David C. Siphron, chairman, Siphron Capital Management Inc., wanted to resign the large-cap growth portfolio his firm managed for the $4.9 billion Orange County Employees Retirement System. But the trustees, with one exception, didn't have the graciousness to let him do so.
Before he could present his resignation letter, the trustees, by a 7-1 vote, terminated Siphon Capital, even though the $64 million portfolio Siphron managed for the county had outperformed its benchmark.
One problem that led Mr. Siphron to try to resign the account was that the pension fund's staff vacillated on the benchmark. The other problem was that officials of the Santa Ana-based fund appeared to be chasing short-term performance.
In a letter Mr. Siphron provided to trustees at an August meeting, he reminded them that Farouki Majeed, system's chief investment officer, some time ago had stipulated the firm's benchmark would be the Russell 1000 growth index,
When the technology stock boom propelled the Russell index to soaring highs, Siphron's relative performance fell behind. The system placed Siphron on a watch list, encouraging Siphron to bulk up on tech stocks, Peter D. Siphron, vice president of the Beverly Hills, Calif., firm, said in an interview.
David Siphron's letter noted that the benchmark, with its heavy dose of tech stocks, was "difficult to prudently match." The firm adhered to its philosophy and performance turned around. Since inception, Jan. 1, 1998, through last July 31, the Siphron portfolio returned an annualized 6.4%, against 5.2% for the Russell index.
"(M)ore importantly," Mr. Siphron mentioned in his letter, "we have achieved these results with considerable - and consistently - less risk than the benchmark."
"That's because we stuck by our investment philosophy," said Peter Siphron.
When Siphron showed it had outperformed the Russell index, pension officials began to compare the portfolio with other benchmarks; Peter Siphron declined to disclose which ones.
"We were not going to compromise the integrity of our philosophy or investment product," Peter Siphron said.
"The client was vacillating to the point where it was imprudent for us to follow," he added. "It was becoming a distraction for us in managing ... for our other clients."
"We had met their investment objective," he said. "They were changing things on us and it was virtually impossible for us to figure out what they wanted us to do."
"No manager can work under those conditions. We had a contractual benchmark."
Although the OCERS mandate was a "material account" for the firm, "it was not a relationship we could continue," he said.
Mr. Majeed and other OCERS officials didn't return calls requesting comment.
The lone trustee who voted to retain Siphron was John M.W. Moorlach, county treasurer. "I personally was happy with its overall performance and with its unique boutique style," he said. "It isn't one to buy `silly shares' just to get close to a benchmark. Everything got loopy in high tech. But they stayed focused."
He had disagreed with putting Siphron Capital on a watch list after only a year of poor performance. "Predicating it just on a benchmark means you are asking for superior performance every year," Mr. Moorlach said. "To put them on a watch list after a year, well, you could put all the money managers on a list and set a precarious precedent. We are supposed to look at the long-term (horizon)."