SACRAMENTO, Calif. - CalPERS board members lambasted staff this month for their handling of the $177 billion fund's international equity manager search, delaying selections at least until December.
The staff had recommended that the California Public Employees' Retirement System, Sacramento, hire 15 managers to run the fund's $5.8 billion in actively managed foreign-stock portfolios, in the system's first major reshuffle of its international manager roster since 1994.
But board members, led by state Controller Kathleen Connell, San Francisco Mayor Willie L. Brown Jr., and former Investment Committee Chairman Charles Valdes, tongue-lashed the staff for omitting ValueQuest/TA LLC, Marblehead, Mass., and Scudder Kemper Investments Inc., New York, from the list of finalists and for abolishing Asia ex-Japan and Japan-only mandates.
Ms. Connell's criticism of the staff focused on the omission of ValueQuest, which currently manages a $236 million international core portfolio for CalPERS and was the only firm under consideration that is majority-owned by a woman. "I am very displeased that a woman-owned firm is not qualified" in the international search, she said, saying it is the policy of the legislature and the governor to encourage women- and minority-owned companies.
After a lengthy debate, the board voted to reinstate the Japan-only mandate - but not the Asia ex-Japan portfolio - and to ask all 15 core international semifinalists and two of the four Japan-only candidates to come to Sacramento for interviews with the board.
Of the 15 managers recommended for hiring, only the three European equity managers were approved: AXA Rosenberg Investment Management, Orinda, Calif.; Bank of Ireland Asset Management, Dublin; and Capital Guardian Trust Co., Los Angeles. Amounts to be allocated to the new managers have not been determined.
The delay means interviews will have to wait until December or January, said Brad Pacheco, a CalPERS spokesman. The staff's plan is to complete the transition from the fund's existing international manager lineup by the end of March. Current contracts expire June 30.
Staff had recommended retaining only three of the existing seven managers: Newport Pacific Management, San Francisco, which runs $260 million in Pacific Basin equities for the fund; Nomura Asset Management USA Inc., New York, which manages $1.1 billion in Pacific Basin equities; and Oechsle International Advisors LLC, Boston, which runs a $1.4 billion international core portfolio (Pensions & Investments, Oct. 16).
But Mary C. Cottrill, senior principal investment officer, said the staff is "looking at cutting Nomura's mandate way back" as it tries to keep Newport Pacific's mandate at the same level. Presumably, the addition of a third Pacific Basin manager - BlackRock International Ltd., Edinburgh, was recommended by staff - and rebalancing among international and regional allocations would require rejiggering of portfolios. However, the reinstatement of Japan-only portfolio puts the rebalancing in the air.
History of sex discrimination
Failure to include ValueQuest among the finalists was the hot button at the board.
Katherine Magrath, ValueQuest's president and chief investment officer, had been the victim of sex discrimination earlier in her career. She was laid off by Keystone Custodian Funds, Boston, in October 1974, even though she claimed to have the best track record among 13 portfolio managers.
"I was told I was female, I was married, and I had a husband who had a good job at Fidelity, and it was not right to fire the men, because they had families to support," she was quoted as saying in "The Money Flood: How Pension Funds Revolutionized Investing," a recent book by Michael J. Clowes, editorial director of Pensions & Investments.
Ms. Magrath won a significant settlement from Keystone in 1976, and she went on run United Brands' pension fund and head up equity investments at the Ford Foundation before establishing ValueQuest in 1982.
Tensions between politicians on the board and staff, which have been mounting in recent months, focused on whether the staff had made sufficient efforts to hire women- and minority-owned managers in the current search.
Ms. Magrath, president and chief investment officer of ValueQuest, and Gregory White, managing director and chief operating officer, were invited by Ms. Connell to address the board. They did not speak, however, because CalPERS General Counsel Kayla Gillan said giving only one manager the opportunity to speak would violate contractual procedural rules.
In the ensuing discussion, Mr. Brown said it requires "a high level of sensitivity (and) creativity" to hire small managers and women- and minority-owned firms. "That goal will never, never be achieved in the current environment." But Ms. Cottrill observed that the international search process, which had been approved by the board last February, "did not specifically address" the hiring of women- or minority-owned firms.
ValueQuest currently manages about $700 million in assets, down from a peak of $1.5 billion in 1998. Mr. White declined to discuss the board's actions because the search is still under way.
Board members also criticized the staff for abandoning Japan-only and Asia ex-Japan mandates, instead relying solely on pan-Pacific Basin mandates. Mr. Valdes said such a major decision should be decided by the Investment Committee, and should not be mentioned "as a one-sentence item" in the staff recommendation.
The board voted to reinstate the Japan-only mandate. Deciding which firm to interview for the international core mandates was tricky, however. Drawing the line for international core managers just below ValueQuest's score would have excluded only John Morrell & Associates, London.
At the behest of Board President William D. Crist, all 15 international core semifinalists were invited, as was Nomura, the second-ranked contender for a Japan-only brief.