SOME TRUSTEES OF D.C. PENSION PLAN CHARGE ONE OF THEIR OWN WITH CONFLICT: ADVISER SAYS SHE TOLD BOARD OF LINKS TO FIRMS

A District of Columbia Retirement Board trustee may have violated the board’s rules on conflicts of interest by voting to hire two money managers with whom she has a business relationship.

Ariel Capital Management and Hughes Capital Management participate in a wrap product that trustee Lenda Penn Washington sells through her brokerage firm. Her company also has traded stocks for Ariel during the past year.

Some trustees charge Ms. Washington failed to inform them about the relationship.

Chairman Betty Ann Kane says the board’s fiduciary committee investigates conflicts of interest or allegations of such conflicts by any trustee or staff member. She would not, however, say whether the fiduciary committee – consisting of two trustees and the pension fund’s general counsel -would investigate Ms. Washington’s votes.

“I have no facts on any trustee I can comment on,” Ms. Kane says.

Ms. Washington says she fully disclosed to the board her affiliation with the wrap program, and her connection with the two managers the board was considering hiring.

“I will do whatever is required to ensure there is no conflict of interest,” she says.

Ariel Capital, which is based in Chicago, was terminated five years ago for poor performance and was not on the short list of managers recommended by consultant Barra/ RogersCasey Inc., sources say.

Ms. Washington, who owns GRW Capital Corp., voted at the $1.7 billion pension fund’s July 29 board meeting to hire Ariel as a small-cap to mid-cap value equity manager, and to proceed with funding Hughes Capital Management as a core bond manager.

Both managers participate in Allison Street Advisors, a new wrap provider offering six minority and women-owned investment advisers, created in a joint venture by Ms. Washington’s firm and Brinker Capital Inc., an investment advisory firm.

Edgar Lomax Co., another Allison Street manager, has been in the DCRB stable for a while.

Ms. Washington did not recuse herself from voting on either manager.

In a similar situation, Marc R. Lippman, a vice president and investment officer at First Union Securities in Vienna, Va., quit the board in 1996 when the board’s general counsel said he could not vote for any money manager that did business with his brokerage firm, even if he did not have any direct relationship with the managers.

ariel rehired

“It was suggested to me that I had to recuse myself” from practically all decisions involving hiring and firing money managers, making it impossible to fulfill his duties as a trustee, Mr. Lippman says.

Ariel Capital oversaw about $34 million for the retirement board in a small-cap value equity portfolio before being terminated in early 1994. The pension fund rehired the firm in July to manage $70 million.

Robin Pellish, the consultant assisting the pension fund, wouldn’t comment, saying that Barra/RogersCasey does not discuss client matters.

But Ms. Kane says it is not the job of the fund’s investment consultant to recommend managers.

“They provide the board with information and analysis.”

She did not say who recommended Ariel Capital to the investment committee.

Ariel’s small-cap value portfolios returned 10.3% for the second quarter, compared with a 16.6% return on the Russell 2000 small-cap value index according to Pensions & Investments Performance Evaluation Report data for the period ended June 30.

downplays controversy

The firm outperformed the benchmark for one-, two-, three- and five-year periods ended June 30, Piper figures show. Its small-cap value portfolios returned 4.4% for the 12 months through June 30, compared with -1.6% for the Russell 2000 small-cap value index, and a compound annual return of 22.3% for the three years through June 30 vs. 13.2% for the Russell 2000 and 19.6% for the five-year period, compared with 15% for the Russell 2000, according to Piper.

Its mutual funds lagged peers for the year-to-date through Oct. 11, landing the firm in the bottom half of midcap blend funds, says Valerie Putchaven, an analyst at Morningstar Inc. in Chicago. The Ariel fund, previously known as the Ariel Growth fund, reported a -3.5% return through Oct. 11, while the Ariel Appreciation fund reported a -3.7% return for the same period, she says. Morningstar ranked the Ariel fund in the 72nd percentile, while the Ariel Appreciation fund came in at the 73rd percentile.

Peter Q. Thompson, Ariel’s senior vice president and director of institutional marketing, says he believes Ms. Washington’s position on the board had no bearing on his firm’s hiring. Ariel does not have any assets under management in the Allison Street program, he says, nor was the firm aware at the time of her position on the pension fund’s board. “We know now,” he says.

Hughes Capital had been hired by the DCRB two years ago, but was put on hold until the bulk of the system’s assets were transferred to the federal government earlier this year.

Hughes also will manage about $70 million, says Ms. Kane.

Ms. Washington says her firm is not now doing any business with either Ariel or Hughes Capital.

Although two trustees say Ms. Washington never disclosed her business relationship with the managers, Jorge Morales, executive director of the DCRB, says the trustees simply do not remember.

Crain News Service