PITTSBURGH - J. Thomas Allen, president and chief executive officer of Advanced Investment Management Inc., resigned amid client uproar over the firm's enhanced index strategy.
At issue are client claims that, between November and July, Advanced Investment Management used much more leverage than the pension funds' investment guidelines called for and, in the process, lost the funds a lot of money. Some of the pension funds terminating the manager or considering doing so had hired it for a synthetic enhanced index strategy designed to replicate the performance of the Standard & Poor's 500 index and to add about 70 basis points through the use of futures.
Mr. Allen accepts the blame.
"Under the extreme market conditions we experienced recently, my decisions in applying our investment strategy produced significant underperformance for a number of our clients. The disappointing performance has caused some of our clients to raise questions regarding our abilities," Mr. Allen said.
Damaging decisions
"There's no escaping that my investment decisions were in several situations damaging to an otherwise excellent record," said Mr. Allen, who founded the firm in 1987 as a subsidiary of Pittsburgh National Bank Corp. The company has been employee owned since 1999. It manages $5.5 billion for institutional investors, about half of which is in the enhanced index strategy, Mr. Allen said.
William Belko, Advanced Investment Management's chief investment officer, will become president and CEO as well. Mr. Allen, 46, will stay on during a transition period, but has not made any other plans.
Trustees of the Minneapolis Employees' Retirement Fund terminated Advanced Investment Management on July 12 for violating investment guidelines of what was, at its high point, a $150 million enhanced index portfolio. "We believe this is a very serious breach of contract and have already referred the matter to outside legal counsel," Judith M. Johnson, CIO and executive director of the $1.1 billion plan, said in a statement.
Ms. Johnson said her fund likely will take its complaint to the Securities and Exchange Commission "for further investigation and, hopefully, enforcement action against the firm." The Minneapolis Employees' fund also will file complaints with the Commodity Futures Trading Commission and with the National Futures Association, Ms. Johnson said.
According to the investment guidelines, the account had to have at least 85% exposure to the S&P 500 index and a maximum of 15% leverage, Ms. Johnson said. After the account experienced unusually high losses in October and November and unusually big gains in December and January, fund officials asked its consultant, Ennis Knupp + Associates Inc., Chicago, to investigate.
Guidelines violated
Ennis Knupp found Advanced Investment Management had violated contract guidelines in December regarding both leverage and S&P 500 exposure, which then was 82%, Ms. Johnson said. In addition, she said, Pacific Investment Management Co., Newport Beach, Calif., the fund's transition manager, found evidence that Advanced Investment was making midmonth directional bets and incurring market losses, also forbidden under the investment guidelines. In July, the account had 400% leverage, for example.
PIMCO was hired as the transition manager in mid-July and deleveraged the $206 million equity exposure of the account by $130 million, leaving it with $76 million in assets and $76 million of exposure to the S&P 500, to bring the account in line with investment guidelines, Ms. Johnson said.
Trustees of the $3.2 billion San Bernardino County (Calif.) Retirement Board terminated Advanced Investment Management on July 18 for similar reasons and decided to pursue a lawsuit. The fund had hired the firm less than four months earlier to manage $498 million.
"In mid-June, when the S&P 500 began to deteriorate, we believe that AIM violated the investment guidelines (of the plan) in an attempt to mask losses. Within a matter of days we discovered AIM's apparent violation ... so we terminated the contract and put an immediate halt to all trading by Advanced Investment Management," Timothy J. Barrett, executive director and CIO of the San Bernardino County plan, said in a statement.
Mr. Barrett said his fund lost $55 million; Minneapolis officials said their fund lost $27 million - a third in June and the rest in July.
In response to Minneapolis' news release about terminating Advanced Investment Management, Mr. Allen said in a statement: "Results of the account were not up to our expectations under extreme market conditions, but they were achieved within our permitted discretion. Through June 30, our long-term, annualized results over the nine-year relationship were within 1% of our S&P 500 benchmark. AIM contacted MERF to discuss positions and performance and reviewed our holdings with them and MERF's consultant. Nothing was concealed from them."
Looking at terminations
Consultants said Mr. Allen's resignation is not likely to stem the tide of pending manager reviews and probable terminations.
The $800 million Minneapolis Teachers' Retirement System terminated Advanced Investment for a $100 million enhanced index account, said Karen Kilberg, executive director. Staff is investigating the fund's losses, trustees will review the matter later this month, and a lawyer will review staff findings, she said.
The $620 million Retirement Board of Allegheny County, Pittsburgh, is having consultant Yanni Partners Inc., Pittsburgh, examine the investment process and returns of the enhanced index account Advanced Investment Management runs for the plan, said Executive Director Cheryl A. Bateman. Fund trustees may discuss it at their September meeting, she added.
Wilshire Associates Inc., Santa Monica, Calif., recommended its clients terminate Advanced Investment Management some time ago, with the last client getting out at least a year ago, said Stephen L. Nesbitt, senior managing director.
"I won't say why our clients terminated them, but I can say that the situation that was described in (P&I Daily, July 25), was not the first time this has happened. There's been a history of this with AIM," he said.
Suzanne Bernard, Minneapolis' lead consultant at Ennis Knupp, declined to comment, saying she could be called as a material witness if there are lawsuits. Stephen Cummings, president of Ennis Knupp, also declined comment.
