The board hired McDonnell Investment Management and TCW Group to manage $120 million each in portfolios of senior secured bank loans of non-investment grade borrowers, pending contract agreements. The remaining $214 million will go to the systems other core bond manager, Western Asset Management, bringing its portfolio to $689 million, said William R. Atwood, executive director of the $12.6 billion fund.
The move completes the funds 26% reduction of core fixed income to 5.5% of total assets, while increasing alternative fixed income to 9% of total assets from 7%.
Core fixed income throws off about 5.4% a year, based on assumptions of the next five years, Mr. Atwood said. We have an assumed rate of return of 8.5%. So we start out more than 3% behind, by investing in core fixed income. So we have looked for core fixed-income proxies to increase return, he said.
Bank loans reflect ISBIs biggest allocation to alternative fixed income, aside from high-yield bonds. It already has $163 million with the J for Jobs commercial and residential mortgage fund of Union Labor Life Insurance, a unit of ULLICO, and $86 million with a mortgage portfolio managed by Amalgamated Bank of New York, and $38 million in the AFL-CIO Housing Investment Trust. It also has high-yield bond portfolios of $307 million managed by Fort Washington and $300 million with Loomis Sayles.
Separately, the board hired State Street Global Advisors to manage $276 million in a Morgan Stanley Capital International Europe Australasia Far East index fund, said Mr. Atwood. Funding came from the termination of Walter Scott & Partners, which managed the money in an active large-cap international equity portfolio benchmarked against the MSCI World ex-U.S. index. Walter Scott was terminated for performance and because of concern among board officials about concentrating too much of ISBIs assets with managers owned by Bank of New York Mellon, Mr. Atwood said. Besides Walter Scott, Bank of New York Mellon owns Boston Co, Asset Management, which runs $334 million in active international equity for the Illinois board, and Ivy Asset Management, which manages $130 million in a hedge fund. Kenneth J. Lyall, director at Walter Scott, couldnt be reached for comment.
Marquette Associates recommended the fixed-income and equity manager changes.
The board also committed $30 million each to Blackstone Real Estate Partners VI, which will have 10% to 20% international exposure and the rest in U.S. properties; Colony Investors VIII real estate fund, which will focus 50% in Asia and the rest in Europe and North America; and Tishman Speyer Real Estate Venture VII, which will invest domestically. Also, $35 million was committed to Jordan Co.s Resolute Fund II, a private equity fund that plans to invest primarily in the U.S., although up to 15% might be invested in Asia and 10% elsewhere internationally. Funding for the commitments will come from cash and a general portfolio reallocation, said Mr. Atwood.
Townsend Group, the funds real estate consultant, and Franklin Park Associates, the funds private equity consultant, assisted in the respective moves.
Also, ISBI adopted Marquettes recommendation to terminate New Amsterdam Partners, which ran $345 million in active domestic midcap growth equity for the fund; EARNEST Partners, $190 million in active domestic small-cap equity; and High Pointe Capital Management, $92 million in active domestic large-cap value equity.
New Amsterdams portfolio will be split evenly between existing domestic active midcap growth managers Goldman Sachs Asset Management and William Blair, raising their assignments to $538 million and $531 million, respectively.
EARNESTs proceeds will be reallocated to existing managers RhumbLine Advisers; Segall Bryant & Hamill Investment Counsel, Opus Investment Management and IronBridge Capital Management. RhumbLine will get $60 million, increasing its Russell 2000 Value index fund to $232 million; Opus, $40 million, raising its active domestic small-cap value equity assignment to $100 million; and Segal Bryant & Hamill and Iron Bridge will receive $55 million and $35 million respectively, increasing their active domestic small-cap core equity portfolios to $175 million and $173 million.
High Pointes proceeds will go to Atlanta Life Investment Advisors, adding $25 million to its existing active domestic large-cap value equity portfolio, for a total of $69 million, and the remaining money will go for benefit payments.