Pension funds looking to switch bond managers this year might find their new firms' ability to unload chunks of their portfolios, from structured products to lower-rated paper, hamstrung by the market's unprecedented liquidity drought.
One example: the Illinois Teachers' Retirement System, Springfield, is reporting slow progress in shedding parts of a $1 billion bond portfolio that had been managed by Western Asset Management Co., Pasadena, Calif. The $41.7 billion fund — which terminated WAMCO in January — tapped Pacific Investment Management Co., Newport Beach, Calif., last month to prune riskier assets from the portfolio.
At a Feb. 21 board meeting, Scottie Bevill, senior fixed-income investment officer for the pension fund, said the huge amount of repricing going on now for big segments of the fixed-income market has left portfolio managers at PIMCO unable to make major changes to the portfolio.
Spokeswoman Eva Goltermann said Illinois Teachers' trustees will decide in May which of three existing enhanced U.S. equity managers — PIMCO; Barclays Global Investors, San Francisco; and T. Rowe Price Associates Inc., Baltimore — will get the mandate on a permanent basis. For now, the fund is looking to PIMCO to trim portfolio holdings that are further out on the risk spectrum.
Investment consultants say the Illinois Teachers fund isn't alone. Many institutional investors “can't move their (fixed-income) portfolios,” and anyone who thinks the answer to their problems now is to switch managers could be in for a “rude shock,” said Cynthia Steer, chief research strategist with investment consultant RogersCasey LLC, Darien, Conn.
February was a “disastrous month” for fixed income, Ms. Steer said. With sectors such as asset-backed securities suffering through their worst liquidity drought in memory, clients might find they won't be able to move portfolios exposed to those sectors at an acceptable cost for the next year or two, she predicted.