markets.
About 30% of fixed income is passively managed, 70% active. The active portion is invested 96% domestic, 4% international.
Mr. Prendergast doesn't expect the allocations change until the asset-liability study is completed.
The pension fund is modestly overfunded, because the stock market has been so strong. AT&T funds its benefit payments by selling off equities, which also allows it to rebalance as needed.
Mr. Prendergast emphasized he considers stocks viable investments that will outperform fixed-income products in the long term.
Market rattles the nerves
He admitted, however, that the recent market gyrations were nerve wracking. "You have to be nervous when markets go up and down 5% to 7% in a day as they did during the Asian turmoil a few weeks ago," he said. He was visiting with money managers in Russia where the stock market fell 20%. ATTIMCO has some small private equity real estate holdings there, which Mr. Prendergast also visited.
While he doesn't worry about the stock market on a daily basis, he pays close attention to the pension fund's performance. He noted AT&T ranked No. 1 in its peer group of the 12 largest U.S. pension funds for the last three-, five-and 10-year periods, based on data the top funds exchange among themselves. And it has done well in comparison to its benchmarks for each asset class.
However, for the last two years and for the 12 months through March 1997, although the fund was still in the first quartile, it lost its first-place ranking. Mr. Prendergast declined to say where it ranked during those periods.
He attributed the slippage to underperformance in the real estate sector and the fact that its U.S. equity benchmark is the Wilshire 5000 Index, while those pension funds that outperformed used the Standard & Poor's 500.
"If we benchmarked to the S&P 500, we would be forced to have a significant overweighting in just a few stocks . . .
"The S&P 500 has become very concentrated in the last three years, with only a few stocks dominating the index. Do we want 8% of the portfolio invested in just a few stocks? I say no."
He prefers to access the vibrant U.S. economy by participating in the broader equity markets.
Taking the helm
Mr. Prendergast took the helm at ATTIMCO in May, replacing David P. Feldman, who retired. He has spent most of his career at AT&T and various subsidiaries, starting as a software engineer at Western Electric in 1963 after graduating that year from Brown University with a degree in math.
In those days he lived in New York's Greenwich Village, attending New York University at night for his master's degree in business administration, which he completed in 1969.
He decided finance was more challenging than software, and started a business that combined software development and money management. After running it for five years, he sold out to his partners and returned to Western Electric. In the meantime, he had written a book about convertible securities, which caught the attention of AT&T's chief financial officer.
"When he realized I was working at Western Electric, he transferred me into finance, where I started as a financial analyst in 1974," he said. Mr. Prendergast was promoted to assistant treasurer in 1980 and vice president and treasurer in 1983.
As treasurer, he had some involvement with the AT&T pension plan, but didn't devote a lot of time to it. He focused mostly on raising debt and equity, buying and selling companies, overseeing subsidiaries and AT&T Capital Corp., a leasing equipment company he started in 1984, which grew to $9 billion in assets by the time it was sold for $2.2 billion in September 1996.
Setting a strategic direction
In his new role, Mr. Prendergast wants to set a strategic direction for ATTIMCO, and plans to be involved in the decision process on changes in asset allocation, the mix of active vs. passive management, and hiring and retaining key people.
He has already been making moves there, starting with the J.P. Morgan deal, which was initiated because some of the executives on the private equity team had been talking about leaving after receiving attractive offers.
"We have instituted programs geared to creating an environment where people feel valued and valuable and are moving towards new business objectives, with compensation topping the list. That involves making changes in the appraisal process and tying compensation to objectives and performance," he said.
Mr. Prendergast travels around 25% of the time to meet money managers in their native environments as well as to inspect AT&T properties throughout the world. But he is in constant communication with a network of top Wall Street money managers and senior-level bankers he has worked with over the years.
He also tunes into the 5 a.m. news shows, while doing his warmups before setting out for a three-mile jog three or four times a week.
