Kentucky Public Pensions Authority, Frankfort, terminated Putnam Investments from a $700 million customized separate account employing the manager's dynamic asset allocation strategies, said Steven Herbert, executive director, office of investments, and chief investment officer.
Investment staff recommended the termination after determining the portfolio was not appropriate for the authority's real return investment policy and beta allocation and results in a "phantom overweight" to public equities and fixed income, according to a Jan. 24 memo to the authority's investment committees from Anthony Chiu, director, office of investments.
The Kentucky Public Pensions Authority oversees the $11.6 billion Kentucky county system, and the Kentucky Retirement Systems, which consists of the Kentucky Employees' Retirement System and Kentucky State Police Retirement System. Those two systems have $4.4 billion in combined assets.
Mr. Herbert said in a phone interview Thursday, "It was just at present, given the cycle in the market, we're looking for more private assets directly associated with CPI moves, just more pure real return than (the Putnam) portfolio."
Investment staff with the assistance of general investment consultant Wilshire will send invitation-only requests for information to potential managers to build out the overall real return portfolio over the next 12 months, Mr. Herbert said. He added the termination of Putnam was solely a "structural decision" and the portfolio met staff's expectations.
In May 2020, the single investment committee of the authority — then known as the Kentucky Retirement Systems — approved the hiring of Putnam for the customized separate account.
Putnam manages three strategies — conservative, balanced and growth — within its dynamic asset allocation strategies, and the customized portfolio had been seen at the time as allowing KRS the kind of diversification that was not then available within the real-return portfolios of previous managers Nuveen and Pacific Investment Management Co. KRS also negotiated a 25-basis-point fee with Putnam, compared with the 88-basis-point fee for PIMCO All Asset and 68-basis-point fee for Nuveen.
Andy Kiehl, then-deputy executive director, office of investments, and Rich Robben, then-CIO, had recommended the new strategic partnership for the pension fund's diversifying strategies allocation. Both executives left the retirement system in September 2020.
In his January memo, Mr. Chiu said "active weights are not material enough to warrant its current allocation to the real return IPS/beta allocation and are duplicative of rebalances and tilts made by the investment team and the KPPA Investment Committees at the larger portfolio level. These include being underweight duration and overweight non-US equity." As of Sept. 30, the Kentucky County Employees' Retirement System's actual allocation to real return was 6.5% and the Kentucky Retirement Systems' actual allocation to real return was 6%.
Assets will be reallocated in the short term to rebalancing and other liquid assets.
C. Prewitt Lane, chairman of the Kentucky Retirement Systems' investment committee, and Merl Hackbart, chairman of the Kentucky County Employees' Retirement System's investment committee, approved investment staff's recommendation to terminate Putnam at their Feb. 8 and Feb. 16 meetings, respectively.
