The NSW Local Government Superannuation Scheme (LGSS) has terminated three mandates with active Australian equity managers to increase the passive component of its $1.1 billion domestic equities portfolio to almost 50 per cent.
The $5.6 billion LGSS withdrew a $200 million core mandate an $80 million long/short allocation from BlackRock, and a $260 million enhanced index mandate from Barclays Global Investors (BGI), and will tip the redeemed capital into an ASX200 index fund run by BGI to meet its target weighting to passive Australian equities of between 40 and 50 per cent.
At one point the domestic equities portfolio held as many as seven active managers, but due to overlapping share holdings and cost concerns this number had been trimmed to “two or three”, Peter Lambert, chief executive officer of LGSS, said.
The fund’s passive exposure now sits close to 50 per cent, Lambert said.
“To have a fully active portfolio is expensive, and can result in a high number of redundancies among managers’ stock positions.
“Over three years or more, [we were] finding it difficult to add value after fees.”
Fewer active managers in the portfolio would result in less overlap among managers’ investment positions and potentially create a higher tracking error, Lambert said.
He would not disclose which active managers had been chosen because the fund was in transitioning the mandates, which is being managed by Citi, but said the fund had chosen managers investing in value and quality styles.
Earlier this year, LGSS implemented a similar strategic overweight to beta in its international equities book, assigning Vanguard to manage 40 per cent of the portfolio, which amounting to $300 million.
“Both portfolios held up to seven active managers, and there was a high level of redundancy in terms of stock selection.
“We were paying active fees and getting a quasi-index outcome.”