Officials of the UAW Retiree Medical Benefit Trust are turning to a conservative risk profile for the $45 billion VEBA, recognizing it will have no employer contributions to make up any investment losses, said Eric Henry, chief investment officer.
As a first step to implementing new asset allocation targets, the United Auto Workers voluntary employees beneficiary association fund issued RFPs in a search for managers for its global equity and fixed-income portfolios, with each likely to be in excess of $1 billion, Mr. Henry said.
In equity, it issued a request for proposal seeking active and passive managers, tracking the Morgan Stanley Capital International global market indexes.
In fixed income, the VEBA issued an RFP for active and passive managers for core portfolios, Treasury inflation-protected securities, and portfolios of long-duration government and corporate securities.
The new asset allocation targets were approved by the Ann Arbor, Mich.-based trust's board from recommendations in an asset/liability study by Ennis Knupp & Associates Inc., its consultant.
The board hasn't determined a total for how much it will allocate through the RFPs, the number of managers and the amount for each asset class. It depends in part on the proposals, Mr. Henry said. Also being determined are the types of equity and other portfolios.
However, Mr. Henry said the majority of the total allocation will go to passively managed funds. “We envision having a large index (fund) allocation,” Mr. Henry said. “We are big fans of broad diversification and low fees.”
Fund officials will keep the searches open until they find candidates, Mr. Henry said. “We have not put out a detailed schedule that responses are due by this (particular) date,” he said. Interested managers can contact Ennis Knupp, which is assisting in the searches, for the RFPs.
Funding will likely come from a combination of terminating or reducing assignments of its some 75 existing managers and from new cash flow, including dividend and interest from securities of General Motors Co., Chrysler Group LLC and Ford Motor Co. VEBA officials haven't made any decisions on what changes to make to its existing managers, who are welcome to submit proposals, Mr. Henry said.
The VEBA's new allocation targets are 50% global equity, 25% core fixed income, 12.5% TIPS and 12.5% long-duration fixed income.
The new allocation also has a zero to 15% range for opportunistic investments, including private equity, hedge funds, high-yield debt and emerging-markets debt. But the current target is zero, even though it has some $2 billion in hedge funds of funds, $380 million in equity real estate and $375 million in private equity, all inherited from its initial setup funding from the three auto companies. It plans no searches in alternatives, Mr. Henry said.
“Those (alternative) assets will be with us for some time,” Mr. Henry said. “It's not in our best interest to transition out of these assets without regard to market conditions and asset values. It's a legacy we inherited.”
Plans are to implement the new allocation over a three-year period, although that might change following another asset/liability study, this one in the fourth quarter when it has better asset valuations.
Aside from the $45 billion in assets, the VEBA owns 55% of Chrysler and 17.5% of General Motors plus warrants for an additional 2.5% of GM, all non-publicly traded equity is still in the process of being valued.
In choosing its new asset targets, Mr. Henry said the VEBA board kept in mind that “what we received from the auto companies (in the VEBA startup funding) is all we are getting from them (in terms of contributions), so we need to be more conservative in our risk profile.”