Norwalk pension board presses Walter Scott on multi-year underperformance; firm cites long-term approach

Norwalk City’s pension board pressed international equity manager Walter Scott on Feb. 11 over several years of relative underperformance, and the firm urged trustees to view recent results in the context of a long-term strategy.

Trustees opened the discussion by asking Walter Scott representatives to explain “what has caused their underperformance,” including whether the manager had changed its philosophy or process, and what market environments would favor the firm’s approach. An unidentified board member said the manager “has struggled mightily” versus the benchmark since joining the plan in March 2023.

A Walter Scott representative said the team remains stable and the firm has not changed its investment philosophy, but acknowledged outcomes have been poor in recent rolling one-year and three-year periods. The presenter pointed to the portfolio’s growth-and-quality orientation as a structural headwind while value and certain cyclical sectors have outperformed. “While the returns have been respectable in the context of equity market returns over the long term, they have fallen short of the index,” the firm said.

Trustees and the consultant pressed the firm on sector positioning. Board members noted the portfolio’s overweight to health care and underweight to financials and praised strong contributors such as Taiwan Semiconductor and ASML, which the presenter said were up “about 55%.” The presenter also listed challenged holdings (for example, Wolters Kluwer, Sysmex, Novo Nordisk and CSL) and said some software and information-services names had been hit by rapid market repricing related to AI developments.

On how long the manager typically holds positions, the Walter Scott presenter said the firm’s average holding period is about 10 years and emphasized a bottom-up approach. “We are a long-term investor,” the presenter said, adding that the firm had turned over some holdings in the last year (selling nine and buying 10) but defended retaining core convictions in many names.

The presenter told the board that Walter Scott reduced fees on the portfolio effective Jan. 1, from 75 basis points to 65 basis points, and described the firm as operationally stable with about $70 billion in assets under management.

Trustees debated whether to move money to passive strategies after reviewing rolling performance charts and long-term comparisons. The Walter Scott representative argued the recent poor results largely reflect a short window of weak performance and that active management has historically delivered value over longer horizons.

The board did not take a policy vote on the manager at the meeting. Trustees said they would continue questioning the manager in follow-up and consider whether additional analysis or changes to the manager structure were warranted.