Massachusetts Pension Reserves Investment Management board, Boston, today voted to terminate active international equity managers AXA Rosenberg and AllianceBernstein, which ran a combined $1.88 billion, as part of a broader plan to boost the passive portion of the $42.5 billion system's non-U.S. equity allocations.
Trustees voted to add $1.5 billion of the money to an existing $2.3 billion international equity index fund managed by SSgA, reflecting a decision to lift PRIM's passive exposure in that market segment to 50% from 25%. The remainder will be added to an existing $1.2 billion Baillie Gifford active international equity portfolio.
AXA Rosenberg, which ran $950 million, and AllianceBernstein, which managed $930 million, had underperformed since they were hired in 2006, according to PRIM staff. AXA Rosenberg spokesman Andy McMillan declined to comment; AllianceBernstein spokesman John Meyers couldn't immediately be reached for comment.
Suzanne Bernard, a principal with Ennis Knupp, the general consultant PRIM hired earlier this year, noted that winnowing the fund's international equity manager lineup to four from six will lower active management fees by $6 million with no substantial reductions in the overall active risk PRIM is taking for that market segment.
PRIM staff and Ennis Knupp consultants argued that, with overseas markets becoming more efficient, it has become increasingly difficult — but not impossible — for skilled managers to add value over time.
Speaking to reporters after the meeting, Michael Travaglini, PRIM's executive director, said that doesn't necessarily mean PRIM's non-U.S. equity allocations will go entirely passive in the future. Instead, PRIM is moving to make more concentrated allocations to managers in which it has high conviction, such as Baillie Gifford, he said.
PRIM's board also voted to add an initial 25% passive component to the fund's $2 billion-plus allocation to emerging markets equity, authorizing the issuance of an RFP for at least one manager that can run $575 million in an emerging markets index strategy.
Funding for the passive strategy would come from reducing the portfolios of two of PRIM's three existing active emerging markets equity managers: Grantham, Mayo van Otterloo, which would see its mandate reduced by $300 million to $625 million, and Emerging Markets Management, which would see its mandate trimmed by $275 million to $625 million, according to PRIM CIO Stan Mavromates.
Asked by one trustee whether PRIM could suffer by giving up the pursuit of alpha, Mr. Mavromates said what's happening now is more a matter of picking and choosing where to pay for taking risk. This year, PRIM decided to dedicate a full 33% of its portfolio to alternatives, including private equity, real estate, hedge funds and timber, and “that's where we're willing to pay for alpha,” he said.
Last year, PRIM decided that domestic equity markets were too efficient to pay managers to try to add alpha, and in August, the state plan fired its last four domestic equity managers: AXA Rosenberg, EARNEST Partners, Numeric Investors and Putnam Investments.