Ka Wai Ola - Office of Hawaiian Affairs, Volume 12, Number 3, 1 March 1995 — Investment managers' performance [ARTICLE+ILLUSTRATION]

Investment managers' performance

by Rowena Akana Trustee-at-Large Brace yourselves. The new numbers on the performance of the Office of Hawaiian Affairs' investment portfolio are in. They are not pretty. In fact, they are downright scary. After paying fees to its nine money managers, the Office of Hawaiian Affairs lost $25,300 - on assets of $147 million! If we are to provide for the generations yet unborn, we must take action soon, before the fund ends up like Social Security, teetering on the brink of bankruptcy, and unlikely to pay out to future beneficiaries. The Office of Hawaiian Affairs' investment fund has taken a horrible beating over the last year and one half. Although the llnaneial market has been weak lately, it certainly hasn't been that weak. Even simple, low-risk, low-yield certificates of

deposit, earning 7 percent annually, would have eamed over $10 million, before fees

were subtracted. For their keen financial aeumen, these nine managers were paid $370,600. Scudder Steven Clark's stunning loss of $700,000 (for whieh they earned $24,668) nearly swallowed up the meager gains of four out of the five managers that made money. That would have been bad enough.

However, three more companies besides Scudder Stevens Clark also lost money. This is clearly a financial hemorrhage of the first magnitude, even in today's soft market. If the Office of Hawaiian Affairs is to preserve its precious resource base, our long-term fiscal goals need to finally be debated and formalized by the Board of

Trustees. Serious shortcomings in the way in whieh money managers are selected

and the manner in whieh their work is reviewed and reported to the Board of Trustees need to be addressed as well. At present, there is a flexibility in the reporting of the performance of investment managers that is wonderfully convenient to making bad numbers look more tolerable. The person paid by the

Office of Hawaiian Affairs to oversee the work of the nine managers (Ms. Martha Brown, Merril Lynch) doesn't even have a contract with the Office of Hawaiian Affairs. While this is not her fault - and she has only been with the Office of Hawaiian Affairs for a few months - without a contract, she has no formal, explicit

guidelines that she ean use to review and report on the work of the managers. This allows numbers to be juggled in ways that ean make a Ioss seem more palatable. For example, a simple reporting requirement that could be written into her eontract could require that all performance reports must indicate profits in relation to the amount of money that they manage. While this may seem elementary, it is not the practice. Instead, profits are reported detached from any baseline of total assets and are compared on a monthly basis. In

this system, a rise in one month's figures may appear to be a profit, when it may very well be a loss when compared to the amount of funds managed. The use of percentage increases and decreases ean be deceptive in a similar manner. For instance, if someone told you that your investment of $1,000,000 declined 25 percent, but then rose 25 percent, you might think that you broke even. However, you would need an increase of 33 percent to break even. This is the kind of number juggling that needs to stop. The Board of Trustees needs clear, straightforward reporting that doesn't try to mask horrible news with mediocre news. Even more importantly, the Office of Hawaiian Affairs needs a clear statement of what its long term fiscal needs are and how its investment portfolio ean be used to meet those needs. Without this basic first step, the managers have no clear mandate about whieh types of investments to pursue. With a mandate of this sort, they would be better able to steer clear of the bad investments made during the last year and one half. But as long as the criteria for choosing managers has more to do with cronyism and exchanging favors than it does with market savvy, these changes are not likely to take plaee. lnformation for this article was gleaned from the draft 1994 Auditor's Report of the Office of Hawaiian Affairs.

FISCAL YEAR ENDING JUNE 30, 1994 Manager Account Size Profit/(Loss) Fees Charged OHA Ashfield $12,289,547 ($330.525) $55,262 Bank of America $25,000,000 $98,411 $31,644 C.M. Bidwell $12.500,000 ($325,808) $23,101 Bradford & Marzek $20,000,000 $210,880 $29,197 Hawaiian Trust Co. $29,196,443 $1,237,558 $59,383 Invesco $12,000,000 $263,476 $45,480 NWQ $11,640,146 $274,140 $63,583 Scudder Steven Clark $12,500,000 ($700,833) $24,668 Dennis Wong $12,500,000 ($185,177) $38,282 TOTAL $147,126,133 $345,300 $370,600