By Muskan Arora
The $5.7bn Kern County Employees’ Retirement
Association terminates FI manager amid $25m allocation to PC portfolio.
Within its fixed income portfolio, the
system has terminated Western Asset Management Company (WAMCo) over structural and
its own asset allocation changes.
WAMCo had two mandates including Western
Asset Core Plus in the Core Fixed Income portfolio and Western Asset High Yield
in the High Yield & Specialty Credit portfolio.
Both are now terminated, following the
board’s approval in the recent meeting.
The pension plan allocates $58m to its core
plus strategy and $174m to its high yield strategy.
Manager’s structural changes
The CIO Daryn Miller alongside consultant
Verus highlighted the departure of John Bell, and co-CIO of the management firm
Ken Leech as alarms leading to the termination.
“One of WAMCo’s edges relative to their
peers is their top-down views, and how that's incorporated in the process. John
Bell is potentially the most important person in that process,” said Brian
Kwan, CFA at Verus, as the pension plan still hasn’t received a clarification
for his termination.
Th departure of Bell indicated that the
firm no longer had that edge.
Further, the co-CIO Ken Leech departed due
to “unfair allocations between client accounts on some Treasury derivatives.”
“His departure in the short term detracts
from their personnel and some of their capabilities longer term, we don't know,
but there could be more implications there,” added Kwan.
The departure seemed to have affected the
manager’s reputation across the board, as the $12.5 billion Chicago Public
School Teachers’ Pension & Retirement Fund has recommended to Western’s
$550 million core-plus fixed-income, at its August 27 meeting.
Further, the $24.2bn Public Employee
Retirement System of Idaho’s reports showed that Western had been reporting net
outflows of just over $500 million in July and more than $1 billion in
June.
Changes in the pension plan’s asset
allocation
The system had also made changes to its
fixed income sleeve in August with an intention to make the portfolio more “rates
focused.”
The changes focused on moving away from
core plus to core plus as its FI strategies had incorporated too much “periphery
risk” whether in EM debt or high yield.
“We want to move high yield into bank
loans, which still gives us credit exposure,” said CIO Miller and his team.
“This is now in the credit portion of our
fixed income book but pulls out the duration component because bank loans are
floating rate,” added the staff.
Therefore, the core-plus mandate to both
PIMCO and WAMCo would change over time.
New private credit allocation
Within its private credit sleeve, the
system has allocated up to $25m to Magnetar Structured Solutions Fund, focused
on Europe.
The fund aims to provide credit protection
to banks as they seek to manage their regulatory capital.
“In the US, you've seen increased capital
requirements at banks going from what was 8% on average in terms of regulatory
capital against loans to now on the order of 16% so a doubling of that
regulatory capital that you have to have on hand, which reduces your return on
equity at banks,” said Keirsten Lawton, partner at Cambridge Associates.
In such a situation, the fund is providing
regulatory capital relief to banks in exchange for taking some of that loss
against a detailed portfolio of loans.
The system disclosed 10.5%, 5.4% and 8% for
its 1-, 3- and 5-year return against a benchmark of 11.8%, 5.2% and 7.8%
respectively.
