SACRAMENTO, Calif. - The California Public Employees' Retirement System's investment staff is recommending numerous changes to the system's international investments as a possible precursor to bringing management of the investments in-house.
The staff of the $160 billion system was expected at an Oct. 18 investment committee meeting to make a number of recommendations concerning its $30.7 billion international equity portfolio and $5.6 billion international fixed-income portfolio.
The key proposals include:
* eliminating global tactical asset allocation by terminating a $1.4 billion GTAA portfolio run by UBS Brinson Inc., Chicago.
* starting searches this quarter for active international equity and fixed-income managers and asking current managers to rebid;
* widening the range of target weightings for international active and passive equity managers from fixed amounts; and
* avoiding investments in multinational and local markets portfolios such as the new FTSE Multinational series.
Staff members also planned to ask the board to allow them to begin studying the possibility of setting up an in-house currency overlay portfolio, as a precursor to possibly eventually bringing management of the international portfolios in-house.
Such a portfolio would "allow the staff to gain foreign exchange experience that may be used to expand into international fixed-income investing in either the futures or cash markets," according to an outline of the meeting agenda prepared by Sheryl Pressler, chief investment officer; Mary Cottrill, senior principal investment officer; and Bob Boldt, senior investment officer.
Such a move would not come until the manager search and transition were completed.
In the short term, the staff is not recommending the committee up the overall target allocation of international equities, now at 20% of the fund, or fixed income, which is 4%.
Rather, it is planning to recommend that active equity managers as a group have license to run between 25% and 40% of the international equity portfolio vs. the current target of 25%. In turn, CalPERS' lone passive manager, State Street Global Advisors, Boston, would manage between 60% and 75% of the international equity portfolio, rather than its current fixed weighting of 75%.
Investment staff at CalPERS refused to comment on their recommendations late last week because they had not yet been looked at by the board members on the investment committee.
CalPERS active international equity managers currently are: Morgan Grenfell Investment Services Ltd., London; Newport Pacific Management, San Francisco; Nomura Asset Management U.S.A. Inc., New York; Oechsle International Advisors, Boston; Paribas Asset Management Inc., New York; Schroder Capital Management International Inc., New York; ValueQuest/TA LLC, Marblehead, Mass.
Its active international fixed-income managers are: Baring Asset Management Ltd., London; Fiduciary Trust Co. International, New York; Julius Baer Investment Management Inc., New York; and Mercury Asset Management International Ltd., New York.
The managers were all hired in 1994. Their contracts, which expired last year, were extended through June 2000. The investment staff wants to review new contracts of any new managers hired annually.
CalPERS currently runs its $35.6 billion domestic fixed-income portfolio in-house. Moving international fixed income in-house would allow the fund to consider running fixed-income assets on a global basis.
CalPERS staff also wants the current fixed-income managers to be able to buy a wider range of paper, including limited amounts of U.S. dollar debt and investment-grade, emerging markets sovereign debt.
Seeking flexibility
At the Oct. 18 meeting, the staff planned to propose the wider range in its active international equity portfolio to give managers "flexibility so that opportunities to add value over a passive portfolio are not limited, but a set amount of assets is not forced into actively managed portfolios, either," according to the agenda memo.
It also planned to recommend the investment committee, which is made up of all 13 board members, consider adding managers running enhanced indexing of international equities to complement the higher risk and higher return of active strategies.
The staff also planned to advocate the investment committee diversify active international managers by style such as growth and value. It also wants license to widen the potential country weights in its passive index fund in order to have more room to fit regional managers into the overall portfolio.
The staff, however, did not plan to recommend searching for a new passive manager while it searches for active managers. It therefore is recommending the investment committee extend SSgA's contract to June 2001.
But CalPERS' staff wants to cut GTAA from its portfolio. The fund first hired Brinson in 1994 to run a GTAA portfolio with a global equity benchmark. GTAA managers distribute assets among U.S. and international equity, fixed-income and cash markets.
The staff, however, now believes the fund's "strategic asset allocation should be controlled at the investment committee level and that managers in the international equity program should be allowed to invest only in international equities," according to the agenda memo.
Against the indexes
And the staff is firmly against running international portfolios based on multinational indexes. "Current research indicates that global multinational companies cannot be considered a separate asset class or separate risk factor," the agenda memo states.
The staff planned to ask the investment committee to move active and passive managers under the same benchmark, a custom Financial Times/International Finance Corp. index. CalPERS active managers currently operate under the Morgan Stanley Capital International All Country World index, ex-U.S. The transition of SSgA's $23 billion passive portfolio to the MSCI ACWI, ex-U.S., benchmark would be expensive. Also, the custom FT/IFC benchmark contains a greater percentage of the market capitalization of international country indexes than does the ACWI.
The staff also wanted to propose the possibility of incorporating small and emerging international equity and fixed-income managers into the fund's manager development program.
