ALBANY, N.Y. -- The New York State Common Retirement Fund is cutting back on actively managed stocks and beefing up its already sizable enhanced indexed equity program, to help rebalance portfolios.
The $104 billion pension fund has taken $1 billion in actively managed domestic equities and shifted the money to enhanced index and risk-controlled managers. At the same time, it reallocated $1.4 billion from its active international regional portfolios to active core EAFE accounts.
As of Jan. 31, after the changes were implemented, New York State Common had $50 billion in its domestic equity allocation. Of that, 75%, or around $37.5 billion, was passively managed.
The domestic equity assets were shifted to enhanced index and risk-controlled strategies as part of the fund's commitment to maintaining its index strategy in domestic stocks, said Jeffrey Gordon, spokesman for the fund.
"Indexing is the basic strategy for that component of the portfolio," he said.
The percentage of indexed domestic equities did not change, he said, noting that as the assets in the fund grew, more was shifted into enhanced index strategies. The large-cap active managers were not cut back because of performance issues, he said.
The fund also changed its international strategy, eliminating its regional portfolios to focus more on the broad EAFE mandate. "It was a decision that allows investment managers greater flexibility," Mr. Gordon said.
New York State Common cut the actively managed Alliance Capital Management account by $600 million -- to $2.5 billion -- and the actively managed Oppenheimer Capital account by $400 million -- to $1.7 billion.
The fund increased allocations to existing managers, giving J.P. Morgan Investment Management $700 million to run in its enhanced index fund, bringing its total under management for New York Common to $1.4 billion, and Jacobs Levy Equity Management $300 million in a risk-controlled strategy, bringing its total under management to $900 million.
Under its new approach to international investing, the fund terminated $1.4 billion in international regional portfolios; it did not renew regional investment management contracts with J.P. Morgan, Nomura Asset Management U.S.A. Inc. and Rowe Price-Fleming International. It changed Baillie Gifford Overseas' investment mandate to core EAFE from Europe only and increased allocations to existing EAFE managers Bank of Ireland Asset Management (U.S.) Ltd., Brinson Partners Inc., Capital Guardian Trust Co. and Templeton Investment Counsel.
After the changes, Baillie Gifford was managing $420 million; Bank of Ireland, $345 million; Brinson Partners, $865 million; Capital Guardian, $1.2 billion; and Templeton, $367 million.
Spokesmen at Alliance, J.P. Morgan and Rowe Price-Fleming each said they don't comment on clients' comings and goings. The other terminated managers did not return calls by deadline.
Not the first time
This is not the first time New York State Common Fund has shifted assets from large-cap domestic stocks to an enhanced indexed strategy. Last August, the fund terminated two large-cap domestic managers that had managed a total of $755 million. The fund transferred $300 million to the J.P. Morgan enhanced index strategy. The remainder of these allocations was divided between short-term investments and a $100 million allotment to Morgan Stanley Asset Management for a large-cap growth strategy.
Pension consultants said New York Common is on the right track with its recent strategy changes.
"A large pension fund like New York State Common can take a little more risk with its passive allocation by carving out a portion and putting it in an enhanced structure," said one consultant who requested that he not be identified. "This is a structured approach that allows the fund to take advantage of an opportunity to gain extra returns."
This is a trend that will likely continue among pension funds with assets of $5 billion or more, he said. "As portfolios have grown so dramatically, it's an approach that makes a lot of sense. And the big funds are likely to add more enhanced index strategies."
The expansion of the EAFE mandate in addition to the move away from regional managers also makes sense, this consultant added. "The regional approach was a good one in the '80s, but in the '90s, there is a greater focus on global managers. Many consultants believe that it is better to let the investment managers decide which regions to overweight, rather than needing to have someone at a pension fund making those decisions," the consultant concluded.