The District of Columbia Retirement Board wants to drop almost half of its equity and fixed-income money managers when it hands over the bulk of its $4.9 billion in assets to the federal government later this year.
Pensions & Investments has learned the retirement board is hoping to replicate its current asset exposure and risk exposure with only 16 equity and fixed-income portfolios managed by 11 managers when it shrinks to $1.275 billion later this year. The fund now has 25 such portfolios with 21 managers.
Details are contained in a plan drawn up by the fund's consultant, RogersCasey & Associates Inc., and approved by trustees at a recent meeting.
For now, the pension fund intends to retain all 20-odd real estate and alternative investment managers.
Whether the Department of Treasury - which will assume control over most of the DCRB's assets - will agree with the proposal remains to be seen. It is presumed, but not certain, that the Treasury Department would retain those managers.
The plan for divvying up the managers was devised so the pension fund would retain some portfolios in their entirety, hand over others to the Treasury Department, and split up the remaining proportionately. Representatives of the retirement board are scheduled to discuss the proposal with Treasury Department officials later this week.
The federal government has not yet announced how it will manage the $3.6 billion investment portfolio it will acquire from the pension fund.
Plan 'makes sense'
Streamlining the manager lineup makes sense because of fees.
Ultimately, though, the breakup plan might become moot if retirement board officials succeed in convincing Treasury Department officials the pension fund should continue managing all of the assets, with separate book-keeping for the money under the Treasury's jurisdiction, said Berna Gunn-Williams, chairman.
"We would love to continue" managing the money, Ms. Gunn-Williams said. The retirement board, she said, has been very successful in managing the assets so far.
Retirement board officials declined to discuss the RogersCasey proposal.
The federal government is scheduled to take over the bulk of the retirement board's assets and its $4.8 billion accrued unfunded liability under a law enacted last August to relieve the financially strapped district of some of its burdens.
Under the District of Columbia Retirement Protection Act, the Treasury Department will use the assets it acquires from the pension fund to pay out retirement benefits to the city's employees and retirees until the money is depleted. The federal government then will chip in to cover any remaining accrued pension liabilities.
Under the proposal, the fund is planning to keep less than a third of its $2.5 billion domestic equity exposure in passive and enhanced index strategies; trim its active domestic equities manager lineup to five from nine; and hand over its entire Standard & Poor's 500 stock index futures portfolio.
Here's the breakdown on equities by style or strategy:
INDEXED: Alliance Capital Management LP, which now manages $741 million for the board, would be retained for a roughly $240 million S&P 500 index fund. The remaining $500 million would go to the Treasury Department.
The fund is contemplating keeping a Barclays Global Investors enhanced index portfolio of $160 million. A second, larger portfolio of $520 million, managed by Fidelity Management Trust Co., would be transferred to the federal government.
GROWTH STOCKS: Alliance also would be retained for a portion of the $78 million small-cap growth portfolio it manages. The board wants to keep Denver Investment Advisors as manager of $67 million in midcap growth, shifting the rest of the now $238 million portfolio to the government, although it proposes giving up a $30.5 million midcap growth portfolio GW Capital Inc. manages. The retirement board wants to hand over a $28.5 million growth portfolio managed by Woodford Gayed Management Inc. It thus could end up with less than $100 million of the $375 million exposure it now has in domestic growth stocks.
VALUE STOCKS: The fund is proposing to keep two of its domestic value stock portfolios intact: $45 million with Edgar Lomax Co. in large caps, and $30 million with The Kenwood Group Inc. in midcap value. The pension fund also proposes splitting with the federal government the $216 million small-cap to midcap value portfolio managed by Sasco Capital Inc.
If Treasury officials approve the pension fund's proposal, the government also will receive the entire $96 million small-cap value portfolio run by Cowen Asset Management, and $42 million in a large-cap portfolio with Sturdivant & Co. Inc.
The fund also is planning to transfer the entire $255 million in an S&P 500 futures portfolio managed by State Street Global Advisors to the federal government.
The fund also is proposing streamlining its $1.25 billion fixed-income portfolio, now managed by four core bond managers, and a separate high-yield manager and a global bond manager.
Under the proposal, the pension fund would keep only two managers - Pacific Investment Management Co. and Western Asset Management Co. The fund would retain a portion of the $434 million core portfolio with PIMCO, but expand its mandate to also include high-yield bonds. Simultaneously, the fund proposes retaining Western Asset as both a core and global bond manager, but keeping only a portion of its current $234 million in domestic bonds and $217 million in global bonds.
The fund contemplates handing over $136 million with J. & W. Seligman, $24.5 million with LM Capital and $209 million with Morgan Grenfell Asset Management Ltd.
Sometime after the transfer of the assets to the federal government, the retirement board will consider funding Hughes Capital, a farm team manager hired last fall to run a $15 million to $20 million core fixed-income portfolio.
Meanwhile, the fund is proposing splitting with the federal government its three international stock portfolios, and handing over the entire $614 million in an international stock futures portfolio with State Street Global. The fund would retain a portion of the Morgan Stanley Capital International Europe Australasia Far East indexed portfolios with Bank of Ireland Asset Management (for $291.5 million) and with Templeton Worldwide (for $327 million). It also intends to keep some of the $140 million Invesco manages in a Japan-only strategy.
Because the federal government has a shorter time horizon than the retirement board and needs greater liquidity, it has expressly stated it does not want any exposure to alternative investments or real estate.
The pension fund therefore is proposing it maintain the $64 million in real estate and $69 million in venture capital for now.
Eventually, it will wind down its real estate exposure.
The fund also has a stockpile with State Street of about $78 million in short-term securities that it intends to use to hike its fixed-income exposure after its breakup.
In addition, about $62 million of the $88 million in a short-term account with UBS Asset Management will go to set up a separate pension plan for 120 Washington judges and beneficiaries.
Also unresolved is whether the retirement board should keep more than the $1.275 billion contemplated under the original carve-up plan drawn up a year ago. The plan was based on the retirement board's $3.75 billion in assets at the end of September 1996. Because of the market's surge last year, the pension fund grew to $4.8 billion in assets a year later, so the Treasury Department will get far more than the $3.2 billion originally anticipated.
In private conversations, retirement board officials have made it clear they believe the excess assets should be divided proportionately between the pension fund and the federal government.