"We are disappointed to learn that the Illinois State Board of Investment has chosen not to retain Northern Trust for custody and investment management services," Richard Jurek, Northern Trust vice president-corporate communications, said in a statement. "It is important to note that the quality of Northern Trust's custody service and investment return performance never came into question.
"As we have previously stated, Northern Trust provided ISBI with accurate data. Fundamentally, we believe that ISBI's concerns arose through a misunderstanding of that data," he added.
In replacing Northern Trust, the board's other finalist for custodian was Bank of New York.
For indexing, the board's finalists for equity were Amalgamated, RhumbLine, Bank of New York and SSgA, as well as NTGI. For fixed-income indexing, finalists were Lincoln Capital Fixed Income Management Co., Chicago, Amalgamated, Bank of New York and SSgA, as well as NTGI.
The selection of RhumbLine and Amalgamated is pending contract terms, including agreement on a fee of 0.75 basis points, said Mr. Atwood.
State Street's Lehman Government/Credit index assignment will eventually be reduced to some $500 million. The board plans to assign some $300 million from that fund to the three active managers hired for that asset class. The board also plans to allocate the existing $500 million in Lehman aggregate index funds to real estate.
Under an asset allocation policy adopted earlier this year, the board is taking a more active approach to management.
It plans to issue RFPs in the next few weeks in the international small-cap equity and mortgage-backed securities searches; it could hire more than one manager in each class.
Funding for the international small-cap portfolio will come from reallocating among the board's international large-cap equity managers, Mr. Atwood said; none will be dropped. Funding for the mortgage-backed portfolio will come from reducing SSgA's intermediate fixed-income index fund. The board is conducting both searches for diversification and return prospects.
Marquette Associates Inc., Chicago, which assisted the board in all the custodian and investment management changes, will oversee the searches.
The board's emerging minority- and women-owned program involves firms with less than $400 million in total assets under management. The program is a board initiative to expand its opportunity with smaller minority- and women-owned firm, partly in response to Illinois House and Senate committee hearings over the last year urging more such usage by public pension funds in the state.