Settlement is latest woe to hit American Express

Some pension fund officials are scrutinizing American Express Asset Management, Minneapolis, after the company settled charges that it improperly paid for trustees' meals and other freebies at the Ohio Police & Fire Pension Fund.

Yet, the company's real problem seems to be clients heading for the exit due to disappointing returns. Even the pension fund at the center of the flap terminated the firm because of poor performance.

The $9.6 billion Ohio Police & Fire fund, Columbus, ended its six-year relationship with American Express Asset Management in June, said spokesman David Graham. The firm ran a $418 million domestic large-cap core equity portfolio for the pension fund.

Performance aside, the two parties recently settled another sticking point. The money manager has paid the Ohio fund $39,680 for giving gifts to trustees. Northwinds Marketing Group LLC, a third-party marketing firm spun out of American Express Corp., New York, two years ago, paid $84,320. Each firm also gave $20,000 to the Ohio Ethics Commission to cover their share of the investigation costs.

While checks were not cut until recently, the settlement with the State of Ohio and the Ohio Ethics Commission was reached in January.

"All parties mutually agreed to bring this matter to a close," said American Express Financial Corp. spokesman Paul Johnson. He declined to comment further.

Regardless, some pension fund officials are keeping a close eye on the firm. The $2.5 billion Houston Police Officers Pension System has been following American Express Asset Management's situation in Ohio "for informational purposes only," according to March 10 board meeting minutes. The minutes stated "no action is required at this time."

American Express manages a $69 million small-cap growth portfolio for Houston Police, according to published reports.

Performance is a concern at the Houston fund. Those same minutes note "Amex has outperformed its benchmark in the 12 months ending January 2005, but they still have underperformed on both a two-year and a three-year basis."

Patrick Franey, chief investment officer for the Houston fund, did not return several phone calls seeking more information.

In early April, the State of Michigan Retirement System's $3.7 billion defined contribution plans, Lansing, terminated American Express. The firm had run $22.6 million in its AXP New Dimension Y Fund for the system's 401(k) plan and $14 million in the same fund for Michigan's 457 plan, said Terry Stanton, system spokesman.

This large-cap growth fund has lost 1.35%, 1.25% and 7.06% over the one-, three- and five-year periods, respectively, according to performance data on the Yahoo! website. By contrast, the Standard & Poor's 500 index returned 6.69% for one year, 2.74% for three years and -3.16% for five years. All numbers for periods longer than one year are annualized.

The $9.6 billion Public Employees Retirement Association of New Mexico, Santa Fe, ended its 12-year relationship with American Express Asset Management effective March 31 because of underperformance, said Robert Gish, chief investment officer. Amex ran $300 million in an undisclosed strategy.

The Florida State Board of Administration, Tallahassee, put American Express Asset Management on watch during the fourth quarter for performance issues, said spokesman Michael McCauley. The firm has run money for the Florida State Board since 1986 and oversees about $1.3 billion in midcap domestic equities for the $107 billion pension fund.

Amex's midcap growth equity strategy returned 3.2% for one year and an annualized 3.7% for three years, according to composite returns from Morningstar Inc., Chicago. Its benchmark, the Russell Midcap Growth index, returned 8.31% and 6.19% for three years, compounded annually.

The firm also runs money for the $47.5 billion Minnesota State Board of Investment, St. Paul. Howard Becker, executive director at Minnesota, did not return calls.

Consultants said legal settlements typically warrant a review.

Shelly Heier, director of manager research at Wurts & Associates, said the Seattle-based investment consulting firm needs more information before making a "judgment call." Wurts has three corporate and two Taft-Hartley plan clients that use American Express Asset Management.

The settlement "raises questions of ethics and the cultural environment there," Ms. Heier said. "How will this impact the asset managers? That's where we will begin our analysis."

L. Robert Frazier, assistant treasurer at Kimberly-Clark Corp., Dallas, said the issue was one pension officials at his company likely will evaluate. He declined to elaborate. American Express Asset Management ran $139 million in cash and stable value investments for Kimberly-Clark's $2.3 billion defined contribution plan as of Sept. 30 (Pensions & Investments, Jan. 24).

The Ohio Ethics Commission tracked $240,000 in payments from various fund vendors for meals, trips, alcohol, golf and other gifts for trustees, staff members and their families and friends between 1998 to 2003. Ethics laws in Ohio are criminal statutes and do not permit public employees to receive "substantial things of value," said Paul Nick, chief investigative attorney for the commission.