Md. shifts 45% of pension funds to Boston firm

Retirement system winding down its role as money manager

An embattled agency

$11 billion will be `run' by State Street Global

March 01, 2003|By William Patalon III | William Patalon III,SUN STAFF

The Maryland retirement system is getting out of the money-management business and has given Boston-based State Street Global Advisors the task of managing about $11 billion - or 45 percent - of the state's $25 billion in pension funds, the embattled agency announced yesterday.

The shift away from internal money management is the latest in a series of sweeping internal changes enacted by the State Retirement and Pension System of Maryland, largely because of a series of serious management lapses that have been chronicled in The Sun.

The Maryland General Assembly is also pushing for reform because of the mismanagement, and two weeks ago recommended a major overhaul of the state pension board.

Shifting away from money management - and concentrating more on supervision - is seen as one strategy that will help the agency reduce the chance of more mismanagement problems, and will likely also help it get better investment returns, the pension board said.

The shift was recommended by Ennis Knupp & Associates of Chicago, an outside investment consulting firm hired by the agency.

"Our overall responsibility will be chiefly one of oversight of the indexes, and oversight" of the outside investment advisers hired to manage state retirement money, said Joseph Coale, a spokesman for the pension system. "It's being done because Ennis Knupp felt it was a way to maximize returns - and minimize risk - over the long term."

Nearly $4 billion currently managed internally will be shifted to outside investment advisers. The state will continue to control about $2 billion in fixed-income money, but those funds are indexed to a widely accepted benchmark, and won't require the buy, sell or hold decisions on individual securities many experts say are better left to private-sector professionals.

In the case of the Maryland pension system, one of those outside advisers is State Street Global.

While a new investment contract revealed as part of yesterday's announcements will have the Boston firm managing state investments now worth $11 billion, Coale noted that the company already controls about $3.8 billion in state money.

Of the $11 billion allocated to State Street Global, $8 billion is to be apportioned to the Russell 3000 U.S. stock index. About $1 billion is to be invested in an international stock index that represents Europe, Africa and the Far East. The remaining $2 billion will be invested in a fixed-income fund, the pension system said.

Although the $11 billion State Street will run approaches half the value of the pension fund, the retirement agency cited as justification for the move the company's track record for market-beating returns, the fact that the money will be held in trust - and therefore protected - and the need to generate better returns for pension-fund members.

"We must continue to reiterate that Ennis Knupp feels that the main risk to the fund is [a] low return," Coale said.

That risk of a low return, as well as the fact that history shows stocks will not keep notching losses year after year, was behind the retirement agency's decision to increase the percentage of money to be apportioned to stocks, as part of a new pension system investment plan, according to the agency.

The pension system's new asset-allocation target for stocks is 70 percent of the overall portfolio, up from 60 percent. The target for domestic stocks was bumped from 43.5 percent to 49 percent, the state said.

To increase its control - and to heighten its supervision - the pension system also tightened the ranges dictating how much of a move was acceptable for each component of the retirement portfolio.

Previously, stocks could drop as low as 50 percent, or rise as high as 70 percent, of the portfolio. Now, however, the low point is 65 percent and the high point 75 percent.

The state said it would search for specialized fixed-income managers to help run $4 billion of pension-fund money. One manager, PIMCO, is already in place, the state said.

The Maryland pension system invests and administers the retirement benefits of more than 250,000 teachers, police officers and other active and retired government workers.

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