CHAMPAIGN, Ill. -- Trustees of the $12.3 billion State Universities Retirement System of Illinois will discontinue investing in active domestic large-cap equities.
"If you can't win, why play the game?" John R. Krimmel, chief investment officer, asked rhetorically.
Trustees believe the large-cap segment of the market is too efficient to outperform, based on the system's experience and many academic studies, he said.
"At least for now, until we see evidence," he said, "we're going to sit on the sidelines and take a benchmark return."
Trustees dropped Fayez Sarofim & Co., Houston, which managed $320 million in domestic large-cap growth equities, and SSBCiti Asset Management Group, New York, which managed $275 million in domestic large-cap value equities.
"They are good managers," Mr. Krimmel noted. He said Sarofim, since inception as a SURS manager, ranked in the top quartile with its peers. SSBCiti ranked in the top half since inception as a manager for the system.
But they could not outperform their benchmarks, net of fees, he added.
Trustees reassigned the $595 million to an existing Wilshire 5000 index fund, managed by Northern Trust Quantitative Advisors, Chicago.
In a related move, trustees scaled back by $500 million a Wilshire 4500 index fund, managed by Barclays Global Investors, San Francisco, leaving it with $250 million. Mr. Krimmel described the portfolio as a "compensating" fund to cover the area of the market generally not part of the two active large-cap portfolios. The Wilshire 4500 excludes the Standard & Poor's 500 index stocks.
Proceeds from the Barclays portfolio went to NTQA's Wilshire 5000 fund as well, bringing its assignment up to $3.3 billion, including the money from the two active managers.
Where possible the proceeds will be transferred in-kind to avoid trading cost, Mr. Krimmel said. "We try to invest in the most cost-effective way," he added.
Sarofim underperformed its benchmark, the S&P 500, by 11.8 percentage points for the year ended March 31, according to the pension fund. For the five years ended March 31, it underperformed by 10 basis points annually. From its inception as a manager for the system -- Sept. 30, 1981 -- through March 31, it underperformed by 50 basis points annually.
SSBCiti underperformed its benchmark, the S&P/Barra large value index, by 10.5 percentage points for the one-year period, March 31. For the five-year period, it underperformed by 170 basis points annually. From its inception as a manager for SURS -- June 30, 1991 -- through March 31, it underperformed by 110 basis points annually. SSBCiti includes the numbers of its predecessor, Smith Barney Capital Management.
Charles E. Sheedy, senior vice president at Fayez Sarofim, declined to comment about SURS. But in general on the large-cap market, he said, "We wouldn't be in business if we didn't think we could add value."
SSBCiti officials declined to comment about SURS or generally on the issue of market efficiency.
Said Krimmel: "It's a tough area in which to operate. Academic research bears that out. Our experience shows that as well. Over the long haul we've just about broken even (that is, equaled the index return), but with slightly higher volatility.
"So we decided to chuck it and go with indexing."
"It's tough to add value," Mr. Krimmel said. "After 18 years, net of fees, we've done just about the index."
Roger G. Ibbotson, professor of finance at Yale University's School of Management, New Haven, Conn., who is also chairman of Ibbotson Associates Inc., a Chicago-based investment consulting firm, said, "It's a reasonable response for an entity like SURS, which doesn't have any compelling advantage" in the large-cap segment of the market.
"It is a relative zero-sum game against the indexes," he added.
"A lot of investors should ask" whether they outperform the index, Mr. Ibbotson said. "Can I hire a money manager that can be expected to beat the market? Am I better than those investors I'm competing with?"
Mr. Ibbotson wouldn't say the large-cap segment is efficient. But he added, "It's reasonable to act as if it is efficient."
In their research paper, titled "U.S. Equity Strategy," Richard M. Ennis, director-investment policy research, and Michael D. Sebastian, director-analytical development, at Ennis Knupp + Associates Inc., Chicago, write with boldface emphasis, "The body of credible, impartial evidence indicates that active stock portfolio managers do not add value."
Large-cap equities represented about 65% of the system's total active domestic equity portfolio. After the changes, the system is left with about $320 million in active U.S. equities, all in non-large-cap segments with five management firms. It also has some $830 million in enhanced U.S. equities portfolios with two firms.
