The $55bn Ohio Public Employees Retirement Sys-tem (Opers) is contemplating alternative ways to add alpha in the wake of the poor equity markets of the start of the new millennium.
The Columbus-based fund, the 10th largest public pension plan in the US, is in the process of reviewing its asset allocation, as set in late 2000. While Neil Toth, director of investments, does not expect any major changes, he said the fund is considering some diversification into alternatives, such as hedge funds.
This is despite strong returns this year for the fund, which is heavily weighted towards equities, on the back of stock market recoveries.
According to research by consultants Ennis Knupp & Associates, Opers was the top performing pension fund among its peers in second quarter 2003. As at the end of June, the fund was up 9.8 per cent year-to-date, compared with 9.7 per cent for its composite benchmark. Mr Toth, who has been with Opers since 1990 and director of investments since 1999, cited unaudited figures for the end of August, showing 17 per cent growth year-to-date.
However, returns were –2.9 per cent against –2.8 per cent for the benchmark over three years to end June, bringing five-year returns down to 2 per cent against 2.8 per cent for the benchmark. Mr Toth, who recognises that “for five years or longer we may be in a period where markets may not provide the returns of the mid to late 1990s”, has decided on a more tactical approach.
The allocation targets, as set in 2000 and not likely to change dramatically, put 43 per cent in domestic equity, 20 per cent in international equity, 23 per cent in bonds, primarily domestic, 9 per cent in real estate, 4 per cent in private equity and the remaining one per cent in cash.
However, private equity is not targeted to reach its 4 per cent level until 2007 and is currently at 1 per cent, giving an interim target of 46 per cent domestic equity. Opers, which uses Ennis Knupp as its consultant, is actively seeking private equity firms to add to its current roster of partnerships, and issued a request for proposals in August for a private equity fund of funds manager to run $100m. This year Charterhouse, Castle Harlan and Freeman Spogli have already been appointed.
Investment objectives are set by the Opers board through consideration of assets and liabilities, Mr Toth said, before the exact asset mix is decided through a detailed study. It is a three-year review of this asset mix that is being carried out. The portfolio is permitted to vary up to plus or minus 3 per cent around the target for each asset class before it is automatically rebalanced.
Performance is benchmarked against a composite return achievable by a portfolio passively invested, with percentage weights allocated to each asset class as specified in Opers’ Statement of Investment Objectives and Policies.
Board meetings are held monthly. “We look at our managers essentially continuously,” Mr Toth said. “The analysts are in touch on a continual basis; they visit us once or twice a year and we visit them once or twice a year. We are continually assessing them in terms of performance but also investment process, people, turnover, management and organisational issues.”
The fund also continually evaluates the strategic fit of the manager with the rest of the line up, he said. “At any one time a number of managers may be on the watchlist and it may not be entirely due to performance issues – it could be management, ownership or us going in a different direction.”
A relatively recent example was Capital Guardian being put on the watchlist in May, but this was on the grounds of the underperformance of its US small cap equity portfolio.
This year, the board has added JPMorgan Fleming for $305m in international growth, AllianceBernstein for $700m in core international equities and Walter Scott & Partners for $400m in international growth, Mr Toth said.
It also has dropped Scudder from an emerging markets brief, Driehaus from an international growth mandate, JPMorgan from an EAFE core brief, Nicholas Applegate from both international growth and international small cap and, most recently, Marvin & Palmer from a $350m active international equities brief.
On the real estate side, Opers is in the process of hiring a manager for the office/retail sector. “We have not yet designated a size,” Mr Toth said. He added that no managers have been dropped – “We are just changing the portfolio a bit.”
The fund has also upped its involvement in corporate governance over the past months, appointing Cynthia Richson in August as its first corporate governance officer. According to Mr Toth, the first priority for Ms Richson, who was previously director of corporate governance for the State of Wisconsin Investment Board, will be to work with the board to develop a corporate governance strategy. “The board recognises the importance of increased oversight in governance,” he said. “Now it is a matter of how we express that to the benefit of the fund.”
He said Opers was already moving from being “somewhat of a passive investor” to a more active stance. In 2002, it was involved in a number of initiatives to increase the focus on corporate governance, updating its proxy voting policy and developing an international proxy voting policy for the first time.
“In 2002 we participated in a number of letter writing campaigns to the SEC and the NYSE on a number of issues related to governance,” he said. “Now we are serving in a couple of litigations where there has been corporate wrong doing.” The plan now is to step this activity up.
But what, then, of socially responsible investment as an asset class, an area in which Opers has not so far invested? Mr Toth does not rule it out. “We don’t have any dedicated portfolios for that and it may be reviewed as a possible element of the strategy,” he said. The asset allocation review should be completed by the end of the year.
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