TRENTON, N.J. — The New Jersey Division of Investment could embark on a novel strategy to use the brainpower — but not the horsepower — of some outside investment professionals.
That could be the result of an Aug. 22 state appellate court ruling that the division, which oversees $77.2 billion in pension assets, may no longer use external money managers, except for alternative strategies. The ruling has left the division scrambling to weigh its options just as its 4-year-old diversification program has begun to pay dividends.
“Instead of using external managers, the division could consult with those people who have a special expertise and use them as external advisers,” said a source knowledgeable about the case who declined to be named.
“It's a small difference, but the Division of Investment could be consulting with external advisers with a special expertise and still be the one pulling the trigger when it comes to the investment decision.”
Orin Kramer, chair of the New Jersey State Investment Council, in an interview, said only that division officials are considering a range of options.
“We are assessing the implications (of the court ruling) and options. One central question is whether there are investment structures which would allow us to pursue the policy objective of using external managers for various niche strategies,” he said.
New Jersey officials could be looking at neighboring New York as a model of sorts. At the $153.9 billion New York State Common Retirement Fund, Albany, state Comptroller Thomas DiNapoli is sole trustee and makes all investment decisions.
“Comptroller DiNapoli consults with a number of advisers as part of the investment decision-making process. But he is the one who makes the final decision,” said Jim Fuchs, spokesman for Mr. DiNapoli.
A source said other options include appealing the decision to the state Supreme Court; creating some investment partnerships; or seeking help from the Legislature.
In November 2004, the State Investment Council adopted a resolution allowing investment in alternative asset classes, designated as real estate, private equity, absolute-return strategies and hedge funds.
In July 2007, the SIC passed new regulations on the hiring of external asset managers, which was challenged in court by the Communications Workers of America, the AFL-CIO, the New Jersey Education Association and some members of the New Jersey Public Employees' Retirement System.
“The Legislature did not intend to authorize the director to delegate investment decision-making authority to a third party,” Judges Mary Catherine Cuff, Marie Lihotz and Marie Simonelli wrote in their ruling. “Regulations authorizing and governing the engagement of external investment managers are invalid.”
In short, the court found that outside money managers — such as the high-yield debt and emerging markets firms employed by the New Jersey Division of Investment — do not have the statutory right to decide in what to invest.
“At this point, the division of investment must either terminate its contractual relationships with external management firms or ask the state's Supreme Court to review the case and seek a stay of the appellate decision,” said attorney Steven Weissman of the law firm Weissman & Mintz LLC, Somerset, N.J., who represent the CWA and the AFL-CIO.
“The appellate court allows for the possibility that the division of investment could use consultants in making investment decisions, but ultimately, the decision as to how to invest pension money must be made by the employees of the division,” Mr. Weissman said.
The external managers for high-yield debt now employed by the state are Pacific Investment Management Co., BlackRock Inc., Logan Circle Partners LP, Nomura Asset Management Inc. and Post Advisory Group LLC.
Officials at PIMCO, Lazard and BlackRock declined comment. Others were not reachable at press time.
A breakdown of the money invested with outside managers was not available at press time, but high-yield debt would likely be part of the fund's $20.6 billion domestic fixed-income portfolio and emerging markets part of the $17.4 billion international portfolio.