Hawai'i feeling fund fallout

By Deborah Adamson
Advertiser Staff Writer

Hawai'i may be thousands of miles from Wall Street, but fallout from the mutual fund investigation is spreading through the Islands, based on a survey of employers, plans and groups in the state.

At least $1.3 billion in retirement money owned by Hawai'i employees, pensioners or retirees has been managed by mutual fund firms under investigation for improper trading. This is money held in pensions, 401(k), 403(b) and 457 plans.

The figure may be a low estimate, since not all companies or groups would disclose to The Advertiser the value of their assets. The sum also excludes money held directly by investors in other accounts.

But investors can rest assured: Despite improper trading by some mutual fund companies, returns on the whole weren't much harmed.

Investment professionals have estimated the impact at 1 percent or less of assets. Even if a mutual fund company fails, investors are protected because their money is held in a trust.

There is some concern that if enough investors pull money from the funds, fund managers could be forced to sell some holdings for cash to pay out. That would put pressure on share prices and increase trading costs for the rest.

Public employee pension plans, companies and investors nationwide have pulled billions from the mutual fund companies being investigated. But overall, investors have been putting in more money than they took out, according to AMG Data, which tracks money flows.

The critical issue, however, is the erosion of trust.

"If your accountant stole $5 from you, it's only $5, but would you still trust him?" said Russ Kinnel, director of mutual fund analysis at Morningstar, a Chicago-based firm that tracks and ranks mutual funds.

In Hawai'i, the amounts handled by these fund firms range from $769 million at Island Savings Plan, formerly the state Deferred Compensation Plan, to $1.1 million at Central Pacific Bank, among the entities disclosing their assets.

Also in the list: retirement plans of First Hawaiian Bank, Marriott, Hawaiian Electric Industries, Kaiser Permanente Hawaii, Alexander & Baldwin, University of Hawai'i and Aloha United Way.

The state Employees' Retirement System already had decided to fire Putnam Investments, which managed $440 million of $8 billion in public employees' money. Putnam has settled fraud charges with the Securities and Exchange Commission but remains under investigation by Massachusetts regulators.

Island Savings Plan will discuss Putnam at a meeting tomorrow .

Bank of Hawaii recently removed mutual funds managed by Janus Capital from its 401(k) because of a probe into the money management firm and concerns over its performance. Bankoh's brokerage division also took Putnam off its approved list of funds for clients.

"I'm appalled. Trust is very important," said Karen Kelley, president of the Hawai'i chapter of the National Association of Investors Corp., of the national mutual fund scandal. "I get concerned whenever I hear about any dishonesty, period, let alone in the financial industry."

Nationally, nearly a dozen mutual fund companies are being investigated for market timing and illegal late trading that benefited certain clients, such as hedge funds, at the expense of long-term investors.

Aside from Putnam and Janus, firms in the probe include Prudential, Strong Capital, Bank of America's Nations Funds, Bank One's One Group, Pilgrim Baxter (PBHG), Federated Investors, Alliance Capital, Fred Alger Management and Charles Schwab's Excelsior funds.

The Securities and Exchange Commission also sent requests for information to 88 of the country's largest mutual fund families, including Bank of Hawaii's Pacific Capital Funds division.

Bankoh officials said its funds unit did not engage in any market timing or late trading activities. In January, Bankoh put in place a 2 percent redemption fee for investors who exit a fund within 90 days, to discourage market timers.

In Hawai'i, Island Savings Plan has the biggest exposure to the funds being investigated, with a total of $769 million managed by Putnam, Prudential and its Dryden and Strategic Partners fund families.

Of Island Savings' $1 billion in assets, about $580 million is in the Prudential Stable Value Fund. Another $80 million is in the Dryden Stock Index Fund; $53 million in the Strategic Partners Equity Fund; $43 million in the Putnam New Opportunities Fund and $13 million in the Dryden Total Return Bond Fund.

"The board is reviewing (the situation). If investors are uncomfortable, they are free to move their money," said Ron Jarvis of CitiStreet, the plan administrator of Island Savings Plan.

First Hawaiian Bank has $118 million in 15 Putnam funds in its 401(k), whose assets total $157 million, said bank spokesman Gerry Keir.

"We're watching things closely and we're thinking of adding more funds" to the plan, he said.

Central Pacific Bank has $1.1 million in the Putnam International Equity fund, 1.85 percent of its 401(k) assets, said spokeswoman Ann Takiguchi.

The University of Hawai'i's 403(b) plan includes funds from Putnam, Prudential and Strong, said UH spokeswoman Carolyn Tanaka. The university could not say how much money is handled by the three, since employees send in money. UH does not match the contributions.

Kaiser Permanente Hawai'i offers funds from Janus and Alger, said the healthcare organization's spokeswoman, Jan Kagehiro. She declined to say how much money was in the two funds, but described them as "among our smallest."

"Our investment committee takes its fiduciary responsibility very seriously," Kagehiro said. "It is monitoring these funds very closely and will take appropriate action if it becomes necessary."

Alexander & Baldwin has Janus in its 401(k), said John Gasher, executive vice president of human resources. He declined to disclose how much money Janus manages.

Marriott has the Putnam International Equity fund in its 401(k), among 13 funds available. A Marriott spokesman said the hotel chain was "actively looking at providing alternatives in that asset class."

Aloha United Way has Putnam and Janus in its 403(b), said AUW spokeswoman Amanda Jones. But the amount in the funds is small, since the nonprofit has only 45 employees, she said.

Hawaiian Electric Industries offers Invesco in its 401(k). The fund company said it had received an inquiry from the SEC and New York regulators, but had not gotten "any notice from any regulator regarding any potential legal actions."

HECO terminated Pilgrim Baxter's PBHG funds from its 401(k) as of Sept. 30. Last week, Pilgrim's two founders resigned after admitting to market-timing the funds. The strategy, in which a preferred client such as a hedge fund is allowed to buy and sell shares quickly to make a profit at the expense of long-term investors, is not illegal, but most fund policies don't allow it, Kinnel said.

For example, European and Asian markets close ahead of the U.S. market. When positive news lifts the U.S. market, it's a good bet the other markets will follow suit when they reopen, Kinnel said. Certain preferred investors, seeing the U.S. market rise, buy in at the closing fund price set in the Asian or European market. Then they sell when the foreign markets reopen and rally, making an overnight profit.

Mutual fund companies make money by charging a percentage of assets, he said. If a $1 billion fund lets a hedge fund add $100 million overnight as it trades, it stands to make $2 million quickly from the 2 percent of assets charged as a fee.

Late trading, which is illegal, consists of allowing certain preferred investors to buy at the fund's closing price — the net asset value — even after trading has ended. If positive news comes out after the market's close, the investor can sell the shares at a profit the next day.

"Those activities dilute returns for long-term investors," Kinnel said.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.