PHILADELPHIA - The Philadelphia Municipal Pension Fund terminated a domestic equities manager, placed five managers on its watch list and kept one firm on the list.
The series of moves, which began last spring, is part of the fund's general evaluation process. "We monitor the whole portfolio every quarter," said Joseph J. Herkness, executive director at the fund. "It wasn't as part of a particular review."
The $2.8 billion pension fund terminated in June George D. Bjurman & Associates, a domestic small-capitalization growth manager that ran a $47.3 million portfolio for the fund, because of "volatility, rather than a particular level of non-performance," Mr. Herkness said. Mercer Investment Consulting is assisting in a search for a replacement. The board probably will vote on a replacement sometime in the fall, he said.
The fund has 26 equity and fixed-income managers following the termination.
Placed on probation were: J. W. Seligman & Co. Inc. and Dreyfus Investment Advisors, which ran small-cap growth and value portfolios, respectively; Sturdivant & Co. Inc. for domestic large-cap; Smith, Graham & Co. for intermediate bonds; and international bond manager Morgan Grenfell Capital Management Inc.
While the fund's trustees placed Seligman and Dreyfus on probation, they did not act on the investment staff's recommendation to terminate the managers. Managers are monitored on a quarterly basis for performance.
Mr. Herkness would not say why the two were placed on probation. J. W. Seligman reported a return of 14.6% return for the year ended June 30 on its Philadelphia portfolio, vs. a 4.6% return for the Russell 2000 small-cap growth index, Mr. Herkness said. At the end of July, the city's portfolio with Seligman was $41.7 million. Dreyfus, managing about $70 million for Philadelphia, reported a 19% return for the period vs. the Russell 2000 small-cap value index's 28%
The pension fund placed Sturdivant on probation because of "performance problems for the past year," according to minutes of the May 22 board meeting. The manager's allocation, previously $165 million, has been cut back as part of a rebalancing to slightly less than $100 million of the fund's $782 million domestic large-cap portfolio, Mr. Herkness noted.
Smith, Graham, which runs a $143.3 million intermediate bond portfolio, was put on probation because its performance has lagged the index significantly, Mr. Herkness said, but he couldn't quantify it. He did not provide numbers on Smith Graham's performance.
Also, the fund placed Morgan Grenfell, hired just about a year ago, on its watch list, he said. Morgan Grenfell, which runs a $123.8 million portfolio, returned 15 basis points below the Salomon Brothers Non-U.S. Government Bond index for the first six months of 1997.
The fund also is continuing to keep Delaware Investment Advisors, which runs $58.7 million in a domestic large-cap portfolio for the fund, on probation. The Philadelphia-based manager, which has been lagging its benchmarks, also has lost several key people in recent months. Delaware reported a 27.15% return for the year ended June 30, compared with 34.8% for the Standard & Poor's 500 Stock Index, and 32.5% for the Russell large-cap index during the same period, Mr. Herkness said.
"We're being patient with them," he said.
At the same time, the fund'strustees also gave the go-ahead to Marc Bonavitacola, investment officer in charge of alternative investments, to negotiate the restructuring of a real estate investment where the fund stood to lose its entire principal, confirmed Mr. Herkness, executive director. The fund had invested $3.15 million; the market value of the property is approximately $13 million.
Mr. Herkness could not recall when the city pension fund made the loan - a second mortgage - to Ellington Road Associates, a Hartford, Conn., real estate developer, for the School Street Square Shopping Center.
Under the restructuring agreement worked out by Mr. Bonavitacola, the pension fund agreed not to take any legal action against the developer for missing interest payments. The fund instead gave the borrower breathing room to make up payments to the first mortgagee by agreeing to let the interest build up until July 1998, instead of demanding monthly interest now. The Philadelphia pension fund also agreed to accept a lower interest rate, which will be reset next July, provided the borrower becomes current on the first mortgage payments over the next year, Mr. Bonavitacola said.
The trustees also learned at their June meeting that one of its private equity partnerships had lost three of its four general partners and would terminate and another partnership was liquidating assets.
The LM Capital Fund II, a buy-out fund, lost three of four general partners, thus triggering the partnership's no-fault termination clause, said Kelly Moylan, of Hamilton Lane Advisors Inc., Philadelphia's alternative investments consultant.
Leslie Corley, president of LM Capital Corp., the sponsor of the fund, said the partnership has been amended and is not terminated. Ms. Moylan declined to comment further when contacted.
Philadelphia committed $7 million to LM Capital II in 1994; $1.4 million was invested, and it had a market value at the end of 1996 of $875,764.
Philadelphia also committed $7 million to the buy-out fund Levmark Capital L.P., managed by Levmark Capital Corp.
The general partners agreed not to make new investments and would liquidate the existing investments in supermarket grocery stores, according to Ms. Moylan, in the meeting minutes.
Philadelphia had invested $2.2 million of its $7 million commitment, and it was worth $3 million at the end of 1996.
Telephone calls to Levmark Capital Corp. were not returned.
The fund does not have any immediate plans of cutting loose from its approximately $800,000 direct equity investment in United Bank of Philadelphia, Mr. Herkness said. The fund invested $300,000 in the early 1990s, and another $500,000 in 1995.
The bank, a local minority-run bank, reported a loss of $832,000 in 1996, compared with a $780,000 loss the previous year, largely because of a one-time $485,000 special assessment by banking regulators on assets acquired from failed thrifts, according to the fund's June 19 investment committee minutes.
The bank did declare a profit of $88,000 in the first half of 1997, although it is still struggling to develop a niche, Mr. Bonavitacola said.
Nonetheless, the equity stake in United Bank, viewed as a long-term investment with similar return expectations as other alternative investments - in excess of 20% after fees - is expected to produce comparable returns in another five years or so, he said.
"If the bank was not in Philadelphia . . . we probably would not have made the investment, and would have tried to get out of it," Mr. Herkness said, noting the pension fund is rooting for the bank, the only minority-owned and managed financial institution in the Philadelphia metropolitan area.
Terry Williams contributed to this story