AUSTIN, Texas -- Six of the 15 trustees overseeing the $17 billion Texas Permanent School Fund filed complaints with the SEC and the AIMR regarding money manager Davis, Hamilton, Jackson & Associates.
The minority group of Texas State Board of Education trustees seeks punitive action from the Securities and Exchange Commission and the Association for Investment Management and Research based on marketing-related actions they allege were taken by executives of the Houston-based money manager. (The Texas Board of Education has oversight of the Texas Permanent School Fund).
Because the letter was not signed by the full board, it is considered an unofficial action.
Trustee David Bradley, a driving force behind the complaint, said Davis Hamilton provided multiple performance numbers in the RFP, and in meetings with the board did not provide an explanation as to which performance numbers were correct, and which composite they represented.
Jack Hamilton, president and principal of Davis, Hamilton, is cited specifically in the complaint letter.
Mr. Hamilton said of the accusations: "It is a total fabrication. There (is) no truth to the charges in the letter to AIMR."
The flap stems from a 1997 manager search that followed the board's decision to hire external managers. Mr. Bradley opposed and still opposes the use of outside managers. Following the search, Davis, Hamilton was assigned a $500 million large-capitalization equity account.
Mr. Bradley charges Davis, Hamilton's response to the fund's request for proposals did not say what style the firm would be using. (Davis, Hamilton's largest strategy includes midcap equities, and the Texas Permanent School fund sought large-cap equity managers). Nor did it give historical returns for that style, Mr. Bradley said.
During the meeting to hire the firm, he said, company officials still couldn't provide performance data for the investment style Davis, Hamilton would be using. A transcript of a recording of the January board meeting provided by Mr. Bradley confirms there was a discussion on the matter.
Jonathan Stokes, the AIMR vice president for standard-setting, to whom the complaint letter was addressed, declined to comment on the situation, as a matter of policy.
Speaking generally, though, he said misrepresentation of AIMR compliance is the type of situation that would be investigated by the organization.
The most severe sanction would be removal of an individual from the AIMR and revocation of the Chartered Financial Analyst designation, he said.
Mr. Bradley said he has not yet been contacted by the AIMR regarding the issue, adding AIMR officials told him he might not be.
But stricter sanctions would come from the SEC, which Mr. Bradley said he also has contacted.
John Heine, an SEC spokesman, declined to comment as a matter of SEC policy.
William J. Nutt, president and chief executive for Affiliated Managers Group, Boston, which has agreed to buy Davis Hamilton, declined to comment about the Permanent School situation, as a matter of policy.
Speaking generally of Davis Hamilton, he said: "They are outstanding people. . . . We think they are individually and as a firm of the highest integrity."
He added consulting firms and clients all had "extraordinarily good" things to say about the firm.
The trustee letter also alleges the marketing techniques of Mr. Hamilton and Alfred Jackson, principal, were "unethical or, at the very least, suspect, in that they showered key state board members and staff consultants with political campaign contributions, meals and entertainment."
It cites four sections of the AIMR code Mr. Hamilton allegedly has violated.
But the other nine trustees on the board did not agree to join the complaint, and outgoing board Chairman Jack Christie sent AIMR a letter highlighting that point.
"Please be informed that no complaint is being filed by the State Board of Education and I hope that the correspondence you received has not misled you accordingly," Mr. Christie's letter states.
In an interview, Mr. Christie, said: "These folks (the six trustees) are not excited about using outside managers."
He said the group is using this issue to try to exert more control over the board.
He declined to discuss the specifics of whether Davis, Hamilton used appropriate AIMR methods in seeking the account, and deferred to the fund's investment consultant that assisted with the search, Insurance Advisory Services, Blue Bell, Pa.
Fred Seponara, principal, was unavailable for comment.
Regarding the accusation about trustees and staffers receiving gifts, Mr. Christie said:
"I'm sure someone took someone golfing. . . . Maybe this someone learned something," he said. He said he wasn't a beneficiary of gifts.
Another trustee who did not sign the letter, Monte Hasie, said Mr. Bradley and the others are using the AIMR issue to cause trouble on the education board. They are using this as way to disrupt the activities of the overall education board, he said.
"It's very incorrect" for them to disparage Davis, Hamilton, he added.
The firm probably is "our top manager since (we) hired them," said Mr. Hasie, who also disagreed with the view that Davis, Hamilton was showering gifts on trustees and staff members.
Indeed, the firm was the fund's best performer in the six months ended Sept. 30, among the three managers that were hired.
It returned -1.8% before fees, ahead of Washington-based Columbia Partners LLC Investment Management's -6.5% and Pasadena, Calif.-based First Quadrant's -12.3%, according to a Texas Permanent performance summary.
The three managers were officially hired in January, and funding began shortly after that, according to Mr. Bradley.
Mr. Hasie confirmed an Austin newspaper report that he received $15,000 from a political action committee to which Davis, Hamilton had contributed, for an unsuccessful run for state Senate.
