New Mexico State Investment Council, Santa Fe, restructured its $4.1 billion domestic equity portfolio, said Charles Wollmann, director of communications for legislative and client relations, in an email.
To improve performance and lower fees of its domestic equity portfolio, the council, which oversees $27.1 billion in endowments, decided June 23 to restructure the portfolio, which has underperformed its benchmark since 2012. It also shifts the portfolio to a risk-neutral, beta 1.0 portfolio strategy with a lower tracking error from a defensive, low-beta strategy.
The restructuring includes increasing the domestic equity portfolio's suballocation to market-cap passive U.S. equities to 68% from 28% and decreasing its suballocation to traditional active management and factor-based equities to 32% from 72%.
As part of the restructuring four managers were terminated: two active managers, Brown Brothers Harriman, which managed $1.2 billion in fundamental large-cap core equities, and Donald Smith & Co., which ran $53.8 million in fundamental small-cap value; and two factor-based managers, AQR Capital Management, which ran a $641.7 million factor-based style premium long-only large-cap core portfolio, and Northern Trust Asset Management, which ran $581.3 million in its Scientific Beta U.S. Multi-Factor index strategy.
At the same time, four existing managers' suballocations were increased. Northern Trust's Russell 1000 index portfolio was increased to 68% from 28% of the U.S. equity portfolio. The council had $1.3 billion in Northern Trust's Russell 1000 index strategy as of March 31. It also increased the suballocation to Northern Trust's Russell U.S. Fundamental index strategy to 12% from 10%. The portfolio had $381.7 million in the Russell fundamental index large-cap value strategy as of March 31. The suballocation for the T. Rowe Price large-cap growth strategy was raised to 12% from 10% and BlackRock's quantitative small-cap core suballocation was increased to 6% from 3.25%. T. Rowe Price had $558.5 million and BlackRock had $132.5 million in their respective strategies as of March 31.
The asset size of the domestic portfolio is as of March 31.
Separately, the council rescinded its redemption from open-end real estate fund Berkshire Multifamily Income Realty Fund based on an improved structure. The council had about $88.5 million invested in the fund as of Dec. 31. The council rescinded its full redemption in exchange for a reduced fee if the fund underperforms its benchmark and for an 18-month lockup.
The council originally committed $75 million to the Berkshire fund in September 2015 but sought a full redemption in the first quarter of 2019 alongside other clients of its real estate consultant, Townsend Group, due to underperformance, lack of capital raising and portfolio manager turnover. Currently, the fund's redemption queue is about $319 million made up entirely of Townsend clients.
Redemption requests have been paid out slowly over time with available capital, but a staff memo to the council said "any future liquidity from the fund has dried up" because of the fund's inability to raise additional capital and an environment with few property sales.
Townsend has indicated it has rescinded the full redemption on its discretionary investments in this fund, and that its clients other than the council are also considering doing the same thing, Mr. Wollmann said in the email.
