New Jersey names SIS as its new consultant

TRENTON, N.J. — The $79 billion New Jersey Division of Investment, Trenton, took a giant step toward diversifying its portfolio and adding outside investment managers by hiring Strategic Investment Solutions.

The consultant hiring is seen as the beginning of a long process to improve the division's performance.

San Francisco-based SIS, which is about to sign a three-year, $1.8 million contract with the state, has its work cut out for it, from navigating potentially choppy political waters to understanding the division's history and its appetite for risk.

"In that situation, a big problem can be politics — how much control they (politicians) want and what they're going to let you do," said an investment consultant who asked not to be named. "That can be a stumbling block. But outside of that, I would try to get an understanding of their mindset — how they work, how they structure things. In this case it's a really big issue since (asset management) is in-house."

In a news release, New Jersey Treasurer John McCormac said the SIS would recommend appropriate asset allocations and ways of reaching those allocations, as well as helping develop investment policies.

"New Jersey's consultant services to date have been limited to monitoring and benchmarking performance," Mr. McCormac said in the statement. "While these functions are important, they fall short of what pension funds of New Jersey's size around the country do to keep in tune with the trends and changing paradigms in the financial markets."

Tom Vincz, a spokesman for Mr. McCormac, said that in addition to ranking above the other seven consultant candidates in two rounds of presentations, SIS "had experience with large pension funds and met the scope of our requirements to the satisfaction of the evaluation committee."

The state's pension fund — which had $66.9 billion in assets as of Dec. 31, according to Mr. Vincz — lost more than 30% of its assets from roughly 2000 through 2002, amid the sharp downturn in U.S. equities. In late 2002, the state hired Independent Fiduciary Services Inc., Washington, to assess the system's performance and provide recommendations on improving it.

The IFS report listed 79 recommendations, including diversifying the system's investments and hiring outside managers to assist in that effort.

Orin Kramer, chairman of the state's investment council, said the council decided last year to diversify into alternative assets and its plan to do so would not hinge on the consultant's evaluation of the overall fund.

"In order to make a judgment that alternative assets are part of an appropriate diversification of the portfolio, the council did not believe it had to await the blessings of a consultant," Mr. Kramer said. "If you wanted to put half your assets in alternative assets, you might want to have your consultant on board before you did that, but when you're just getting started and putting relatively small amounts," there is no reason to wait for a consultant's OK.

He said the council had set a target of at least $4.5 billion, or roughly 7% of the plan's assets, for alternatives, but had not decided what strategies to use or how to fund the allocation.

Mr. Kramer added he was confident political resistance to the investment council's plan to diversify its holdings and hire outside managers would neither preclude SIS from beginning its work nor be a stumbling block.

He said there are "issues in the minds of some people as to the legal authority" to use outside managers. "In my own mind, I think I'm comfortable that issue will be resolved. It has to happen through a formal process, which has not happened."

He added the investment council would establish restrictions on political contributions by investment managers that are "by far the strictest in the country."

In the news release announcing the signing of SIS, Mr. McCormac listed several other state pension plans that have used the firm. But at least one plan on that list, the $53.7 billion Ohio Public Employees Retirement System, Columbus, no longer is a client.

Michele Kowalik, OPERS spokeswoman, said SIS was terminated as part of the system's periodic review process, not for any specific reason such as performance.

The $5.1 billion Oklahoma Public Employees Retirement System, Oklahoma City, has used SIS since 1995, and Executive Director Thomas Spencer said he is satisfied with the firm.

"They do the same type of general consulting work I've seen other consultants do for other pension systems and public pension funds — manager searches, performance evaluation and general advice on portfolio structure and asset allocation," he said.

The consultant who asked not to be named said the process for SIS should be "to build from risk to return" by understanding the system's appetite for risk and then creating an asset allocation.

"Through that process you want to have an understanding of what asset classes you can use, what's the most effective structure and how much the system can stomach losing," he said. "Then you can come up with a roadmap with two or three asset allocation mixes. You run the models and outline the strategies available and once they make a decision, you can build all the portfolios by selecting firms to fill all the asset slots."

He said that process could take time, because New Jersey's assets are managed internally and SIS will need to learn how the fund's unique system works. According to the state's news release, SIS is expected to begin work later this month.