NEW ORLEANS -- The New Orleans Employees' Retirement System discovered the hard way that international investing can be a tricky business.
As a result of poor returns, the $380 million system recently dumped State Street Global Advisors, Boston, from its quasi-passive international equities mandate and hired U.S. Trust Co., New York, and Waddell & Reed Inc., Overland Park, Kan., to replace SSgA as its international equities managers.
The fund also is considering terminating Bank One, Columbus, Ohio, as its global custodian, after spending about $400,000 on a currency conversion the bank handled for the fund.
Jerome Davis, chairman of New Orleans' board of trustees, said when the fund was making its first foray into international investing in 1996, "we asked the wrong questions or weren't listening to how different they (SSgA) were from other managers."
"We were lulled into complacency when they said they could handle the whole thing" -- meaning the investing, the currency conversion and the custody of the $10 million they were given to invest, according to Mr. Davis.
"It was our fault for not being more sophisticated in the international arena," he added.
A spokeswoman for SSgA wouldn't comment.
Trustees didn't understand the investment process SSgA was using, he said, a quasi-index strategy through which the manager bought stock indexes of different foreign countries.
"They said it was a country selection strategy," said Mr. Davis.
Mr. Davis said SSgA "bought and sold indexes like you would buy or sell stocks -- they would go from one to another."
In the end, "turnover was not what hurt us. It was the choice of places to invest, in unproductive sectors of the world," he said.
But since the firm was using the Morgan Stanley Capital International Europe Australasia Far East index as its benchmark, it had to invest in certain countries. It was overweighted in Japan in 1997 and 1998, which hurt its performance.
"The top-down strategy as followed by State Street did not give us the returns (we expected)," said Mr. Davis.
The $10 million investment shrank to $9.1 million by the time the fund decided to terminate SSgA in early 1999, although since 1999 was a good year for international investing and the EAFE index, the investment actually was up to $15 million when the fund cashed it out, according to Mr. Davis.
By the time the fund hired the new managers, the pension plan had grown significantly -- from $280 million to its current $380 million, he said. As a result, it increased its international equity allocation to a total of $40 million for the two new managers. U.S. Trust got $30 million; Waddell & Reed, $10 million.
Bank One, New Orleans' domestic custodian, took over global custody -- including currency conversion -- after SSgA was terminated.
"We thought the currency conversion costs (from Bank One) were excessive," said Mr. Davis.
Morgan Stanley Dean Witter & Co., New York, the fund's consultant, and Frank Russell Co., Tacoma, Wash., the execution broker, are "working with them (Bank One) to try to get the costs down on the currency conversion," said Mr. Davis.
He said the fund may look for a currency manager after it sees the results of an analysis now being done by Morgan Stanley.
Morgan also is doing a custodian review for the fund and "something may come out of that," said Mr. Davis.
A Bank One spokeswoman wouldn't comment.
What has the fund learned from all this?
"We're now more specific in how we question the managers about how they manage money," said Mr. Davis.
Both U.S. Trust and Waddell & Reed will be using an all-cap growth style. Mr. Davis said the fund considered hiring a value manager but decided against it "because it's not complementary to growth now."
But the fund is not totally down on indexing or SSgA. It gave the firm $10 million to manage in a Standard & Poor's 500 index fund for its domestic strategy.
"We may give them more money, having made the decision to be in the S&P 500," said Mr. Davis.
