State must recalculate investment portfolio

7/20/2005

COLUMBUS - A consultant hired to examine the investment portfolio of the Ohio Bureau of Workers' Compensation told agency officials yesterday that investment performance reports provided by the bureau's outside money managers had not been properly vetted for accuracy.

State and bureau officials reacted to the report at their oversight committee by asking whether the bureau has been sitting on a "time bomb" that questions the value of the bureau's entire $14.3 billion investment portfolio.

Richard Ennis, a consultant with Ennis Knupp of Chicago, said performance data under review is based on information compiled by the investment managers rather than independent auditors.

He said his firm must re-create records for several years to judge the performance of investments against benchmarks.

"It's vitally important you understand the state of things," said Mr. Ennis, adding it could take until Thanksgiving to review the 144 firms managing money for the bureau.

Ennis Knupp was hired to ex-

amine the investments after the bureau disclosed that MDL Capital Management lost $215 million in an offshore hedge-fund investment and after lawyers for Toledo-area coin dealer Tom Noe acknowledged that up to $13 million was missing from his $50 million rare-coin venture.

In total, the state's insurance fund for injured workers has acknowledged $300 million in losses and fired five investment managers since The Blade began reporting on the agency's troubles in April.

State Sen. Jay Hottinger (R., Newark), a nonvoting member on the committee, said it is "alarming and shocking" that the bureau does not have the records to compare the performance of its investments against benchmarks "with any degree of accuracy."

"The average investor probably has a greater level of sophistication and understanding of their rates of return and their investment objectives then what we do in managing billions of dollars," Mr. Hottinger said.

Sen. Eric Fingerhut (D., Shaker Heights), a nonvoting member of the oversight commission, asked if there are questions about the value of the bureau's entire portfolio.

Mr. Ennis said that while there are "similar issues with respect to the valuation of the total fund," the concerns are not as intense because about 97 percent of the agency's assets consist of public securities held by the bureau's bank and outside the hands of investment managers. The greater concern, he said, is with private equities, which account for about 3 percent of the bureau's fund. The custodial bank typically does not hold those assets.

"Under normal circumstances, we do not have a concern about theft [with the private equities]," Mr. Ennis said. "In this particular instance, we have not yet had an opportunity to evaluate all of the scores of limited partnership investments and we are in the process of doing that now."

Tom Hayes, the leader of a management review team appointed by Gov. Bob Taft, has told The Blade that Callan Associates, the bureau's longtime investment consultant, is under review.

Callan was paid $140,000 a year for "performance and evaluation services" of the bureau's largest 30 managers, but Callan has been criticized for not independently verifying performance data.

A Callan spokesman has said the firm performed its work for the bureau in compliance with its contract.

Jim McLean, the bureau's chief investment officer who was put on leave following reports of the failures with the MDL investment, said yesterday that he suggested changes to the bureau's performance review policy when he joined the agency in 2003.

He said the changes he suggested were not implemented, and he should not be blamed for the procedures he did not believe were "appropriate or accurate."

"There were huge problems with the way we reported performance," Mr. McLean said.

The oversight commission also voted yesterday to have the bureau draft a proposal to add restrictions to political contributions by money managers.

Commissioners will decide whether to adopt a policy similar to New Jersey's, where contributions are limited from investment managers.

Bureau officials said the agency would likely temporarily fall out of compliance with guidelines that require certain percentages of investments to be managed by minority firms.

The noncompliance, they said, would result from the examination of investments and termination of some managers.

Contact Steve Eder at:

seder@theblade.com

or 614-221-0496.