BOSTON -- The Massachusetts Pension Reserves Investment Management Board has hired seven new managers to handle $1.65 billion in new mandates to increase its exposure to alternative investments and shift equity investments to active portfolios from overexposed passive ones.
Five of the firms will manage alternatives, and the other two, large-cap active equities. The fund also plans to search for a new small-cap manager.
As part of its annual asset allocation review, the $30 billion MassPRIM this month approved an asset allocation increase of one percentage point for alternative investments, bringing the allocation to 5%, and a one-point reduction in the domestic equity target, to 44%. Both shifts bring the interim allocations closer to long-term target ranges of 42% for domestic equity and 8% for alternatives. The rest of the fund's allocations are: domestic fixed income, 24%; international equity, 16%; real estate, 6%; and emerging markets, 4%.
The board chose to invest that money in four venture capital investments with firms with which MassPRIM has existing relationships and one firm with which it has not worked in the past.
The board approved investments in:
* Battery Ventures VI, Wellesley, Mass., an early-stage investor in the communications, software, and Internet industries. The $50 million venture cap investment is MassPRIM's second in a Battery Ventures fund. Last year the fund put $10 million in Battery Ventures V.
* Schroder European Ventures II, London.
* Thomas H. Lee Equity Fund V, Boston.
* Willis Stein & Partners III, Chicago.
In addition, the board ratified a $20 million investment, approved in February, in Alta Communications VIII, a venture capital firm with which MassPRIM had not previously invested. The firm agreed to accept the commitment if MassPRIM could meet the fund's targeted Feb. 15 closing date.
These moves bring the fund up to a 5% exposure to alternatives.
"We're still working toward ultimately getting our exposure to the asset class to 8%," said Michael Travaglini, the state's first deputy treasurer.
The fund's alternative investments had a strong year, returning 22.5% for the one-year period ended Jan. 31, and an average annual return 25.3% for the five-year period.
The money for the increase to alternatives was taken from the overall domestic equity category. Over the five-year period ended Jan. 31, the fund's domestic equities have posted an average annual return of 24.8%.
George Wilson, MassPRIM senior investment officer, said the system typically looks to invest in ventures with strong management and good track records, with which the system has existing relationships.
In January, the PRIM board approved a target allocation of $825 million for new opportunities in alternatives in 2000. Mr. Wilson plans to recommend two to four managers at the next MassPRIM board meeting in May.
The board may change the alternative investments benchmark, the Standard & Poor's 500 stock index plus 4% for special equities and the S&P 500 plus 5% for venture capital, to the Wilshire 5000, the benchmark used by adviser Wilshire Associates Inc., Santa Monica, Calif.
To create more balance within the equity portion of the portfolio, MassPRIM broadened some of its small-cap mandates and shifted other small-cap assets to active from passive management.
The board decided to shift $100 million to active small-cap manager Rosenberg Institutional Equity Management, Orinda, Calif., from passive small-cap manager Dimensional Fund Advisors, Santa Monica.
Another $350 million passive portfolio run by DFA will be given to a new small-cap manager. MassPRIM will issue an RFP for an active small-cap equity manager with either a Wilshire 4500 or Russell 2500 mandate in the near future.
"We'd like to test the marketplace to find some small-cap managers to get our current status more in line with our overall policy benchmarks," said Mr. Travaglini.
The fund's targets are for 75% of the small-cap portfolio to be actively managed and 25% passively managed. But the passively managed side grew to 38% as small-cap active managers were terminated last year and the proceeds from the terminations were redeployed to DFA. By the end of 1999, the overallocation to passive was about $450 million.
In an effort to increase capitalization and reduce overexposure to the smallest cap stocks, the board adopted larger cap mandates for two current Russell 2000 managers, Lazard Freres Asset Management, New York, and DFA. Lazard's benchmark was changed to the Russell 2500, and DFA's was changed to the Wilshire 4500.
New active large-cap domestic equity managers J.P. Morgan Investment Management Inc., N.Y., and Legg Mason Inc., Baltimore, Md., will manage money shifted from passively managed domestic equities. Because more than MassPRIM's target of 80% of its domestic large-cap equities were managed passively, the board hired J.P Morgan to manage $483 million and Legg Mason to manage $867 million.
Assets were shifted away from passively managed large-cap equities, managed by State Street Global Advisors, Boston.
MassPRIM also shifted $840 million to domestic fixed income from international equity to bring investments in line with long-term target ranges. International equity exceeded its target by 2.7% at the end of 1999, while domestic fixed income was under its target by 4.7% at year's end. The transfer was taken from four international equity managers -- Capital Guardian Trust Co., Los Angeles; Marathon Asset Management, London; Putnam Advisory Co., Boston; and State Street Global Advisors -- and given to three fixed-income managers: BlackRock Financial Management Inc., New York; Loomis, Sayles & Co., Boston; and Pacific Investment Management Co., Newport Beach, Calif. The rebalancing increased the fixed-income allocation to 23%, with further rebalancing anticipated from domestic equity into domestic fixed income.