CHAMPAIGN, Ill. - The $9 billion State Universities Retirement System of Illinois is boosting its international equities allocation and searching for a manager, while ending currency hedging.
These moves are among several other major changes approved by trustees to the system's international investments.
The fund will:
Increase international equity allocation to 22.5% from 17.5%;
Search for an international equity manager, assigning it $125 million to $150 million;
End currency hedging;
Add $50 million to Martin Currie Ltd.'s existing assignment to increase its emerging markets allocation; and
Shift Brinson Partners Inc.'s existing mandate to an active stock-selection approach, rather than just active country selection.
Changes were based on recommendations by staff and consultant Ennis, Knupp & Associates Inc., Chicago, said John R. Krimmel, the system's associate investment officer.
The fund plans to increase its international equity allocation to 20% in 1998 then raise it to 22.5%, although no timetable has been set for the expanded target.
The search for an international manager might begin in March. The system will look for a manager that will focus on bottom-up selection, small-capitalization and midcap equities and have both developed markets and emerging markets stocks in the portfolio.
The system might divide the assignment into separate mandates - for the Morgan Stanley Capital International Europe Australasia Far East index markets and emerging markets - with a single manager, depending on how the manager structures the strategy.
Funding for the new manager likely will come from domestic or international index funds, managed by Barclays Global Investors, San Francisco, which would retain $3.75 billion.
The system also plans to end its practice of hedging about 50% of its currency exposure around the beginning of the year.
Mr. Krimmel said trustees concurred with staff and consultant findings that hedging provided little benefit to the system.
A report to trustees says, "some believe that the hedging of foreign currency exposure reduces risk. Others maintain that foreign currency exposure is best left unhedged."
Active international managers, however, will be allowed to hedge currency on a defensive basis.
The system had hedged 50% of the currency of its international index funds and 50% of its active international portfolios. Hedging was done by the managers. The system estimates the currency hedging cost $1 million a year.
The system plans to retain all four of its existing international managers, but it is changing the assignments of two and may alter the amount of funding for BGI.
The system's $50 million addition to Martin Currie increased its emerging markets mandate to $100 million. Coupled with its active EAFE mandate, Martin Currie will run $326 million.
For the nine months ended Sept. 30, Martin Currie's EAFE mandate returned 15.6%, the same as its benchmark, the MSCI EAFE index. Since it began with the system in 1992, it has returned 13.1% a year, 1.2 percentage points more than its benchmark.
For its emerging markets portfolio, which the system began in February, Martin Currie returned 4.8% since inception, compared with its benchmark of -6%.
The system will change Brinson's mandate to fully active. Before the change, Brinson actively allocated among countries, but used a passive approach for stock selection. Instead of stocks, it used stock index futures.
Brinson manages $179 million for the system. In the nine months ended Sept. 30, it returned 16.2%, ahead of its benchmark return of 15.6%. Since it began with the system, Brinson has returned 11.6% a year, 0.3 percentage point below the benchmark.
The assignment of American Express Asset Management, the system's other active international manager, will not change. It manages $285 million in a combination top-down, bottom-up strategy. It returned 13.8% for the nine months ended Sept. 30, below its benchmark of 15.6%. But since it began as a manager for the system in 1992, it has returned 1.8 percentage points a year above the benchmark.
BGI manages $617 million in an EAFE international index and $146 million in an emerging markets index. Since the EAFE index fund inception in 1986, through Sept. 30, BGI returned 9.1% a year, compared with its benchmark 8.8%.