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Published: Friday, 11/18/2005

STATE OF TURMOIL

Workers' comp bureau fires remaining money managers

$15.7 billion portfolio shifts to fixed-income funds

BY STEVE EDER AND JAMES DREW
BLADE STAFF WRITERS
William Mabe, the bureau's new administrator, says it's 'imperative to move quickly and decisively' on transforming the portfolio. William Mabe, the bureau's new administrator, says it's 'imperative to move quickly and decisively' on transforming the portfolio.
ASSOCIATED PRESS Enlarge

COLUMBUS -- The Ohio Bureau of Workers Compensation yesterday approved one of its largest reforms in response to the financial scandal that has plagued the agency, terminating its 69 remaining money managers and moving to invest nearly all of its $15.7 billion portfolio in conservative fixed-income funds.

During the next four months, the bureau will divest its $7.2 billion stake in equities and shift that money into investments designed to reduce risk.

The decision by the bureau's Oversight Commission comes more than seven months after The Blade first reported that the agency invested $50 million in a rare-coin venture with former Toledo-area Republican fund-raiser Tom Noe.

The scandal that ensued caused attorneys for Mr. Noe to acknowledge a shortfall in his coin funds of up to $13 million, and bureau officials to disclose losses of $215 million in an offshore hedge fund.

In September, the bureau released a report by consultant Ennis Knupp that said the State Insurance Fund had lost almost $1 billion in potential returns during the last decade by relying on subpar investment managers.

The agency's troubles have sparked policy reform, investigations, and high-level departures from the bureau, including the forced resignation of its former administrator/CEO James Conrad. Mr. Noe was indicted last month on charges that he laundered money into the re-election campaign of President Bush.

Yesterday, Michael Koetters, chairman of the Oversight Commission's investment committee, said the bureau's long-term financial outlook would be "bleak" if the agency didn't modify its portfolio.

He added that the bureau spends $1.31 for every $1 dollar it collects in premiums.

William Mabe, the bureau's newly appointed administrator/CEO, said it was imperative to move quickly and decisively on transforming the portfolio, which Gov. Bob Taft and agency officials had defended until recently.

"We need to move decisively to clean this portfolio up and get it going in the right direction as quickly as possible," said Mr. Mabe, who did not believe the changes would signal the end of the bureau's dividend program.

Commission members and bureau officials said it was difficult to sever relationships with money managers and characterized their termination as "without prejudice" meaning there was no implication of wrongdoing by any of the managers fired.

The commission used the work of consultants Ennis Knupp and Callan & Associates in reaching its decision.

Yesterday, the commission chose Pittsburgh-based Wilshire Investments over Ennis Knupp to be its primary investment consultant, a role previously held by Callan.

$15 million for transition

The direct cost of the transition is estimated at $15 million, and bureau officials expect to save millions annually in management fees. But the bureau's former chief investment officer, James McLean, said the cost in lost opportunity could be much higher.

Mr. McLean, who was fired during the scandal, said the oversight commission took an ill-advised approach and should have analyzed the investments on a case-by-case basis because some funds were posting good returns for the bureau.

"Instead of saying 'dismissing without prejudice,' why don't they just say, 'We are dismissing them because we have no spine and because we are not willing to make the hard, critical choices that are necessary to manage an investment portfolio?' " Mr. McLean said.

"I suspect they believe that they are making a clean break with the past, but you can't deny the history."

Mr. Mabe said that a "more methodical process" of vetting each money manager separately "would have been more expensive" and "would have taken on a lot more risk with the portfolio."

Mr. McLean said the bureau's decision to go solely with a fixed-income portfolio was the politically expedient route to go considering the pressure on officials because of the agency's recent troubles.

'Opportunity cost'

"If I was still the chief investment officer and I wanted to preserve my job and people said turn this portfolio into something that wasn't going to lose a dime, you put it all into the fixed income," Mr. McLean said.

"You can argue that it isn't going to lose a lot of money, but in fact, there's a tremendous opportunity cost.

"There's an obligation to the workers in the state of Ohio and those who rely on the state of Ohio to structure a portfolio that's appropriate for the liabilities and the type of business the bureau is in."

Mark Rickel, Mr. Taft's press secretary, said the governor did not make the decision to shift to a fixed-income approach.

"By law, these decisions are made by bureau staff and the Oversight Commission," Mr. Rickel said.

Once the bureau's equities are moved into fixed-income funds, the only nonfixed-income funds in the agency's portfolio will be "alternative investments," which often are longer-term investments and difficult to liquidate.

Brad Pacheco, a spokesman for the California Public Employees Retirement System, said there are very few reasons why a public system would put all of its fund in one type of investment.

He said CALPERS $196 billion portfolio contains a mix of investments, including fixed-income funds, equities, hedge funds, and alternative investments like real estate.

"Your asset allocation is what drives your return," he said.

"Obviously, an all fixed-income instrument is pretty conservative. Our board believes that we have a diversified portfolio ... so if we have losses in one area, gain in another can offset those losses."

He added, "We don't put all of our eggs in one basket."

Contact Steve Eder at: seder@theblade.com or 614-221-0496.



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