SACRAMENTO, Calif. - CalSTRS' trustees will nearly double the fund's active domestic equity allocation, countering a trend among large pension funds toward dumping active management for passive.
The unanimous decision by trustees of the $80 billion California State Teachers' Retirement System, Sacramento, means the pension fund will shift about $3 billion into active equity next year.
Patrick Mitchell, chief investment officer, said CalSTRS officials plan to issue a request for proposals early next year for as many as 14 active domestic stock managers. Decisions on manager styles probably won't come until January, he said.
The fund's active domestic equity allocation will jump to 20% of domestic equities from 10.6%, or to $6.4 billion from $3.4 billion. CalSTRS has $32 billion allocated to domestic stocks.
About half the money to fund the additional allocation to active domestic equity will come from Barclays Global Investors, San Francisco. Barclays manages about $25.3 billion in CalSTRS domestic equity assets. The remainder will come from cash.
The fund uses six active domestic equity money managers now; those slots also will be up for grabs.
Existing managers are: Brown Capital Management Inc., Baltimore; Denver Investment Advisors, Denver; NCM Capital Management Group Inc., Durham, N.C.; Oppenheimer Capital, New York; Provident Investment Counsel Inc., Pasadena, Calif.; and Sasco Capital Inc., Fairfield, Conn.
"It's a good decision," said Mr. Mitchell about the move to increase active domestic equity. "I feel more confident that active (domestic equity) managers will add value" over index returns.
Mr. Mitchell said CalSTRS' active DNMdomestic money managers have outperformed the fund's passive money managers by 55 basis points per year for the last 10 years.
That translates into $30 million a year, net of fees, he said.
"That is a lot of money."
By increasing active domestic equity money management, CalSTRS is moving in the opposite direction of some of its peers. The decision is also good news for active money managers.
The trend among large pension funds has been to increase passive domestic equities. Only last April, the Massachusetts Pension Reserves Investment Management Board, Boston, increased its domestic passive equity allocation to 76% of domestic equity assets from 51%.
In May, the $38 billion Washington State Investment Board, Olympia, dumped six active stock money managers and put all of its $12.2 billion in domestic equity assets into passive vehicles. A key reason cited by Washington fund officials at the time was that it was too hard to choose good active domestic equity managers.
Richard M. Ennis, principal with the pension consulting firm of Ennis, Knupp and Associates, Chicago, has found a strong trend toward passive money management.
He said a study of Pensions & Investments' 200 largest pension funds shows passive management increased to 36% of assets in 1996 from 30% in 1995.
CalSTRS' board has been a big believer in domestic equity index management, drifting toward higher and higher levels of indexing as it fired underperforming active money managers.
According to P&I's survey of the largest pension funds, CalSTRS' domestic equity indexing commitment - at 89.4% before the change last week - was second only to the New York City Retirement Fund, with 95% of its domestic equity indexed.
And, even though the CalSTRS board vote to boost active equity management was unanimous, some CalSTRS board members expressed concerns about whether active money managers could outperform passive ones.
Just last August, CalSTRS' board was considering putting all of its domestic equity assets in passive money management. At that time, board Chairman Emma Zink said she would favor no more than 10% of assets in active domestic equity management.
But Allen Emkin, the fund's general consultant, contended an allocation to active management of less than 15% of domestic equity assets would have no impact on the fund's returns.
Both he and Mr. Mitchell recommended the board increase its active equity commitment to 20%, with a range of 15% to 25%.
Stephen Nesbitt, senior vice president at Wilshire Associates, Santa Monica, Calif., said a pension fund's decision to increase active domestic equity is "swimming against the stream." He believes large public funds will continue their move toward passive domestic equity management. Mr. Nesbitt isn't involved with the CalSTRS fund.
Mr. Mitchell said large funds with very high levels of domestic equity assets indexed tend to hit a plateau and do not index all domestic equity assets.
One reason some fund officials support a mix of active and passive domestic equity management is that active managers tend to invest in a higher percentage of smaller stocks than do Standard & Poor's 500 stock index funds.
With the recent market trend toward smaller capitalization stocks, active money managers could be in a advantageous position relative to S&P 500 index funds that have benefited in recent years from the investor focus on larger capitalization stocks.
Commented Ron Peyton, president of Callan Associates, a San Francisco consultant: "Certainly large funds have used passive (management) for capacity and fee reasons - to reduce costs - to a much greater extent than smaller funds.
"But the current market environment is favoring mid(cap) to small-cap issues, which are greater (in number). There are more inefficiencies in that part of the market, therefore active management can add more value," said Mr. Peyton.
Investors trying to protect themselves from a potential down market might have a greater need for active management "to see them through potentially rough periods ahead," he said.