ARLINGTON, Va. -- The Navy-Marine Corps Relief Society came up a winner last year with its big bet on stocks.
The $211.1 million endowment fund used a combination of active managers and a futures overlay on its market-neutral strategy to gain extra returns from its massive exposure to domestic stocks.
Until Jan. 3, the fund had plunked 80% of its assets in domestic stocks, including its market-neutral portfolios. Since then, the fund has peeled that exposure to 70% of total assets.
"It was a very good decision," said James L. Koltes, who oversees the investment strategy of the fund and did a brief stint in the Navy years ago.
The fund consistently has topped the 21 pension funds and endowments in the Washington Area Investment Forum, with returns of 24.69% for the year ended Dec. 31, an annualized 22.16% for the three years ended that date, and an annualized 22.38% for the five-year period. It achieved these returns despite a strong weighting to long-short strategies, which in general have lagged other investment approaches in the past few years.
The fund, which offers interest-free loans and grants to sailors, Navy retirees and their families, also ranked in the top percentile of funds between $100 million and $1 billion in the plan sponsor database of Callan Associates, San Francisco, for the year ended Dec. 31. The fund ranked in third percentile in the Callan database for the five years ended Dec. 31 and in the fourth percentile for the 10-year period.
"The impressive return on the society's investments since 1996 has allowed us to increase our assistance for post-secondary education from $2.6 million in 1996 to $6.6 million in 1999," Jerome L. Johnson, president of the society and a retired Navy admiral, wrote in the annual report released in April.
The fund has handed out $879 million in financial assistance to sailors, Marines, their families and retired personnel since it was established in 1904. It depends on a combination of contributions, investment returns and repayment of loans for its funding.
The key to the fund's performance is its tactical asset allocation model, which has dictated the fund max out its domestic equity exposure at 80%, the cap under its asset allocation targets, for five years.
The fund's current allocation is 70% domestic stocks, 5% international stocks, and 12% fixed income. The fund also has 13% in a long-short or absolute-return strategy, which serves as a proxy for fixed income, said Mr. Koltes, chairman of the fund's asset allocation committee and a senior vice president at PaineWebber Inc. in Washington.
The fund's equity managers turned in 33.68% last year, including returns of equitized long-short investment managers, and a spectacular 120.16% by the fund's international stock manager, INVESCO, Atlanta, compared with a 36.8% return by its benchmark, the James Capel HSBC index.
The fund's sole unequitized long-short money manager, the Weiss Total Return Fund, Hartford, Conn., logged 13.1% in 1999, while the median market-neutral return in Frank Russell Co.'s universe was -5.81%. The Weiss fund is a sector fund, focused solely on utilities.
Fixed-income manager ASB Capital Management Inc., Washington, underperformed last year, returning -1.28% compared with a -0.81% performance by the benchmark Lehman Brothers Aggregate index.
Because of the fund's need for liquidity -- it paid out $43.1 million last year -- it has stayed away from private equity investments, which tend to be illiquid, but officials now are reviewing whether to add that asset class, said Mr. Koltes.
The fund is able to squeeze out more exposure to domestic stocks by overlaying stock index futures -- the S&P 500 and the S&P 500/BARRA Growth index -- on its long-short strategies.