NEW YORK - Assets under management at Ark Asset Management Co. Inc. are less than half of what they were at year-end 1998, decimated by poor market returns and slashed by terminations by plan sponsors fed up with poor performance.
Total assets were $12.3 billion at year-end 2000, down 51.2% from $25.2 at the end of 1998 and down 43.7% from $21.8 billion as of Dec. 31, 1999. Virtually all of the assets under management are from U.S. institutional tax-exempt investors.
Performance for New York-based Ark's flagship large-capitalization equity style was poor until last year, when the stock market's April shift began favoring Ark's deep-value style. The composite return was 11.3% for the year ended March 31, placing it in the third decile among peer large-cap value managers in Pensions & Investments' Performance Evaluation Report. The large-cap value equity strategy handily beat its benchmark, the Standard & Poor's 500 index, which returned -21.7%, as well as the 0.3% of the Russell 1000 Value index for the year.
But longer term, compound annualized returns for the large-cap value stock strategy plunged to the 10th decile ranking in PIPER for the three- and five-year periods, with -0.4% and 9.2%, respectively. The strategy ranked in the ninth decile over 10 years, with a 13.4% return. The large-cap value approach trailed its benchmarks, for these periods, with the S&P 500 returning 3% for the three years, 14.2% for the five years and 14.4% for the 10 years ended March 31. The Russell 1000 Value index returned 3.8% for the three years, 14.2% for the five years and 15.2% for the 10 year period.
Relative value fares better
Ark's relative-value strategy fared a bit better compared to peer PIPER managers over the long term, although short term, its one-year performance of 8.5% as of March 31 placed it in PIPER's fifth decile among midcap value managers. It was in the eighth decile for the three years ended March 31 with 1.8%, and the ninth decile for the five and 10 years, with 11.9% and 13.7%, respectively. The strategy trailed the Russell Mid Cap Value index, which returned 13.8% for the year, 3.1% for the three years, 13.1% for the five years and 15.5% for 10 years.
Among the clients that lost patience with Ark in the past 18 months:
* Aurora (Colo.) City General Employees' Retirement System found a new manager for a $28 million large-cap value equity mandate in March;
* New York State Teachers' Retirement System, Albany, terminated a $1 billion large-cap value assignment in February, having put Ark on watch in May 2000, when the portfolio totaled $1.3 billion;
* Halliburton Co., Houston, found a new manager for a large-cap value equity portfolio in January;
* The MTA Long Island Rail Road Pension Plan, Jamaica, N.Y., dropped a large-cap stock mandate in January;
* The Alaska Permanent Fund, Anchorage, ended a 16-year relationship in December when it dropped Ark as manager of a $300 million large-cap value account;
* The Pasadena (Calif.) Fire & Police Retirement System in September terminated Ark, which had managed the entire $150 million pension fund in a balanced mandate;
* The North Dakota Pension Trust, Bismarck, dropped the firm for $65 million in large-cap domestic equities in May;
* The Ohio State Highway Patrol Retirement System, Columbus, terminated a $120 million large-cap value portfolio in March 2000; and
* The San Francisco City & County Employees' Retirement System terminated Ark in March 2000 for the poor performance of a $170 million large-cap value equity portfolio that had shrunk from a peak of $509 million in August 1997.
Ark's client losses due to performance woes were compounded by an unresolved lawsuit brought against the company last year by a former client, the $24 billion Teachers' Retirement System of Illinois, Springfield.
The suit alleged breach of contract and fiduciary duty and violation of the Illinois Pension Code because Ark sold off nearly 75% of the $800 million in specialty growth equities it managed for TRS on the day it was notified of the termination by the pension system (Pensions & Investments, Feb. 7, 2000).
The company's chairman, Henry R. Breck, denies the charges and said the company does not intend to settle the suit.
Mr. Breck acknowledged client losses were heavy, and attributed them to performance problems in the firm's value equity strategies. He said he could not judge whether clients that terminated Ark did so because of the suit, although he said some public fund terminations might have been influenced by it.
