Illinois puts $1.1 billion to work right away

Teachers' Retirement System of the State of Illinois, Springfield, kicked off its 2015 fiscal year with investments and commitments totaling $1.1 billion and set the stage to tactically deploy at least another $1 billion with real estate and hedge fund managers.

The system's longest-tenured manager, Pacific Investment Management Co., Newport Beach, Calif., was awarded $500 million for management in a new strategic partnership by trustees of the $45.3 billion fund.

PIMCO will manage the allocation in a customized strategy that will invest in corporate and mortgage-related credit opportunities globally with an annual net return target between 10% and 12%.

“This opportunistic strategy is flexible enough to take advantage of attractive investments wherever the investment team finds them,” Jennifer Bridwell, managing director and head of PIMCO's alternative products business, told trustees at their Aug. 26 board meeting.

The strategic part of the partnership includes PIMCO setting up an internal investment committee made up of senior portfolio managers and strategists from relevant strategies to manage the new TRS portfolio as well as monthly conference calls between PIMCO and the fund's fixed-income investment team.

Ms. Bridwell said part of the strategic approach to managing the special situations credit fund is the absence of a rush to get all of the allocation invested right away. Instead, it likely will take between 12 and 18 months to fully invest the TRS allocation.

The latest PIMCO investment brings the total the firm manages for the fund to nearly $3 billion; PIMCO managed a total of $2.4 billion in eight different strategies for TRS as of June 30. PIMCO has managed money for TRS since 1982.

Trustees also gave the nod to commitments of up to $100 million each to private equity funds Baring Asia Private Equity Fund VI and NGP Natural Resources Fund XI, both follow-on funds from existing managers Baring Private Equity Asia Group and NGP Energy Capital Management LLC.

A $75 million commitment was awarded to another energy-focused private equity fund, Sheridan Production Partners III, TRS' first investment with Sheridan Production Partners Manager LLC. The investment is part of the retirement system's real assets category, said Scottie Bevill, senior investment officer for fixed income.

Another change in the real assets category was the decision by trustees not to renew the contract of AQR Capital Management LLC for investment in the firm's reinsurance strategy. AQR's two-year contract will expire in December. Mr. Bevill told trustees that the pension fund's investment team lacks conviction that reinsurance strategies will do well in the near future. TRS had $40.9 million invested in the AQR reinsurance strategy as of June 30.

Regarding the $9.5 billion global equity portfolio, the board terminated Loomis Sayles & Co. LLP for management of an active U.S. large-cap value equity strategy that accounts for about 2.7% of the global equity portfolio, or $255 million.

Bill Thomas, investment officer for domestic equities, told trustees that the termination is part of the investment team's decision to “reduce the volatility of this mandate,” noting that “we want large-cap value to do more to provide downside capture” than the Loomis Sayles strategy offers.

Setting part of the investment schedule for the new fiscal year, which began July 1, the board approved 2015 tactical investment plans including at least $1 billion of investments and commitments for the $5.6 billion real estate portfolio and the $2.6 billion hedge fund portfolio.

The real estate tactical plan calls for total new investment of $850 million in fiscal 2015 — $550 million will go to opportunistic strategies and $300 million to core/value-added approaches. Additional opportunistic real estate managers will be sought.

Funding for the new real estate hires will come from rebalancing other asset classes. How many real estate managers will be sought and the timing of the search process was not specified by TRS internal staff or its consultants.

For the core category, trustees accepted the recommendation of investment staff to immediately award all of the 2015 $300 million allocation to INVESCO Real Estate, an existing manager. The market value of Invesco's core/value-added real estate investments totaled $671 million as of June 30.

The 2015 tactical plan for hedge funds includes two to three non-directional hedge fund strategies for core portfolio allocations of between $150 million and $200 million each, Kenneth Musick, investment officer for hedge funds, explained to the TRS board.

Funding for the new hires will be drawn from assets being liquidated from hedge funds-of-funds manager K2 Advisors LLC, which was terminated by the pension fund in December. The former K2 portfolio totaled $532 million as of June 30.

The timing and process for the hedge fund manager searches was not specified during the board meeting.

Responses to the RFP are due by 2 p.m. on Sept. 26. Finalists will be presented at the pension fund's Dec. 12 meeting.