SCOPE:
After completing a $7 billion acquisition of another company, our client was faced with combining three defined benefit (DB) plans with roughly
$4 billion in assets and seven Voluntary Employees Beneficiary Association (VEBA) plans with total assets of over $1 billion into a cohesive package. The challenge was twofold: realign the three DB plans to achieve the same asset allocation and manager structure and adjust the seven VEBAs to achieve a similar manager line-up to generate economies of scale.
APPROACH:
Our initial task was to understand the number and types of strategies in the three DB plans. We found that the three plans contained a high number of unique strategies:
- 19 U.S. equity funds
- 8 non-U.S. equity funds
- 2 global equity funds
- 8 fixed income funds (with a combination of intermediate-term,
long-term, and global investments)
- 2 opportunistic and private equity funds
In addition, each company had representation on the new investment committee, which meant that EnnisKnupp needed to maintain flexibility throughout the entire process. It was also important to keep the committee fully informed at each step of the process. We provided the committee with background and “big picture” information so that everyone understood the basis for our recommendations.
Recommendations:
Our evaluations focused on six primary areas of activity – risk analysis, asset/liability study, manager structure, education, manager selection, and implementation. The final recommendations included:
Risk Analysis. EnnisKnupp completed an initial review of all investment managers, terminating two immediately. We also conducted two types of analysis, risk budgeting and holdings-based style analyses, to help the client understand the sources of risk in their current portfolios.
Asset/Liability Study. Our first asset/liability study was completed in mid-2008. We are currently doing a second study to help ensure that the client has the proper asset classes included in their portfolio to successfully address the liabilities inherent in their DB plan.
Manager Structure. We conducted an analysis to determine the distribution of managers across four major areas: active vs. passive
(by asset and sub-asset class), U.S. vs. non-U.S. stocks, style-box approach vs. broader “whole stock” approaches, and total number of managers.
Education. EnnisKnupp conducted in-depth education sessions covering infrastructure, real estate, commodities, and opportunistic strategies, all areas where the investment committee had minimal exposure.
Manager Selection. We started the manager selection process in the higher impact areas such as strategies with the largest dollar amounts and new mandates. We conducted searches in each asset and sub-asset class and included all of the incumbent managers in the selection process.
Implementation. EnnisKnupp proposed, and the committee approved, a stable of four transition managers. We solicited bids from all four firms for each asset class transition, analyzed the bids, and developed recommendations to the committee.
OUTCOMES:
EnnisKnupp successfully addressed the two initial challenges presented by the client. We helped them realign the three DB plans to achieve the same asset allocation and manager structure. We also worked with them to restructure the VEBAs to achieve a similar manager line-up and realize benefit from the economies of scale resulting from investing more assets with fewer managers.