Pension fund executives who don't want to constrain their international money managers to individual style boxes are giving them broader powers to move between value and growth and mandates that are more global.
This represents a backlash against the narrow style boxes favored over the past decade and a movement away from holding money managers to strict benchmark performance measurement.
FTI Institutional and Julius Baer are among the leading proponents of the growth/value flexibility, while Commonfund is considering blending its growth and value equity portfolios.
The ability to move between growth and value stocks is the main reason FTI Institutional, New York, was created last year. Fiduciary Trust Co. International, New York, specializes in international growth mandates, and its parent company, Franklin Templeton Investments, San Mateo, Calif., specializes in international value investing.
FTI's "dynamic international strategy" concentrates as much as 75% of the portfolio in one style, depending on which is performing best. The firm also offers global investing strategies, including a global small-cap portfolio, that mixes growth and value investments.
Peter Anderson, head of sales and marketing for FTI, said the ability to move between growth and value also removes volatility. Even its core international equity product uses active growth and value managers, said Mr. Anderson.
The General Conference of Seventh Day Adventists, Silver Spring, Md., recently hired FTI for a $115 million international mandate that will shift between growth and value stocks.
"At different times each style does better," said Roy Ryan, assistant treasurer, who manages about $2 billion in church assets, including the $1.4 billion pension fund. "Let them time the market to get returns that have meaning. You can't pay retirees with relative returns."
Mr. Ryan said he is tired of money managers who talk about relative performance and tell him that they "lost less than the index, when the index lost $30 million and we lost $20 million."
With FTI, "we're willing to experiment and see how they perform and see how our other managers do," said Mr. Ryan. He said if FTI provides better returns than its single-style managers, the fund may look for other money managers who can move between styles.
The Indiana Public Employees' Retirement Fund, Indianapolis, hired INVESCO, Atlanta, in February for a $200 million global mandate that allows the manager to invest as much as 30% of the portfolio in areas outside the MSCI All Country World index, which is its benchmark, according to Patricia Gerrick, chief investment officer of the $8.3 billion pension fund. The manager can overweight or underweight growth and value stocks and also invest in small-cap stocks, fixed income, emerging market equities and debt, and real estate investment trusts.
Choices this week
The Florida State Board of Investments, Tallahassee, expects to announce its choice of a manager for a global mandate this week, according to Lee Baldwin, a spokeswoman for the $78.7 billion pension fund. Scott Seery, director of international investments at the pension fund, said the new manager will be allowed to invest in "various strategies, including growth, value and core equities and in U.S. and international stocks."
"There's a shift to broader mandates," said Richard Pell, chief investment officer for Julius Baer Investment Management Inc., New York. "They're allowing managers to shift back and forth between growth and value.
Mr. Pell describes the firm as a core manager, more of a "generalist" that moves between growth and value stocks.
"Some large public pension funds are looking for firms with wide abilities who can do growth and value, to get more global mandates," said Mr. Pell. He said the firm has won about $700 million in new international equity accounts allowed to move between growth and value so far in 2003, although he declined to name any new clients.
Commonfund, Wilton, Conn., is considering combining its growth and value portfolios into one portfolio. "There has been some very preliminary discussion ... but no decision will be made until the summer at the earliest," said John Griswold, Commonfund senior vice president of marketing. He declined to provide more information.
Some funds have become more forgiving of their international managers. "I have seen a relaxation of holding managers strictly to benchmark tracking error," said Ron Peyton, president of Callan Associates Inc., San Francisco. "Adhering (strictly) to the benchmark has caused problems," he added.
However, not all consultants agree with the concept of allowing broader growth/ value mandates.
"We're talking a lot about various forms of absolute return mandates," said Jeff Nipp, director of research for Watson Wyatt Worldwide, Atlanta. "You have to be careful about trying to implement something like that (a strategy that combines growth and value investing)."
NorthRoad Capital Management LLC, New York, an international money manager, has $350 million in mandates , with about 40% of it in global portfolios, according to Robert P. Morgenthau, president. "For us, global (investing) is pure stock selection," said Mr. Morgenthau. "It makes sense to give managers the ability to invest in all areas." n