Illinois Teachers juggles equity managers' allocations

Illinois Teachers' Retirement System, Springfield, approved rebalancing the system's $14.6 billion equity portfolio by increasing the assets of four managers, decreasing another manager's target allocation and cutting the allocation of three managers to zero.

Trustees of the $33.5 billion system on Dec. 13 accepted staff recommendations to shift target allocations within the $8.3 billion domestic equity portfolio.

Large-cap core managers Levin Capital Strategies LP and MFS Institutional Advisors Inc. each will see their allocations increase to 6% of the domestic equity portfolio, from 4%. In current dollars, each manager's new target will be $495 million. As of Sept. 30, Levin actively managed $309 million while MFS managed $314 million in an enhanced index fund.

The S&P 500 index fund managed by RhumbLine Advisers Ltd. will increase by two percentage points to 25% of the total domestic equity allocation, or about $2.1 billion. As of Sept. 30, RhumbLine managed $1.7 billion in the S&P 500 index strategy.

The board also increased a U.S small- to midcap index fund benchmarked to the Russell Small Capitalization Completion index. RhumbLine will manage $165 million, which represents 2% of domestic equity assets, up from 1.5%; as of Sept. 30, it had $111 million in the strategy.

Managers losing assets are EARNEST Partners LLC and Fred Alger Management Inc., which each had a 2% target allocation, and AQR Capital Management LLC, which had a 2.5% target.

Kent Custer, senior investment officer-equities, told trustees the allocations were being cut for “structural reasons only” not because of performance problems or “a lack of conviction.”

R. Stanley Rupnik, chief investment officer, stressed in an interview that EARNEST, Fred Alger and AQR Capital are not being terminated, despite the plan to eliminate their current mandates.

“We are reducing small-cap equities because we are overweight in the asset class. If we decide to increase small-cap exposure in the future, we may invest with these managers again,” Mr. Rupnik said.

As of Sept. 30, EARNEST Partners managed $172 million in active large-cap core equities; Fred Alger ran $178 million in active small-cap to midcap growth; and AQR Capital managed $149 million in active small-cap value.

In the $6.3 billion international equity portfolio, a three-percentage-point allocation was moved to emerging markets manager Aberdeen Asset Management Inc. to bring its target allocation to 7.5%, an increase of $173 million. The move decreased Grantham, Mayo, Van Otterloo & Co.'s emerging markets target allocation to 9% from 12%. As of Sept. 30, Aberdeen managed $303 million in active emerging markets equity, and GMO managed $701 million.

TRS staff is considering a move to add passive emerging markets exposure before the end of the June 30 fiscal year but is not ready to request a manager search, Mr. Custer said during the meeting.

Mr. Custer is leaving the system to become CIO of College Illinois, the $1.1 billion 529 prepaid college tuition plan run by the Illinois Student Assistance Commission, Chicago, on Dec. 27, confirmed John Samuels, an ISAC spokesman.

Zak Doehla, senior investment officer-private equity, on the other hand, will head up the system's efforts to search for a fourth adviser to assist the investment staff in sourcing co-investment opportunities. The RFP will be posted on the fund's website, http://trs.illinois.gov, in the near future.

In November 2010, the board approved the appointment of Houlihan Lokey, LP Capital Advisors LLC and TorreyCove Capital Partners LLC as co-investment advisers.

On the advice of Houlihan Lokey, staff recommended and trustees on Dec. 13 ratified private equity co-investment commitments of $23.5 million in Emdeon Inc., a health-care payment systems provider, and $45 million to Summit Midstream Partners, a gas pipeline developer, made by the system's investment staff.

With the new investments, Illinois Teachers' co-investment program commitments and investments total about $177 million, bringing the program close to its goal of reaching $200 million by the end of the fiscal year on June 30.

Also in private equity, the board committed of up to e50 million ($66 million) to Rhone Partners IV, which invests in middle-market Pan-European and transatlantic companies.

Trustees also accepted the recommendation of Mr. Doehla to renew TRS' venture capital investment program, which has been quiet for the past three and a half years.

In order to bring the fund's venture capital exposure closer to the 10% upper limit of the target allocation for the asset class, Mr. Doehla said between $75 million and $125 million will be invested over the next three years.

As of Sept. 30, the system had $835 million, or about 2.5% of total assets, invested in venture capital strategies, according to board meeting materials.

Trustees approved the first step in the venture capital ramp-up with a commitment of up to $100 million in Morgan Creek Partners Venture Access Fund I, a customized separate account fund of funds.

Illinois Teachers' private equity investments, including venture capital, totaled $3.7 billion as of Sept. 30, according to board presentation materials from the fund's general consultant, R.V. Kuhns & Associates Inc.

In other alternative investment news, a $200 million commitment was made to Blackstone Real Estate Partners VII fund, a value-added opportunistic strategy that invests in distressed and undermanaged properties worldwide. Between 80% and 85% of the Blackstone fund likely will be invested in the U.S. The teachers' fund had $54 million invested in Blackstone Real Estate Partners VI fund as of Sept. 30.

Another $150 million was approved for a direct hedge fund investment in the Pine River Fund, a global multistrategy relative value portfolio run by Pine River Capital Management LP.

Funding for both hires will come from cash, passive/enhanced index accounts or rebalancing.

Within the system's emerging manager program, trustees accepted a staff recommendation to move a total of $38 million into a new enhanced return core-plus bond strategy managed by LM Capital Group LLC. The bulk of the money, $28 million, came from LM Capital's opportunistic core fixed-income strategy. The remaining $10 million was a new allocation.

Emerging manager Channing Capital Management LLC received $30 million for its active U.S. small-cap intrinsic value strategy. The source of the funding is the RhumbLine S&P 500 index fund dedicated to the system's $500 million emerging managers program.

Separately, R.V. Kuhns reported that the pension fund's third-quarter return was -8.86%, underperforming the fund's internal benchmark by 45 basis points.

Steve Daniels, a reporter for Crain's Chicago Business, a sister publication of Pensions & Investments, contributed to this story.