ERS fires
embattled
fund firmHawaii pension plan officials
say they’re pulling out about
$415 million due to the fraud
charges against Putnam
The retirement fund for Hawaii's public employees yesterday voted to fire an investment management firm that was handling about $415 million in retirees' funds because of a national scandal involving the firm, Boston-based Putnam Investments.
The fund made money for the state Employees' Retirement System, but disclosures that it allowed some favoritism by letting some managers trade mutual funds overnight three years ago led the ERS to decide that Putnam's ethics weren't up to ERS standards.
ERS staffers said none of the Hawaii money, which backs retirement plans for more than 97,000 city, county and state employees and their beneficiaries, was involved in the particular trading that recently brought attention to Putnam.
Rick Humphreys, chairman of the ERS investment committee and acting chairman for the board of trustees meeting yesterday, said the worry about Putnam was not about its performance but its ethics.
"It's a question of management's ethics. Performance was acceptable," Humphreys told the board of trustees. "We have to hold ourselves as board members to higher standards. We have to hold anyone who works for us to higher standards."
Yesterday's decision leaves the handling of about $807 million of ERS money open to change, because the fund recently fired another manager, Alliance Bernstein, for poor performance.
Alliance has been handling about $392 million in ERS money.
One result is that ERS officials have been seeking bids from other managers and have four proposals they are now looking at, said Kimo Blaisdell, ERS chief investment officer.
A meeting is set for later this month and ERS staff could recommend retaining two of the four, not just one, sharing the Alliance and Putnam funds, Blaisdell said.
Pension funds in six other states pulled more than $4 billion from Putnam's management last week, after federal and state regulators filed fraud charges against Putnam, alleging that the firm allowed some customers and money managers to trade rapidly in and out of mutual funds. That is not illegal but regulators said Putnam has policies against it and did not enforce them.
The events happened in 2000 but have just recently become public.
The ERS fund, which a few years ago was worth more than $9 billion, had slipped in recent years but grew to $7.9 billion by Sept. 30 from $7.75 billion at the end of the previous quarter.
According to Callan Associates Inc., a national consultancy that advises the ERS on how its money is being managed, that wasn't a bad performance.
The ERS money had a return on investment of 2.89 percent in the latest quarter, and in the universe of large investment funds that was acceptable compared to a median return of 3.05 percent, said Ron Peyton, a Callan Associates executive.
The value of the ERS investments Putnam was handling rose 3.3 percent to $414.8 million by Sept. 30 from $404.3 million on June 30.
Peyton said the retirement system's handling of its money has worked well and will continue to do so if it keeps it money managers disciplined, puts them on a watch list when their returns aren't satisfactory and fires them when they don't improve.
As for Putnam, they were not a poor performer. "In fact, they performed well," Peyton said. "They don't show any signs of not being able to perform in the future," he said.
But Peyton said there are issues about the way Putnam management handled the matter when it did come to light.
Blaisdell said ERS will act quickly if any similar controversies arise in the future, demanding explanations and warning managers they could lose the ERS business.
