Arizona fund board moves tentatively toward master manager plan

PHOENIX — Trustees at the $7 billion Arizona Public Safety Personnel Retirement System cut CIO Rob Brown’s baby in half at a three-day meeting in mid-April, giving tentative and contingent approval to a proposed index-plus “master manager” program while setting aside, at least temporarily, a proposal for an absolute-return portfolio.

The unusual situation pitted staff and the board’s investment consultant, Ennis Knupp + Associates, at odds, with the consultant pulling the reins on a hard-charging push to take the 93% internally managed system into a cutting-edge program.

Mr. Brown and James Hacking, executive director, pressed for adoption of a complete portfolio revamp that Mr. Brown designed. The administrators argued that a new approach that will improve returns and turn around the 69% funded system is needed — and needed soon.

(See P&I’s earlier story Arizona fund considering huge revamp.)

“Given where we are … we can’t afford to be too terribly conservative,” Mr. Hacking said in an April 24 interview. Most of the system’s assets are passively managed securities. “We can’t sit on $7 billion in assets and not have them fully invested.”

But Ennis Knupp consultants, in a written review of the staff proposal, warned the board against haste and urged trustees to require that staff include the consultant in the development of any plan changes.

“We advise against adoption of any part of (the proposal) at this time,” Richard Ennis, principal, wrote in the review, which questioned staff members’ urgency, “uncritical assessment of” and lack of due diligence on index-plus strategies, and the viability of an absolute-return portfolio that would one day subsume all of the system’s assets.

“In addition to (the “absolute-return portfolio”) being undefined, the staff has not shown that (the portfolio) is even feasible,” Mr. Ennis wrote in the review.

The result: the board voted to “bifurcate” Mr. Brown’s plan, giving tentative approval to a 90% allocation to a “relative protection portfolio” to be run by four index-plus master managers, while leaving a 10% absolute-return portfolio allocation “for later study and action,” according to the approved motion.

Consideration of the absolute-return portfolio “shall not” begin until the relative protection portfolio is in place. And that could take some time. The motion states that the board won’t approve master manager contracts until all staff members — including legal counsel and the compliance officer — “certify that the due diligence is complete and recommend approval,” and Ennis Knupp has a “reasonable opportunity” to review all information related to the program.

In his review, Mr. Ennis said the only information on master managers’ proposals his firm received were “marketing-type booklets” that did not “represent actual account performance for the type of account contemplated.” When the firm attempted to get the information directly from the managers, “we discovered … that the staff had directed the investment managers to share no information with Ennis Knupp.”

In response, Mr. Hacking said, “Allegations are easy to make. The fact is, they (Ennis Knupp) were provided with a ton of information.” In an interview, Mr. Ennis confirmed the firm received plenty of documents, but did not receive specific information it requested. “You don’t weigh insight by the pound,” he said, citing an adage from the firm’s website.

Mr. Hacking said staff recommended Benchmark Plus Management LLC, Tacoma, Wash.; BNP Paribas Asset Management Inc., Morgan Stanley Investment Management, both of New York; and Western Asset Management Co., Pasadena, Calif., as the four master managers. Through those firms the system will employ 131 individual managers, as opposed to the two staff members who now manage most of the system’s assets, Mr. Hacking said. “It’s going to be highly diversified.”

However, the identification of master managers was another point of contention for Ennis Knupp. “Manager selection should follow from the adoption of the strategy,” Mr. Ennis’ review stated.

In the end, the board included many of Mr. Ennis’ concerns in its motion. The motion “encourages proposed master manager contracts to include a phase-in provision that provides a period of evaluation prior to full investment,” puts off the absolute-return portfolio until later and requires more study before approval.

Mr. Hacking said many of Ennis Knupp’s concerns amounted to “professional pique” because staff didn’t include the firm in development of the program.

“Ennis Knupp is a fiduciary to that board,” Mr. Ennis responded. “It’s not a matter of professional pique, it’s a matter of professional responsibility.”

Contact Drew Carter at [email protected]