SACRAMENTO, Calif. - Trustees at the nation's largest pension fund made the right decision when they terminated three value managers - two small-cap and one large-cap - and hired four new ones.
A study by the $169 billion California Public Employees' Retirement System showed that, overall, the new managers have outperformed the old ones.
For the six months ended Dec. 31, the new managers returned a weighted, cumulative 21.3%, vs. 15.6% for the old managers.
But one of the terminated firms - Brinson Partners Inc., Chicago - outperformed two of the new managers.
CalPERS spokesman Brad Pacheco said the study, conducted internally, was designed to get a better sense of whether recent hirings and terminations were the right decisions to make at the time. Approximately $2 billion in active value equity assets changed hands.
Managers terminated were: Valenzuela Capital Partners Inc., New York; ValueQuest/TA, Marblehead, Mass.; and Brinson. They were replaced with J.P Morgan Asset Management, New York; Osprey Partners Investment Management, Shrewsbury, N.J.; Sanford C. Bernstein & Co., New York; and Pzena Investment Management, New York.
Breaking down the performance, Pzena and Bernstein carried the day for CalPERS, with returns of 37.9% and 27.1%, respectively, during the six-month stretch. Osprey returned 17.6% and J.P. Morgan, 12.6%.
One piece of irony: Pzena, the best performer, has been allocated the smallest piece of CalPERS' value equity pie - 14%. Conversely, J.P. Morgan, the worst performer, got the biggest slice - 38%. Bernstein is managing 28% of the value equity assets; Osprey, 19%.
On the other side, Brinson returned 18.8% during the six months, outperforming both Osprey and J.P. Morgan. CalPERS hired Brinson to manage the large-cap value portfolio in May 1998 and terminated it less than two years later because of turnover among senior investment professionals and significant underperformance of its custom benchmark.
ValueQuest/TA returned 12.1% during the six-month study period; Valenzuela, 11.2%. Neither outperformed the new firms. Both ValueQuest/TA and Valenzuela were hired in January 1991, and terminated Dec. 31, 1999, after their contracts weren't renewed.
Brinson sticks with style
Greg Fedorinchik, spokesman for Brinson, said the performance rebound in the large-cap value portfolio has come from sticking to the firm's investment philosophy and making enhancements to its processes. "We've redoubled our efforts," said Mr. Fedorinchik.
Brinson executives are looking closely at themes and strategies that may have led to underperformance and "attacking them head on."
He also said Brinson has taken advantage of its global resources, particularly London-based UBS affiliate Phillips & Drew, and broadened its research platform.
Mr. Fedorinchik said many clients were concerned about the departure of Brinson founder, Gary Brinson. But solid performance since points to continued strong leadership within the organization, he added.
Kent Novell, principal with Boston Research Group, Woburn, Mass., a money manager consulting firm, said it's important for plan sponsors to analyze their managers and develop a process by which to evaluate them.
However, he added, the decision to hire and drop managers is a difficult process that very often can be an exercise in futility. "It's difficult to know when is the right time to pull the trigger," said Mr. Novell, because there are so many different variables, such as personnel turnover and style. Even managers within a style, such as value, have different approaches and risk parameters. "It's every bit as much an art as it is a science," said Mr. Novell.
Looking at the CalPERS case study, Mr. Novell said the pension fund hit it right with the hires of Pzena and Bernstein. "They happened to switch managers at exactly the right point in that cycle.
But a six-month time period is not long enough to get a good indication of performance, particularly in the value market, he said.
"Call me two years from now to see if the returns (of the seven value portfolios in the study) are vastly different."