Asset Allocation, Asset Managers, Consultants, Defined Benefit, Institutional Investors, Pension Funds, Public Funds

KRS Seeks EM, U.S. Micro-Cap and Distressed- Opportunities Managers

The Kentucky Retirement Systems (KRS), which includes the Kentucky Employees Retirement System, the County Employees Retirement System, and the State Police Retirement System, is seeking several new managers in various classes as it shakes up its investment portfolio, according to Rich Robben, who in February was named chief investment officer (CIO) of the Kentucky System, effective April 1. Robben had been serving as interim CIO of the $17.6B billion retirement system for the past two years while KRS conducted a CIO search to find a replacement for David Peden, who left the fund in January 2017. KRS is currently 12% funded and ranks as the least-funded pension fund in the U.S.

KRS is looking to add one or two dedicated emerging-market equity managers, according to Robben. The search, which started at the beginning of March, is by invitation only and is being led by Wilshire, KRS’sinvestment consultant. 

Rich Robben, CIO, KRS

The System will seek to award “up to $800 million in new dedicated EM equity mandates, but most likely it will be around $500 million,” Robben said. “We have six managers in that portfolio currently, with about 40% of the assets run in indexed strategies. The other 60% is in active mandates. In the past, our international managers had the ability to do EM investments as they saw fit. But we think it’s better to have a dedicated manager,” he explained.

KRS is also seeking a small-cap or micro-cap manager in the U.S. market. This manager search is also invitation-only. This search too is being led by Wilshire and is slated to start this summer. KRS will award $400 million to the chosen manager. KRS currently has one small-cap manager, running a $250 million portfolio.

The system will continue to use index products for its U.S. large-cap and mid-cap stock investments and for much of its international stock (and bond) investments, Robben said. The system holds an approximately $3 billion U.S. public equities portfolio and has approximately $3.9 billion in international public equities, which includes emerging markets. However, “there is more room in the international portfolio to add value
[alpha],” Robben said.

KRS is also looking for a dedicated distressed debt manager for co-investment opportunities. (See related story: IA, 10/15/2018.) It currently has no dedicated distressed portfolio, but “we have a 15% allocation to specialty finance/high yield. A new distressed mandate would be within this 15% allocation. Ultimately, we could have an allocation of 3%-4% to distressed once the opportunity presents itself,” said Robben.

“There is going to be a distressed cycle,” Robben asserted, “I just don’t know when.” KRS began researching distressed managers last fall. “We will be doing at least one RFI [request for Information] in conjunction with Wilshire this summer, and we will also allocate to at least one existing credit manager,” he said. “There are a lot out there with trigger funds; they have a draw down vehicle, so you sign it all, but they do not call capital until the high-yield spreads hit X amount,” he explained. “That idea is appealing to us, because it helps us mitigate the slow speed at which things happen at a public pension plan.”  Once the fund is approved by the board, then Robben can give the go ahead to invest. “Manager won’t issue a capital call until the fund triggers have been met,” he said. The investment team is looking to bring it to committee in August.

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