Losses were most acute from the company's large-cap value equity strategy, where performance problems were caused by the "very unusual period" in the stock market between 1996 and the beginning of 2000, Mr. Breck said.
"We suffered badly during this period, like many value managers. Charlie Hetzel (C. Charles Hetzel, vice chairman) has been managing money the same way for 20 years and during this period, we underperformed the S&P 500 spectacularly, and the Russell 1000 Value index for three years within this time frame, as well," Mr. Breck said.
He compared the enormous runup in technology stocks during the four-year period he described with the heady euphoria managers exhibited over oil stocks in the late 1970s.
But the "world restored itself" in April 2000, Mr. Breck said, when value stocks began to strongly reassert themselves. "We've been quietly sitting here, watching it happen. The old world really ended April 1, 2000, and the future has started. Clients who stayed with us have gotten their money back and then some."
Ark's large-cap value strategy surged since April last year, according to recent performance data Mr. Breck supplied. The composite return of the large-cap value equity strategy was 14.6% for the year ended April 30, according to Mr. Breck, trouncing the -13% return of the Standard & Poor's 500 index and the 6.4% return of the Russell 1000 Value index for the period. The relative-value equity strategy returned 14.3% for the year ended April 30.
Clients happier now
Clients that did not terminate Ark for large-cap value equity management certainly are happier. "We've gotten our money back," said Jerry Fox, director of the $4.7 billion Wyoming Retirement System, Cheyenne.
Wyoming has been an Ark client since 1983. The firm now manages $425 million in large-cap value equities for Wyoming.
"They have done a fairly credible job for us. Ark was hurt in the last few years when value was out of favor, the same as many value managers, and trustees were concerned. We watch all managers that are not performing. But they have had a fairly decent year in 2000 and also, this year, when growth managers were badly hurt. 2000 was a classic example of why you diversify pension portfolios," Mr. Fox said.
Ark Asset Management was formed in 1989 by employees of Lehman Management Co. who purchased the institutional business of Shearson Lehman Hutton, a division of American Express. The company always has had the reputation of being one of the old-time "relationship firms," where spending on client entertainment made up for performance that was sometimes less than stellar, said Stephen P. Holmes, president of the consulting firm, Summit Strategies Group, St. Louis.
"The younger chief investment officers and treasurers of pension plans are now making, say, $175k or $200k and say to themselves, `I can pay for my own golf and play with my own friends.' They aren't going to accept subpar performance. There's no reason they should," Mr. Holmes said.
"That view of the marketplace is outdated. What you see at Ark is what you get," Mr. Breck said. He added the firm's investment performance has always been its top priority.
Mr. Holmes said he hasn't recommended Ark to clients because performance hasn't been good enough.
For its part, Ark itself has been bringing in younger employees to fill portfolio management, administration and marketing positions. Mr. Breck said company ownership is quite wide: there are 36 shareholders in the company. "You have to make provisions to hand the firm on when you are in your 60s," said Mr. Breck, who is 64.
Ark also is incubating new products for the institutional market, which Mr. Breck declined to describe. He said the new products would broaden Ark's coverage of the investment spectrum, which is wider than most people imagine, he said.
"We are more than just a (large-cap) value shop," he said, mentioning such strategies as midcap value. That strategy has a two-year track record that has been outperforming its benchmark. The composite return for Ark's midcap value portfolios was 20.5% for the year ended April 30, Mr. Breck said, compared with 19.6% for the Russell Midcap Value index; the compound annualized return for two years was 11.8%, compared with 6.9% for the benchmark, according to Ark.
Aside from two growth-stock strategies and a fixed-income product, Ark also has a 6-year-old small-cap value equity strategy that has $600 million under management. That strategy returned 29.6% for the year ended April 30, 10.7% for the three years and 9.9% for the five years, according to Ark figures. The small-cap value product has been the main source of new business for Ark since January 2000.