BOSTON - Trustees of the $1.2 billion Massachusetts Bay Transportation Authority Retirement Fund terminated Frank Russell Co.'s Private Partnerships Fund, citing poor performance.
The company also was barred for five years from doing additional business with the fund for being insubordinate.
MBTA had invested $27 million in the $99 million fund. Trustees wanted the money returned by Sept. 30, but Russell officials said the money will be returned early next year. First, they said, Russell will audit the 11 underlying hedge fund partnerships and value their assets as of year end, as stated in the trust documents.
MBTA officials said Russell is playing a game of semantics and could make an exception. "They are saying there is only one valuation date," said Paul McCarthy, an attorney for the MBTA. "It can be selected at their option. Our position is a reasonable interpretation of the agreement."
Russell officials say the Private Partnerships Fund's trust documents restrict it to end-of-year redemptions. An exception could be made, but will not because the underlying partnerships are audited annually. Assigning a value before would be an estimate, said Randall Lert, chief investment officer at Russell.
"We would be afraid to pay out on estimated values at the quarter," said Lynn Anderson, president of Frank Russell.
John Gallahue, MBTA executive director, said the trustees took the unusual step of barring Russell from additional fund business as an alternative to a lawsuit that would have accused Russell of changing the trust documents without notification.
"Basically, it's the first time they (trustees) have ever put a prohibition against a manager," said Mr. Gallahue. "That's a big statement."
The MBTA fund initially invested in a Russell real estate fund that allowed quarterly redemptions. It transferred the money in 1990 to the PPF. MBTA officials claim they never received an amended trust agreement and operated under the assumption the trust agreement never changed.
"They were in real estate before, which allows for quarterly redemptions, and they may have gotten confused," said Mr. Anderson. "There is no explanation other than that. I'm sorry. We can't vary the trust declaration as a practical manner if we wanted to."
Neither side disputes that the PPF has underperformed its bogey, the Standard & Poor's 500 Stock Index.
"In the last five years we've been in a strong stock market," said Mr. Lert. "The fund has short and hedged positions, so it has substantially underperformed, probably more than we have anticipated or liked."
For the one-year period ended Sept. 30, the PPF returned 7.4%, vs. 26.1% for the S&P 500. For five years ended Sept. 30, the PPF returned a compound-annualized 7.1%; the S&P 500 returned 12.1%.
One other of the PPF's seven investors made a redemption request. Russell officials declined to identify the investor or say how much money it represents. But the fund will not have to terminate, although more than one-third of its assets under management will be gone, Mr. Lert said.