Pension funds finally are turning to multiasset class managers in numbers. While pension executives have been reluctant to give managers investment discretion for large chunks of their funds, the idea is reaching the tipping point.
Increasingly, pension officials are forging strategic partnerships or master manager arrangements and naming the money manager as a co-fiduciary. That relationship lets the money manager design the portfolio and pick both internal and external managers, speeding up the manager selection process and more efficiently investing pension dollars in capacity-constrained alternative investments. The idea is not new: GTE Corporation pioneered the concept in 1995 for its defined benefit plan. But these arrangements were rare and tended toward money managers running the portfolio internally with a global tactical allocation overlay.
Today, strategic partnerships are just as likely to involve big alternative investment mandates using an open architecture platform that by design includes external managers and a wide spectrum of strategies and asset classes. The master manager typically becomes a co-fiduciary, and can use both internal and external managers. However, the range of these strategic partnerships is extremely wide.
Among the institutional investors that have forged strategic partnerships with money managers this year:
• The US$110 billion Teacher Retirement System of Texas hired four large multiasset managers to manage US$1 billion each in portable alpha portfolios. The move is the brainchild of T. Britton Harris IV, chief investment officer, who held the same position at GTE.
• Ford Motors hired Lehman Brothers in late March to manage at least US$3 billion in alternatives, with hedge funds, private equity and real estate each reportedly getting US$1 billion from the firm’s US$46 billion defined benefit plan.
• South Carolina Retirement System Investment Commission has signed two strategic partnership deals worth US$1 billion each with FrontPoint Partners and its parent company, Morgan Stanley, to manage hedge funds and private equity. Officials of the US$30 billion plan are searching for managers for US$800 million to US$1 billion investments in opportunistic credit and emerging market debt/high yield.
• Pending successful contract negotiations, Arizona Public Safety Personnel Retirement System will give 90 per cent of the US$7 billion fund to Benchmark Plus Management, BNP Paribas Asset Management, Morgan Stanley and Western Asset Management in a variation of the master manager model using index-plus strategies.