BOSTON - The $26 billion Massachusetts Pension Reserves Investment Management Board is looking to make a splash in relatively uncharted waters as it searches for managers focused on corporate governance in the capital markets.
PRIM officials plan to place up to $800 million - 3% of the total fund and about 14% of its active equity assets - with managers that invest in underperforming public companies, with the goal of helping them turn around through corporate governance initiatives.
The concept, known as relationship investing, finds money managers investing in a concentrated portfolio of firms, taking sizable stakes and gradually building larger positions in the firms as they attempt to fix them.
This is new territory for Massachusetts PRIM, said James Hearty, executive director, and an area where only a few institutions - including the California Public Employees' Retirement System, Sacramento, and Ontario Teachers' Pension Plan, Toronto - have ventured.
Stan Mavromates, senior investment officer at PRIM, said the move stemmed from the PRIM board's search for new ways to generate returns.
The money managers in this area - such as Relational Investors, San Diego, and Providence Capital, New York - aren't exactly household names, but the investment returns of some of the firms PRIM researched have been outstanding, said Mr. Mavromates.
PRIM staff met with a handful of relationship investors over the past year or so and came away impressed, said Mr. Hearty. "Track records appear to be very solid," said Mr. Hearty, citing one firm that was beating the S&P 500 by close to 1,000 basis points year-to-date.
While prepared to invest up to $800 million in this area, the size of the mandate and the number of managers hired depend on the response PRIM gets from the RFP. Mr. Hearty pointed out that the RFP is exploratory and PRIM may end up awarding nothing to this area. "This (the RFP) will allow us to do adequate due diligence to see if it makes sense to make a recommendation to the board." Determining the risks of investing in these concentrated portfolios will be part of the scrutiny and due diligence, he explained.
Consultants say this type of investing has not shown up on a lot of radar screens. "It's not terribly common," said Timothy Barron, director of research at CRA RogersCasey, Darien, Conn. Taking a big enough stake and degree of influence in a company to help improve its fortunes is a niche that's been successful for managers such as Mario Gabelli, said Mr. Barron. The idea of taking large stakes and employing corporate governance is a niche within a niche, he added.
"It's an interesting construct," but as fiduciaries, pension funds must have confidence that these relationship managers have a positive, not a negative, influence on the firms, Mr. Barron said.
Mr. Hearty admits it's an unusual area. "I don't think anyone has benchmarked these (types of investments) to the public funds market," he said.
The mandates will be part of PRIM's active domestic equity portfolio and will be benchmarked to the S&P 500 and either the Wilshire or Russell small-cap benchmarks, depending on the awards. PRIM hopes to look at both large-cap and small-cap relationship managers.
The money would come out of the fund's nearly $7 billion in passively managed equity assets.
The RFP is part of PRIM's focus on further diversifying the pension fund's assets. The board is reviewing the fund's asset allocation, and "we are exploring our asset allocation options," said Jerry Mitchell, chief investment officer at PRIM. The PRIM board last conducted an asset-liability study in late 2000. While satisfied with the asset allocation that's in place, Mr. Mitchell cited two areas where improvements could be made. He would like to see a broader range of investment portfolios in the pension fund, and he and the staff would like to examine the ratio of passive to active investments, which is currently 75/25 in the large-cap area and 25/75 in for small-cap.
In terms of further diversifying the portfolio, the PRIM investment staff would like to explore alternative asset classes such as hedge funds, oil and gas, and distressed debt. The PRIM board's investment committee will meet later this month to review the asset allocation.
As part of the 2000 asset-liability study, the board added timber to the portfolio, allocating 2% of the asset class. In November, PRIM acquired more than 200 acres of timber in Oregon and Washington for about $400 million, acreage which CalPERS recently sold off (Pensions & Investments, Oct. 28).
Timber has been a top performer in the PRIM portfolio, returning 9.7% year-to-date through Oct. 31. Mr. Hearty said he was not concerned about purchasing property that the California fund unloaded, saying PRIM had significant assets to spend in timber and found these properties to be good investments.
With the recent purchases, PRIM has invested about 1.8% of its 2% timber allocation and plans to invest in more timber next year.