Some $10bn of US telecoms group AT&T’s huge pensions portfolio of $21bn in pensions assets is invested in US public traded stocks. Given that there is no way in which such a portfolio could contemplate being a market timer, how does such a fund expose itself to the investable US equities market?
The benchmark is the Wilshire 5000, says Michael Sinunu, vice president equities at AT&T Investment Management in Berkeley Heights in New Jersey. “We do not try to make style bets. So we are neutral to growth, neutral to value and neutral in terms of large and small as this relates to the Wilshire 5000.” The fund’s strategy, however, is roughly 50% passive and 50% active.
But at the same time as mirroring the Wilshire 5000 in terms of characteristics, the aim is to add value through the actively managed component. “It is all externally managed, with managers using a number of different styles,” says Sinunu. Altogether AT&T pension plans employ 17 different active managers, with even a greater number of mandates.
“It is a varied group, some are purely quantitative and others who use purely fundamental rsearch. We have large gowth, large value, we have small growth - in fact a myriad of styles. So when we aggregate our active and our passive managers we want to look like the Wilshire 5000 – but we outperform.”
The fund has performance targets for managers, and evaluates them in a variety of ways, through attribution analysis, style analysis, tracking and information ratios. “We want to see that they are adding value and where they are getting it from.”
The approach has been successful, Sinunu says. Managers are not judged on a quarter-by-quarter basis, but rather are evaluated over a three- to five-year period. “We take a longer-term view, but we do adjust our manager mix from time to time.”
More often than not, the way this is done, which also helps keep the balance vis-a-vis the Wilshire 5000, is through the fact that the fund pays out considerable benefits each month. “Due to the out-performance of the US equity market, it has been a source of funds to us,” he says. “Each month we essentially make some decisions on our manager mix beacuse we need to find funds for our benefits.”
A range of factors go into that decision, some relating to the managers’ situations and others to where the fund is “characteristic-wise” in relation to the Wilshire benchmark. The fund, of course, has the ranges within which it operates, but as the US market has boomed and outperformed re-allocations have been done at the plan level too. “Money has been moved from the US equity to US fixed income market and to international equities, as well a changing the equity allocation from paying benefits.
“We have our asset allocation targets and our ranges, but we are not market timers in terms of saying that the US market has done so well, we should change our targets,” Sinunu adds. Fennell Betson