Alaska’s $33 billion public pension manager is unwinding its dedicated active emerging-market equity programme and has decided against setting up a separate China A-share portfolio, a senior executive at the institution has told AsianInvestor.

Alaska Retirement Management Board (ARMB) took the decision last month as part of a broad review of its investment operations with an eye on simplifying its setup and improving performance.

ARMB, which oversees investments for Alaska’s public pension schemes, is firing some two-thirds of its active equity managers, Greg Samorajski, deputy commissioner of the US state’s department of revenue, said late last week (see box below).

The move heralds an increase in its passive and quasi-passive exposures, said Samorajksi, who oversees ARMB’s investment team.

Greg Samorajski, ARMB

“We looked at a pie chart of our active managers and decided that we simply had too many for any one of them to make a meaningful contribution to performance one way or the other," he said. 

“So we decided to terminate some of the managers and focus on those we really felt could generate excess return that was not available through simple passive or factor-based investing.”

As part of the review, ARMB also decided not to pursue country- or region-only active equity strategies outside the US, Samorajski said.

The fund had been mulling making a stand-alone allocation to China A-shares, as other Western pension funds have done or are considering doing. But it chose not to proceed with the idea amid its push for greater simplicity and cost-efficiency.

Samorajski denied that ARMB's decision to cut back on active emerging market strategies and row back on a China focus had anything to do with the US-China trade spat – or indeed to emerging US political opposition to investing in Chinese assets.

He said ARMB’s choice did not have “anything to do with federal discussions or policy”.

He also stressed that the active managers ARMB is retaining will continue to invest in emerging markets, including China, if they see fit. 

ARMB's emerging market moves form part of a broader streamlining of its investment operations.

In the first part of this process, the fund in June terminated almost all of its active US equity managers. It followed that up in September by dropping at least half of its active non-US equity managers, Samorajski said.

ARMB is also set to review its private equity strategies in December, he added.

WINNERS AND LOSERS FROM ARMB’S SHAKEUP 

Alaska Retirement Management Board has fired 17 asset managers so far as a result of its review. 

They include its $640 million emerging market equity programme – run by Deprince, Race & Zollo and Lazard Asset Management – and its small-cap non-US strategy, run by Mondrian and Schroders. It has also decided not to fund a Sands Asset Management mandate to actively invest in emerging markets.

For the non-US developed-market equity strategy, ARMB is terminating its mandates with Lazard Asset Management and Mckinley Capital, a fund house based in Anchorage, Alaska.  

For the non-US equity portfolios, the fund is retaining ArrowStreet, Baillie Gifford, Brandes Investment Partners and Capital Group. 

It is also keeping Legal & General Investment Management to run its factor-based strategy and State Street Global Investors as its passive manager. 

These decisions follow ARMB’s move in June to axe eight managers running $843 million in US equity strategies. 

For ARMB's defined-benefit plans, totalling about $27 billion, US equities account for $6.9 billion and non-US stocks $4.8 billion. Also, there are several hundred million dollars of additional equity securities in the fund's opportunistic strategies.

PASSIVE PUSH

The fund’s ongoing manager review has seen its shift more assets into passive or quasi-passive, factor-based strategies.

ARMB is switching the breakdown of its non-US equity portfolio from about 70% active and 30% passive to a target of 50% passive, 20% factor-based and 30% active.  

For example, in August the fund hired Legal & General Investment Management to run a $193 million non-US developed market equity portfolio based on factor strategies. And it aims to increase its non-US equity factor allocation to $1 billion, which is set to include an emerging-market portion, Samorajski said.

“While active now has a lower weighting, the 30% will allow us to give more funds to those we are retaining, given there are a large number of mandates being terminated,” Samorajski said.

The fund decided to review its managers earlier in the year, he noted. At a public meeting in early April, Bob Mitchell, ARMB’s chief investment officer, noted how much time was spent monitoring managers and argued that “simpler is better”, according to the meeting minutes.

As a result, Mitchell recommended the termination of several strategies.

See the latest (Autumn 2019) issue of AsianInvestor magazine for an in-depth feature on US state pension funds' approach to investing into Asian assets.