NEW YORK -- Citigroup Inc. officials have been overhauling the $7.5 billion pension fund ever since the defined benefit plans of Citibank and Travelers Group merged in January.
Major strategic changes include:
* Expanding the alternatives program;
* Possibly creating a separate asset class for a portfolio of inflation-linked indexed bonds; and
* Conducting an asset allocation study.
The defined contribution plans, which total in excess of $8 billion, will be merged next year.
Ronald Walter, executive vice president of Citigroup Investments Inc., said one of the biggest changes he has made since the defined benefit plans merged is increasing exposure to alternative investing.
"We want to set a 20% allocation to non-traditional assets, which would encompass real estate, private equity and absolute-return strategies, including hedge funds, that have a low correlation to stocks and bonds," he said.
The investment committee has not yet approved the allocation.
Previously, Citibank's pension fund had no private equity investments, while Travelers' fund had a small allocation to real estate and private equity.
This year, Mr. Walter hiked private equity to 2% to 3% of total assets from less than 1%. The fund has nearly 5% of assets committed to real estate and 7% to 8% to absolute-return strategies. It recently made two non-U.S. commitments: $5 million to Ripplewood Holdings LLC, New York, an Asian private equity fund, and $25 million to Equity Office Properties International, Chicago, its first allocation to an international real estate fund.
One of the main goals is to be as diversified as possible. "I expect diversification is going to be rewarded," Mr. Walter predicted.
The strategies for fixed income and equities have not changed, although Mr. Walter and Louis Ferrante, vice president, have been evaluating all of the firms managing money for both pension plans, and expect to complete their reviews by the end of the year.
The investment committee is considering expanding the pension fund's current 2% to 3% allocation to inflation-linked indexed bonds, and treating it as a separate asset class, Mr. Walter said. The portfolio is now managed by The Bridgewater Group, Wilton, Conn.
"We're looking at all these strategies in terms of what might work if mainstream markets collapse. These bonds have a low correlation to both normal bonds and equities," Mr. Walter said.
The Citibank defined benefit plan will be converted to a cash balance plan starting in January. The Travelers plan was converted before the merger. Citibank retirees and employees who are 45 and older or who have 10 years of service still will be covered under a defined benefit pension plan. Employees whose pensions are converted will not lose any of the benefits they had accrued, Mr. Walter said.
After merging the defined benefit plans, Citigroup retained its large number of money managers and dropped the very small ones, Mr. Ferrante said.
2 pros run the show
Messrs. Walter and Ferrante were the sole investment professionals on the Citibank pension staff, which is not likely to be expanded, Mr. Walter said. Travelers didn't have a staff dedicated solely to its pension plan. But Travelers is staffed with investment professionals who manage its insurance portfolios and these people have been helping the pension fund perform due diligence on managers.
After Citibank and Travelers tied the knot, the firm created a new asset management firm, SSBCiti Asset Management, which now runs about two-thirds of Citigroup's pension assets in a variety of strategies.
"But we treat them at an arm's length," said Mr. Walter, who calls the firm's managers "affiliates." In fact, he said, "we consider them external managers, not internal managers."
Around 50% of the stock and bond portfolios are managed by SSBCiti, the other half by outside managers, Mr. Walter said. No new managers have been hired in those areas.
Along the way, there has been a merger of styles along with the merger of assets. Travelers used a more conservative approach that emphasized fixed income, which made up 46% of its pension assets; while Citibank took a more aggressive stance, investing heavily in equities. At one point in the early '90s, Citibank had an 80% allocation to equities, Mr. Walter recalled.
That allocation boosted the pension fund's returns to such an extent that the investment committee decided Citibank could afford to be more conservative, and at the end of 1997, the allocation was cut to 55%. It now stands around 50%, with about 39% of the pension fund in domestic equities and 11% in international. Of the remaining assets, 15% are allocated to alternatives and 35% to fixed income.
"That's more fixed income than we would want and less equities than would be normal," Mr. Walter said.
The asset allocation study, being conducted by Messrs. Walter and Ferrante and due to be completed this month, will help determine what the equity allocation should be.
But it would be a hard sell to change it, Mr. Walter said. "The plan is very well funded, and the committee decided it was appropriate to reduce the risk level. We're comfortable with that."
A new investment committee was formed last year, post-merger, and consists of three representatives from Travelers and three from Citibank, all senior managers who sat on their respective pension fund committees before, in order to preserve a sense of continuity.
Messrs. Walter and Ferrante are still framing the alternatives program. "It takes a long time to get invested in private equity," noted Mr. Walter. For that reason, he is mainly using large buyout funds, some of which have venture capital components. Most of the commitments to alternatives are for $25 million and are being funded from equities.
"We realized they (commitments) need to be at least that amount to have any impact on a fund of our size," Mr. Ferrante said.
Citibank has invested in hedge funds for three to four years, and is now in five funds, which Mr. Walter declined to name. The system primarily invests in market-neutral long-short strategies that are low-risk, use modest leverage and have a low correlation to the rest of the portfolios.
Around 85% of the real estate portfolio is in a core separate account managed by RREEF Funds, San Francisco, which is diversified by property type and region. The pension fund also has small allocations to private funds run by Lend Lease Investment Management Inc., Atlanta; AMB Property Corp., San Francisco; and Equity Office Property Trust, Chicago.