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Pension Funds

New Jersey cuts emerging markets equity lineup in half, shifts more to passive

The New Jersey Division of Investment has restructured its emerging markets equity adviser program for the New Jersey Pension Fund by reducing the number of active management advisers to four from eight.

"The EM program's new structure provides for a more balanced approach to investment style and risk utilizing four active advisers," the division said in a report submitted Thursday to the New Jersey State Investment Council, which governs policies for the division of investment.

The managers serve as advisers for the pension fund, providing non-discretionary investment advice to the division of investment. The division staff retains investment discretion and authority.

"The determination was made that four advisers is more optimal for the EM program," the report said. "The marginal benefit of diversification declines as the number of advisers increases."

The division is keeping J.P. Morgan Asset Management (JPM), Lazard Asset Management, Pzena Investment Management and Schroder Investment Management North America, spokesman William Skaggs said in an email. Each received a one-year contract extension, as did BlackRock (BLK) as a passive investment adviser, he said. BlackRock is the only adviser for passive emerging markets equity, he added.

The division allowed contracts to expire for Morgan Stanley (MS) Investment Management, Parametric Portfolio Associates, Quantitative Management Associates and Wellington Management, Mr. Skaggs wrote. The contract extensions and expirations took effect during various dates in July and August, he wrote.

"The division elected to let the agreements of the four advisers expire as a result of ongoing due diligence and after conducting an analysis from a portfolio perspective," Mr. Skaggs wrote.

"The four retained advisers were selected based upon style, relative performance and portfolio fit, as well as organizational, investment process and performance reviews," the division report said. "Underperforming advisers that also provided less benefit from diversification ... were not retained."

It could not be learned how much in assets each manager advised on.

The restructuring doesn't change the overall allocation to emerging markets equity, the report said. As of June 30, emerging markets equity represented $5 billion of the total $77 billion in pension fund assets.

The report said the Trenton-based pension fund has increased its allocation to passive investments, which now represent 62% of the total emerging market equity program, up from 28%. "The allocation has been shifting over a period of months," Mr. Skaggs wrote.

Mr. Skaggs said the increased allocation to passive would result in fees dropping by an estimated 36%.

The report said the remaining advisers provide "a more balanced approach to style investing and shifts emphasis from top-down market exposure to bottom-up stock selection with respect to active risk."

The division of investment anticipates issuing an RFP next year for the emerging markets program when it "will determine any future changes to the EM adviser structure and lineup," the report said.

Mr. Skaggs wrote that the RFP also "is intended to retain investment advisers for the international developing and international small cap portfolios."

The division also announced Thursday it would seek to sell on the secondary market its interest in the Lubert-Adler Real Estate Fund VI-B. In January 2011, the division made a $100 million commitment. The current net asset value for the pension fund's portion is $20 million.

The Lubert-Adler fund has made 89 investments, of which 16 remain in the fund, a division report said. "These remaining investments are either in development or are otherwise not expected to be stabilized and sold in the near term."

The report said the fund is scheduled to terminate on Dec. 18, and "the manager will need investor approval to extend the fund in order to stabilize the residual assets."

Noting that the fund is allowing investors to liquidate their remaining investments through a secondary sale, "the division sees little upside from the residual investments going forward," the report said. "It also believes that participation in the secondary sale would facilitate an efficient exit and would avoid the payment of further fees and expenses over an indeterminate period of time."