CHICAGO - The $9.8 billion Chicago Public School Teachers' Pension and Retirement Fund reallocated about $1.6 billion, in part to reduce money management fees.
Three fixed-income managers were dropped. In international equities, the fund scrapped its separate allocations to emerging markets and replaced an international growth manager.
As a result, fees will be cut by about 25%, including around $500,000 a year for fixed income alone.
In fixed income, it allocated $530 million to Western Asset Management Co., Pasadena, Calif., for what the fund calls an active core opportunistic style. It terminated Banc of America Capital Management LLC, Charlotte, N.C., which managed $103 million for the fund; Morgan Stanley Investment Management, New York, which managed $336 million; and Wellington Management Co., Boston, $340 million.
Incumbents rebid
All three incumbents, which managed active core opportunistic styles, rebid for the assignment. Besides the incumbents, Western beat two other finalists selected from a search by Mercer Investment Counseling, Chicago. They were Pacific Investment Management Co., Newport Beach, Calif., and UBS Global Asset Management, Chicago.
Some incumbent managers cut fees in their rebidding proposals, while others raised their fees. Banc of America proposed cutting its fee to 10 basis points from 15; Morgan Stanley, raising its fee to 18 from 17; and Wellington, to 21 basis points from 20.
Of the short-listed managers, PIMCO proposed a fee of 28 basis points; UBS, 18; and Western Asset, 20.
In addition, trustees retained Smith Graham & Co. Asset Management, a minority-owned manager, for its existing $63 million in active core opportunistic fixed income at a reduced fee. Smith Graham volunteered a proposed fee of 12 basis points from its current 24 basis points.
Smith & Graham's retention, as well as the hiring of Western, are pending contract negotiations.
The fund, at Mercer's recommendation, also is changing allocations of other fixed-income managers. Some will be getting a piece of the $250 million from the terminated managers that isn't going to Western Asset.
Northern Trust Global Investments, Chicago, will have its fixed-income index assignment raised to $1.77 billion from $1.55 billion. MDL Capital Management Inc., Pittsburgh, a minority-owned manager, will be increased to $150 million from $52 million for its investment-grade portfolio. Lincoln Capital Management Co., Chicago, will be reduced to $440 million from $502 million for its enhanced index fund.
Saving fees
Mercer estimated the new structure will save the fund $500,000 in fixed-income fees. In calendar year 2001, the fund paid about $2.06 million in fees for its managers to run about $3 billion in fixed income.
In international active growth equity, the fund selected MFS Asset Management Inc., Boston, assigning it about $325 million. MFS replaces Deutsche Asset Management Americas, New York, terminated for performance and organizational changes. Besides DeAM, which rebid for the assignment, MFS beat two other managers selected by Mercer - William Blair & Co., Chicago, and Northern Trust. MFS' hiring also is pending contract negotiations.
Trustees voted 5-4 with one abstention to select MFS over Northern Trust. Blair received no votes, although Mercer's report showed it was the best performing of the four managers over a five-year period. Blair, however, was the smallest of the four in terms of international growth assets, with some $800 million under management.
Northern offered a fee of 24 basis points, significantly lower than the other candidates. MFS offered a fee of 39 basis points, a 27% discount from its regular fee. Blair proposed a 47 basis-point fee, which it offered to negotiate. DeAM offered to lower its fee to 38 basis points from its existing 56 to 64 basis points for developed and emerging markets.
DeAM officials, appearing before trustees at their meeting, acknowledged performance problems and organizational changes but appealed for retention.
"It would be a mistake not to give us another year," William F. Shiebler, chief executive officer of DeAM Americas, told trustees.
Unanimous vote
Trustees voted unanimously to terminate DeAM, which ran $258 million in international active growth equities in developed markets and $66 million in emerging markets equities.
The fund's other international managers, Morgan Stanley and Lazard Asset Management, New York, which weren't involved in the fund's review, manage $427 million and $206 million, respectively. In addition, Lazard received $56 million in emerging markets equities, which had been managed by Schroder Investment Management North America Inc., New York. Schroder was terminated as a result of the change in the fund's strategy.
The Chicago fund eliminated its separate allocation to emerging markets, allowing all of its international managers to invest 15% in emerging markets.
Some of the losing managers in the searches continue to manage portfolios in other areas for the fund. Blair manages $127 million in domestic active growth equities; UBS, $256 million in domestic active value equities; and Northern Trust, in addition to fixed income, $2.1 billion in small-cap, midcap and large-cap indexed equities.
