Mass PRIM cuts 1 high-yield manager, spurns another

BOSTON — The $36 billion Massachusetts Pension Reserves Investment Management Board shook up its high-yield bond lineup last week, terminating W.R. Huff from a $300 million portfolio and leaving Fidelity Management Trust Co. the odd man out as it distributed that money among its remaining high-yield bond managers.

A dispute over $48,000 in consulting fees led Boston-based PRIM to fire W.R. Huff Asset Management Co. LLC, Morristown, N.J., a distressed debt manager.

Fidelity, meanwhile, lost out on its $75 million share of the Huff allocation after failing to satisfy PRIM's staff that recent news of Fidelity traders accepting "excessive" gifts from brokers hadn't left PRIM paying more for its trades than necessary.

The PRIM board divided Huff's allocation among Loomis Sayles & Co. LP, Seix Investment Advisors Inc. and Shenkman Capital Management Inc.

The decision to snub Fidelity appears to have been a recent one. The materials PRIM board members received for their Feb. 1 meeting called for Fidelity to share the Huff portfolio equally with the three other high-yield managers.

Less than a week before the board meeting, Fidelity informed the board that the gift controversy — which officials had thought was limited to equity traders — extended to the firm's high-yield trading desk as well, said Stan Mavromates, PRIM's acting chief investment officer. Fidelity has said that four of the 16 traders involved were terminated, but 12 — including two high-yield traders — remain, Mr. Mavromates noted.

Fidelity spokeswoman Anne Crowley declined to confirm the details. Ms. Crowley said Fidelity understands the need for PRIM to do its due diligence, and values its relationship with the fund.

Despite Boston-based Fidelity's assurances, "the jury's still out" on whether PRIM's $350 million large-cap domestic equity portfolio or its $350 million high-yield bond portfolio with the firm "have been impacted by the conduct of Fidelity traders," said Executive Director Michael Travaglini. "We're going to continue a dialogue to see if we can get the comfort we need to make an informed recommendation to the board."

By contrast, the PRIM jury came back last week on the question of W.R. Huff and, having failed to settle differences over $48,000 in consulting fees, the verdict was termination.

The disputed fees are related to $11 million in consulting fees paid to Huff executives for their work in turning around two distressed U.K. telecom companies, Telewest Global Inc. and NTL Inc. According to PRIM, the $48,054.20 total represents "PRIM's pro-rata portion of fees for consulting services performed by W.R. Huff on Telewest bonds that are held in PRIM's high-yield bond portfolio." PRIM's agenda materials said that Huff had provided the calculation for the $48,054.20 figure.

When investment consultants brought the fee issue to their clients' attention last summer, several of Huff's pension fund clients said they accepted the firm's explanation that the consulting fees were legitimate compensation for the firm's work on NTL and Telewest.

At the time, William R. Huff, the firm's founder, left open the possibility that some clients might take issue with the fees, and indicated a willingness to reimburse them on a case-by-case basis. Mr. Huff, in an e-mailed response then, said: "Upon a full discussion of the facts and circumstances, we have made that offer to our clients. Very few have taken us up on that offer" (Pensions & Investments, Sept. 6).

Massachusetts PRIM was one of the few.

At the Feb. 1 board meeting, Mr. Mavromates said Mr. Huff met with PRIM staff in September and agreed to return the fees, should PRIM so desire. But when PRIM subsequently asked for the money, planning to funnel it back into its high-yield portfolio with the firm, W.R. Huff "did not comply," Mr. Mavromates said. He said Huff had gotten five separate legal opinions that it was entitled to those fees.

PRIM officials said under the terms of PRIM's money management contract with W.R. Huff, the fees should have been cleared with PRIM in advance.

Mr. Huff, in a telephone interview last week, said his firm's offer to distribute those consulting fees to institutional clients on a pro-rata basis was always conditional on their being able to make the case that they were "legally, morally and ethically" entitled to them.

Less than a handful of W.R. Huff's almost 90 institutional clients took that to mean they could claim those fees just by raising their hands, he said.

W.R. Huff provided a pro-rata figure at PRIM's request mostly to show just how marginal the amount in question is, Mr. Huff said. That $48,000 fee should be seen against the backdrop of an investment of $5 million of PRIM's money in Telewest that grew to $9 million over 18 months, he noted.

A reading of the firm's investment management contract shows that W.R. Huff was entitled to take fees for work that was "separate and apart" from its investment management duties and proved to be very much in the interest of clients, Mr. Huff said.

PRIM's Mr. Travaglini rejected that argument: "In PRIM's view, the only fees that our asset management firms appropriately receive for managing our assets are asset management fees."

Mr. Mavromates conceded the amount in question isn't a big sum. What is troubling is "just the way (W.R. Huff) approached this. We're a client, and they treated us as if we were on the witness stand."

At the PRIM board meeting, board members also received data showing PRIM's portfolio with W.R. Huff underperforming its Merrill Lynch Master High Yield II benchmark since inception on Oct. 31, 2001. For the three years through Nov. 30, 2004, the compound annualized return of 9.98% trailed the benchmark's 14.2%. For the 12 months through Nov. 30, the portfolio delivered a 7.6% gain, compared with 10.9% for the benchmark.

Mr. Huff said that benchmark may not be appropriate. It contains a higher weighting of the lower-grade paper that has performed strongly in the past two years; Huff largely avoided those investments in line with its understanding of PRIM's objective of investing in better quality high-yield bonds. Measured against subindexes for better quality bonds, Huff's portfolio for PRIM has outperformed, he said.

The fallout for Huff from the fee issue might not be limited to the PRIM account.

The bond manager was dropped by another client last week — the $109 billion Florida State Board of Administration, Tallahassee, which put Huff on its watch list last June, shortly after the fee issue came to light.

Michael P. McCauley, director of investment services and communications for the Florida fund, said "the FSBA reached a resignation agreement" with Huff effective Jan. 31. Florida, which had about $340 million in its high yield mandate with Huff, hired the firm in July 2001.

The issue could also be on the agenda of the Ohio Public Employees Retirement System, Columbus, when the $64.5 billion public pension fund meets later this month. Huff manages a $334 million high-yield mandate for the fund.

Spokesman Richard Baker said W.R. Huff, after suggesting last summer that the firm would reimburse the NTL and Telewest-related fees, has recently indicated "that it does not intend to reimburse fees."

"We are aware of the Mass PRIM action. OPERS will be making a decision regarding Huff and will update our board" as early as this month's board meeting, he said.