NEW YORK -- Philip Morris Cos. Inc. has terminated all of its active equity managers and placed the roughly $2 billion they managed into passive strategies.
According to sources familiar with the workings of the $8 billion defined benefit plan, the reason was underperformance, a problem that had been plaguing the pension fund for the past several years.
The terminations cover all active U.S. equity managers, as well as real estate investment trust, international and emerging market managers, the sources said. The pension fund is retaining its fixed-income, alternative investment and real estate equity managers.
Mark Werner, vice president benefit investments at Philip Morris, refused to discuss the changes, saying: "It is company policy not to comment."
Mr. Werner would not identify the managers, but according to a form the company submitted for Pensions & Investments' Top 1,000 pension funds survey, the fund's active domestic and international equity managers as of Sept. 30 were: Alliance Capital Management LP; Goldman Sachs Asset Management; Sanford C. Bernstein & Co. Inc.; Neuberger Berman LLC; Wellington Management Co.; Merrill Lynch Mercury Asset Management; WorldInvest Ltd.; Morgan Stanley Dean Witter Investment Management; and Ardsley Partners. Officials at the firms refused to comment as a matter of company policy, or did not return phone calls by press time.
State Street Global Advisors already manages indexed equities for the fund; sources said Philip Morris has added Barclays Global Investors, San Francisco, as well.
The move apparently has been in the works for several years.
According to the sources, the system's active portfolios had been significantly underperforming their benchmarks and there were significant deviations in terms of tracking error relative to the benchmarks. As a result, experts involved with the fund recommended Philip Morris increase its passive exposure. At that time, only about 25% of the equity portfolio was managed passively. But relatively little action was taken until last year, when the investment committee increased passively managed equities to 39%, while continuing to search for solutions to the underperformance.
The changes were engineered by the investment committee, which did not do an asset allocation study, the sources said.
Originally, the new strategy was to index 70% to 80% of equities and to retain a few active managers, but that idea was scrapped this year.