Desmond MacIntyre, who joined the BAM from Deutsche Asset Management as chief investment officer on February 3 this year, unceremoniously quit less than four weeks later. The question is why.
The spin at the $69 billion fund is that a personality conflict between MacIntyre and deputy comptroller for pensions Horatio Sparkes was the root cause of his departure. MacIntyre, reached at his home in Westport, Connecticut, said his departure was friendly and that he had offered his ongoing assistance to the bureau, but declined any further comment, and BAM itself is uncommunicative on the issue. But there is clearly more here than meets the eye.
For a start, the fund seems to have found itself in the midst of a securities lending imbroglio. According to sources, the city’s pension fund has taken an as-of-yet undisclosed $60-80 million hit on its lending portfolio. Citibank is the City’s custodian and securities lending agent, but officials there will not talk about the incident. According to sources, however, the loss occurred through investments in the City’s collateral reinvestment program – when securities are lent, they are usually collateralized with cash and those funds are invested in securities, generally short-term fixed income securities that are detailed in guidelines agreed to by both the lender (the City fund) and the agent (in this case, Citibank).
The investment that appears to have detonated the program is National Century Financial Enterprises , an Ohio healthcare finance firm that collapsed late last year amidst a federal fraud investigation. The National Century Financial Enterprises implosion has already damaged a number of state funds – various Arizona city and county agencies, for example, investing in that state’s Local Government Investment Pool, reportedly lost in excess of $131 million. It is unclear whether the $80 million investment in National Century Financial Enterprises paper was within guidelines – this would be the pivotal question. But even if it was in dispute, it is possible that Citibank would be willing to make up some of the losses, as custody banks have historically been reticent from a reputational standpoint to stand idly by while prominent clients take collateral reinvestment hits. As of now it is unclear what is the specific value of the $80 million investment, but analysts say the Ohio company is worth just cents on the dollar.
From an investment standpoint, the City fund has not distinguished itself these past two years, although it is not alone in that regard. Independent Fiduciary Services, a Washington DC-based investment advisory firm, has just finalized a fiduciary audit of the City fund, and sources who have seen that audit say it contains substantial criticism as to some of the procedures and governance at the fund. Calls to Skip Halpern, general counsel at IFS, went unreturned by press time.
Some of these problems may have been a function of lack of oversight – Donna Gilding, the last chief investment officer, quit 18 months ago to join San Francisco-based Progress Investment Management: since then John Burns, a veteran Bureau of Asset Management employee, has been acting as interim CIO. The CIO reports into First Deputy Comptroller Adam Blumenthal, who reports into Comptroller Bill Thompson, who has ultimate responsibility for the fund.
Only last week, Thompson issued a release noting that the fund was looking at options that “may include the use of consultants for the implementation and design of investment strategy, where they can deliver improved service with lower cost and risk.” This would essentially outsource some of the functions that now belong to staff officials: According to one source, it was a step that MacIntyre was insisting on if he was to stay at the fund. The fund already has a number of consultants – including Rocaton and Callan Associates – but these are traditional consulting relationships that function largely as a sounding board for the various trustees of the fund.
If the fund actually moves to a more outsourced decision-making process, it would be a radical step for a large public fund. As of now, however, the signs are not positive, despite the sanguine tone of the press release: MacIntyre, clearly a force for change at the fund (previously he was CFO at Asset International, the parent company of PLANSPONSOR, and CFO and head of risk management at General Motors Asset Management) ran for the door, although a fund spokesman notes that the departure was “amicable.” This leaves the fund again without a CIO, but sources at the fund say the position will, at least in the short term, be likely taken over by Blumenthal. In these perilous times, this is not a recipe for success, even for well-funded plans.