AUGUSTA, Maine - The Maine State Retirement System might become the first pension fund to adopt Ennis Knupp's controversial "whole-stock portfolio" approach to domestic equities.
The $7.5 billion Augusta-based pension system has authorized the Chicago-based consultant to pursue the approach and come back with names of managers to review over the next two to three months, said David Wakelin, chairman of the board of trustees. The potential restructuring could affect up to $750 million in actively managed U.S. equity portfolios.
"There appears to be good justification and logic in allowing managers more investment discretion than we have in the past. Tying managers into a particular box might not take advantage of all the expertise in the firms we are dealing with," he said.
Ennis Knupp & Associates consultants have become convinced that the current practice of using a variety of specialized U.S. stock portfolios has created closet index funds, causing plan sponsors to pay high management fees while not adding anything to performance.
The consulting firm's "whole-stock portfolio" approach would create actively managed U.S. equity portfolios with full discretion to invest in the entire stock market, layered on top of an index strategy comprising roughly 70% to 80% of a client's domestic equity assets. A single, wholesale fee would be negotiated with 10 to 15 preferred managers, while performance would be measured against a broad benchmark, such as the Wilshire 5000 or the Russell 3000 index (Pensions & Investments, Nov. 27).
The Maine system, which has 80% of its domestic assets indexed, has been unhappy with the performance of its active domestic managers over time.
In the past six or seven years, the fund has pared its active U.S. equity managers from six to two: Alliance Capital Management LP, New York, which runs a $450 million large-cap growth stock portfolio; and Peregrine Capital Management, Minneapolis, which runs a $315 million small-cap portfolio. (A $20 million multimarket fund run by J.P. Morgan Investment Management, New York, is being liquidated.)
The pension fund has a 20-year relationship with Alliance, and the firm might be in the running for a whole-stock portfolio. It remains to be seen whether the fund will keep some assets in a separate small-cap portfolio, Mr. Wakelin said.
"But we are pursuing the possibility of hiring one or more broad-based managers," he said, noting it might take six months to implement any restructuring.
The concept has captured the attention of the institutional investment management community. On the day the story on Ennis Knupp's approach broke in P&I, the consultant's web page containing its whole-stock portfolio manager questionnaire scored 300 hits, and reached 600 during the first week, said Richard M. Ennis, principal.
Opinion on the strategy has ranged the gamut.
Jim Hamilton, president of Hamilton & Co., a Princeton, N.J.-based consultant that has employed broad-based mandates for 31 years, blasted style-specific mandates as "sort of a paint-by-the-numbers approach."
Disagree with idea
Others, however, think the whole-stock idea misses the boat.
Bill Schneider, principal at consultant Dimeo Schneider, Chicago, said he thinks Mr. Ennis is "off-base for a couple of reasons."
For one thing, Standard & Poor's 500 index-type stocks have been in favor for the past couple of years, favoring a trend toward indexing. Second, many consultants can't pick good managers, he said.
Another problem is that Mr. Ennis' thesis requires finding "macromanagers who are not specialist" and "go where the action is," Mr. Schneider said. Assuming one can pick a manager that makes the right tactical shifts "presupposes that in '97, one would have been expert in buying Internet stocks."
Robin Pellish, senior managing director, and Venita Olsen, director of research, at BARRA RogersCasey, Darien, Conn., agreed that few managers have been successful in making tactical shifts. Tactical asset allocation managers, who are not burdened with stock-selection decisions and have to focus on only one issue, are a case in point, they said.
Rather, BARRA RogersCasey consultants favor using risk-budgeting within the entire pension fund. Their studies show that only managers in certain subasset classes consistently have added value over time. The bottom line: it's better to use indexed and enhanced index products to cover the bulk of exposure in U.S. large-cap stocks, while it pays to pick active managers to handle domestic small-cap investments.
Other experts, however, believe the strategy holds out promise to reverse the trend of overspecialization.
Peter Gerlings, senior vice president at New England Pension Consultants, Boston, said using a core-satellite approach with the large index component allows a pension fund to take added risk with the active management mandates.