Retirement fund trustees keep money-losing firm
By John Duchemin
Advertiser Staff Writer
The state Employees' Retirement System has gone against the advice of its investment adviser, maintaining ties with an underperforming investment firm whose principals include a former ERS administrator.
Trustees for the $8.4 billion system voted last month to halve the assets under management, while keeping 3Bridge Capital in charge of $165 million in state money. That contradicted a recommendation by Callan Associates Inc. to terminate 3Bridge for losing tens of millions of ERS dollars.
In a report to the trustees, Callan president Ronald Peyton said 3Bridge "should have done better ... has not met its performance hurdles" and made money-losing investments, including buying stock in the now-bankrupt telecom giant Global Crossing.
But ERS trustees, who oversee the retirement system that pays pensions for more than 30,000 former state employees and beneficiaries, said outright termination would be unfair to 3Bridge, which has been affected by the poor economy, declining stock market and a change in ERS performance measures.
"I don't think this is a good time to terminate anyone," said Jackie Ferguson-Miyamoto, a trustee elected to the seven-member ERS board. "I think we need to give them more time and another chance to improve."
The decision to retain 3Bridge comes at a difficult time for the state pension fund, which is under growing pressure to increase assets through better investment performance as the number of retirees grows and the state refuses to cover the full cost of the fund.
Assets dropped from $9.9 billion in June 2000 to $8.4 billion in December 2001.
Trustees say their decision has nothing to do with 3Bridge's affiliation with Stanley Y.H. Siu, an ERS administrator for 22 years until he retired in July 1998 and joined Hanson Investment Management later that year. Now a partner in 3Bridge, a Hanson spinoff that took over Hanson's ERS portfolio, Siu serves as manager of business development and client services.
The San Francisco Bay area firm is classified by ERS as a value manager, tasked with seeking out quality stocks at bargain prices. For several years it has been at the top of a watch list of four or five of the pension fund's most poorly performing investment managers.
ERS administrator David Shimabukuro did not respond to requests for comment about 3Bridge, such as how long it has been on the watch list and the composition of its portfolio.
In the last three years 3Bridge's ERS portfolio has lost 5.7 percent annually, according to Callan. That compares with a median gain of 2.7 percent per year in value portfolios nationwide over the same period, Callan said.
In the more than 14 years that 3Bridge has managed ERS assets, it has averaged 10.7 percent annual returns. But Callan Associates said 90 percent of value managers had better returns — the median is 12.6 percent, while the top 10 percent of firms gained 14.1 percent.
3Bridge's average annual returns ranked in the bottom 10 percent of comparable value managers in the one-, two-, three-, five-, and 10-year periods ending last Dec. 31, Callan reported.
Since December 1999, as the stock market soured, the 3Bridge portfolio has lost $90 million.
"Frankly, they should have done better," Peyton wrote in his report. He said 3Bridge behaved too much like a growth stock fund, investing in riskier stocks than the typical value fund. Peyton also criticized 3Bridge for investing in Global Crossing and Tyco, stocks that have plunged amid questions about the companies' accounting practices.
But Toby M.L. Martyn, chairman of the ERS board, said he felt uneasy about following Callan Associates' recommendation to terminate 3Bridge.
In 2000, on Callan's recommendation, ERS started judging 3Bridge's performance against growth-oriented stock managers instead of value managers — a move that Martyn said could account for 3Bridge's recent losses as the company changed its investment style to adapt to the new standards.
In the first quarter of 2001, ERS changed the benchmark back again to value funds, but the damage was done, Martyn said.
By halving 3Bridge's portfolio rather than terminating the firm, Martyn said, trustees showed their displeasure while giving 3Bridge a final chance.
"They've performed well in the past, and even given the recent hiccup, they deserve time to rectify the situation. But we're mindful that if they don't do better over the next six to 12 months, we'll have to terminate the relationship completely, no matter who works for that firm," Martyn said.
Maurice Morita, a legislative representative for the Hawai'i State Teachers Association, said that while he was not familiar with details of 3Bridge's situation, ERS is usually not so lenient with its investment managers, and trustees generally move quickly to terminate firms on its watch list if they fail to show rapid improvement.
"They're pretty tough. If someone's not making money, they'll go and find someone else who can," said Morita, who has attended ERS meetings for about eight years. "They put people on probation, and if they don't get better, they're out."
Trustees said they had tried to deal with 3Bridge impartially, and that Siu never entered discussions or tried to influence their decisions. They said Siu occasionally served as a company contact and liaison with his San Francisco partners.
Siu, who lives in 'Aiea, said he has had a hands-off relationship with ERS out of concern for potential conflicts of interest. State ethics laws place a one-year ban on ex-government officials dealing with their former departments.
Siu also said he lets other 3Bridge employees handle the ERS portfolio, which until the recent cut made up more than half of the company's assets under management.
"It would make everyone uncomfortable if I represented 3Bridge in this case, so I try and stay away from it," Siu said.
ERS trustee Pilialoha E. Lee Loy said Siu scrupulously stuck to the one-year ban on dealing with ERS, and has been in touch only on routine matters since.
But Martyn acknowledged that some might find it difficult to understand why ERS has been lenient in dealing with Siu's firm.
"On the surface it may raise an eyebrow or two, and we definitely understand how things look," Martyn said. "Particularly because of that, we definitely try to err on the side of being mindful of appearances. But the bottom line is this decision was the result of people trying to be objective.
"We as a board give people the benefit of the doubt a little more so than other funds — we're predisposed to giving people an opportunity to right the ship when things go bad."
Reach John Duchemin at jduchemin@honoluluadvertiser.com or 525-8062.
