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August 04, 2008 01:00 AM

PBGC on the prowl for strategic partners

Doug Halonen
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    PBGC Director Charles E.F. Millard wants managers to help educate PBGC staff.

    WASHINGTON — The Pension Benefit Guaranty Corp. issued an RFP on July 31 seeking to develop strategic partnerships with two to three money management firms to invest up to $2.5 billion total in private equity and real estate.

    Charles E.F. Millard, PBGC director, said the search follows an asset allocation policy adopted in February that permits the agency to invest up to 10% of the $55 billion it has available for investment in private equity and real estate. Both are new asset classes for the PBGC.

    The new asset allocation is designed to help close the PBGC's $14 billion deficit over the next 10 to 20 years. Under the new policy, 45% of assets will be in equities, 45% in fixed income and 10% in alternatives. Previously, 75% to 85% was in fixed income in a strategy designed to better match assets with liabilities. The remainder of the portfolio was invested in stocks.

    Mr. Millard said in an interview the PBGC intends to finish funding the allocations established by the new policy within the next five months. “We will be fully allocated to this (new) policy by the end of the year,” Mr. Millard said in the interview.

    The agency already has launched requests for proposals for fixed-income and equity index managers. Those searches, which were not announced publicly, are closed and hirings are expected this fall, he said.

    The fixed-income RFP seeks managers to run about $22 billion in assets, including core fixed income, high yield and emerging markets debt. (PBGC's existing fixed-income managers — Prudential Investment Management Inc., Wellington Management Co. LLP, Western Asset Management Co. and Pacific Investment Management Co.— were free to apply for the new fixed-income allocations, a PBGC spokesman said.)

    Another RFP seeks one or more index fund managers to run $16 billion to $18 billion for the agency in emerging markets equities, international equities, U.S. equities and possibly real estate investment trusts. “We're not sure yet whether we want to use REITs but we're asking for bids on that,” he said.

    (The PBGC's existing equity managers — State Street Global Advisors, Barclays Global Investors, Wellington and PIMCO — were free to apply for the new allocations, the PBGC spokesman said.)

    Mr. Millard said additional RFPs might be issued next year to reallocate some of the index fund assets to active equity managers.

    “We want to walk before we run,” Mr. Millard said.

    In addition, the PBGC has launched a search for a chief investment officer, a new position, and hired executive recruiter Russell Reynolds Associates to assist. A decision is expected later this month.

    “The size of the portfolio is significantly larger than it was just a few years ago, and we're allocating to five new asset classes we have not allocated to in the past,” Mr. Millard said. Besides private equity and real estate, emerging-market debt, high-yield bonds and emerging-market equity are new asset classes. “With all these new needs, we needed more leadership at the senior level.”

    Another $2.5 billion

    Mr. Millard said the agency is seeking managers as strategic partners for private equity and real estate because officials plan to eventually allocate another $2.5 billion to external managers outside of the strategic partnerships. The strategic partnerships are intended to get PBGC investment staffers up to speed on the alternative asset classes.

    “We're still going to have to allocate on our own to real estate and private equity, so one thing we may want is very deep and detailed staff training and staff augmentation in those very fields,” Mr. Millard said.

    Mr. Millard said PBGC officials expect to hire the strategic partners Oct. 31. The RFP is available at www.fbo.gov. The deadline for responses is Aug. 28.

    The PBGC's shift to a more aggressive investment policy prompted concerns on whether the agency would have enough money to pay benefits if more pension plans are terminated.

    “The whole point of this (new) policy is to increase the likelihood that we can meet our liabilities,” Mr. Millard said. “We tried to get a return that would most increase the likelihood of closing the gap over time. A diversified portfolio mitigates risk, and that's one of the reasons this is a superior portfolio” over the PBGC's former asset allocation.

    “The PBGC is one of the country's most important investment operations and deserves the full benefit of the unique products and services that can only be supplied collectively by a small number of the world's premier firms,” said T. Britton Harris IV, CIO of the $107.5 billion Teacher Retirement System of Texas, Austin, in an e-mail. “Their partnerships are likely to deliver significant benefits to their structure in the years ahead.”

    In April, TRS announced a series of strategic relationships in which it invested $1 billion in global asset allocations to each of BlackRock Inc., JPMorgan Chase & Co. Inc., Lehman Brothers Holdings Inc. and Morgan Stanley, according to an announcement on pension fund's website.

    Contact Doug Halonen at [email protected]

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