Firm's standing reviewed by ERS
By Deborah Adamson
Advertiser Staff Writer
The state pension fund is looking into allegations that its largest bond manager — which handles nearly $1 billion in government retirees' money — has allowed a client to engage in improper market-timing.
The Employees' Retirement System said it is reviewing the investment manager's standing after New Jersey regulators sued Pacific Investment Management Co. of Newport Beach, Calif., on Feb. 17.
PIMCO allegedly allowed Canary Capital Partners LLC, a hedge fund, to market-time two bond funds last year.
However, PIMCO told investors that the trading didn't violate fund policies or hurt shareholders.
In market-timing, a favored client would trade in and out of shares quickly, increasing trading costs and volatility and generally hurting returns in the long-term.
Hawai'i joins pension funds in California and Illinois, which also are looking into the allegations.
Last November, the ERS board fired Putnam Investments after regulators charged the money management firm with securities fraud. Putnam had managed $440 million.
PIMCO manages $917 million of the $8.5 billion in Hawai'i's pension fund. But these funds are not held in mutual funds, the type of investment where the alleged market-timing occurred, but rather in separately managed accounts.
Still, any hint of impropriety gives ERS officials pause.
"We are conducting further due diligence," said Kimo Blaisdell, ERS' chief investment officer.
PIMCO manages $615 million in domestic fixed-income securities and $302 million in international. Fixed-income securities include U.S. Treasurys, bonds issued by foreign governments as well as corporate debt.
In 2003, domestic fixed-income investments managed by PIMCO for ERS had a return of 6.5 percent. For the past three years, it was 8.9 percent on average per year; for five years, the return was 7.5 percent annually. The international side returned 21 percent last year and 13.6 percent per year on average over three years.
Both handily beat their benchmarks — the Lehman Bros. Aggregate Bond Index and the Citigroup Non-U.S. Government Bond Index.
"Over the long run, they've been one of our better and most consistent performers," Blaisdell said.
Bloomberg News Service contributed to this report. Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
