Clients look hard at Huff after key staffers depart

MORRISTOWN, N.J. — High-level personnel turnover at W.R. Huff Asset Management Co. LLC is prompting a number of pension funds to review their allocations to the high-yield bond and distressed debt money management firm run by iconoclastic industry veteran William R. Huff.

Those leaving the Morristown-based firm include Ed Banks, a senior portfolio manager and 18-year Huff veteran, and Matt Swope, an analyst-portfolio manager with five years at Huff. Both left in early October. A few weeks later, Ken Harmonay, a senior portfolio manager with 17 years at Huff, and Bill Connors, a senior portfolio manager with 14 years at the firm, departed.

In a telephone interview, Mr. Huff said he and Mr. Banks, whom he said had taken on a largely client-service role for the high-yield bond portfolios, had "a mutual parting of the ways." Mr. Huff said he terminated Messrs. Harmonay and Connors as part of a reorganization designed to put an end to years of performance-damaging style drift by having Mr. Huff himself resume control of the firm's portfolios.

Mr. Banks said he and Mr. Swope left the firm "on very good terms" after an extended period of talks with Mr. Huff about Mr. Banks' interest in striking out on his own. Mr. Banks said he and Mr. Swope are raising money to launch a new firm focused on "distressed and stressed credits" — tentatively named Sato Capital Management.

Mr. Connors didn't return phone messages; Mr. Harmonay couldn't immediately be contacted.

The loss of so many veterans in such a short time is putting the firm under watch or review by several pension clients.

"Major turnover in a firm like that is definitely cause for concern," and "we're talking about it with several of our clients," said Alan D. Biller, president of Menlo Park, Calif.-based pension consulting firm Alan D. Biller & Associates, Inc. "At the very least, we have to put them on watch."

Pension executives and consultants said the failure of W.R. Huff to immediately inform clients and consultants of the turnover only aggravated their concerns about organizational instability. Clients learned about some of the departures several weeks after they occurred, "way beyond the envelope for reasonable disclosure," said one consultant, who declined to be named.

One client that has already pulled the trigger on Huff cited tardy disclosure as a factor. On Nov. 15, the $14.9 billion San Francisco City & County Employees' Retirement System fired Huff from an $88 million high-yield corporate bond portfolio, expressing concern, in a memorandum, that the turnover would affect the firm's ability "to generate expected excess returns moving forward."

A separate memo by San Francisco's pension consultant, Santa Monica, Calif.-based Angeles Investment Advisors, said Angeles and system officials learned about the departure of Mr. Banks on Oct. 31, roughly four weeks after he left the firm, even though the "agreed-upon guidelines" for the portfolio call on the firm to make "a good faith effort to notify the retirement system within one business day of any … significant organizational changes or events."

Mr. Huff said the argument that his firm failed to provide clients with timely information on important developments is baseless. As a client-service executive, the departure of Mr. Banks wouldn't have a big impact on the portfolios of the firm's high-yield clients, while letters were sent out to all clients on Oct. 30 informing them that Messrs. Harmonay and Connors had been fired less than a week before, he said.

Other clients said the turnover is more important than the disclosure issue. That "sets off an alarm bell," said John Hammond, investment committee chairman and chairman of the board of trustees with the $1.2 billion Anne Arundel Retirement Systems, Annapolis, Md., which has a $60 million high-yield bond portfolio with W.R. Huff. Mr. Hammond said his board will evaluate the changes at the firm at its meeting in December and make a decision then.

In an e-mailed response to questions, Bobby Beale, chief investment officer of the $7.1 billion Louisiana State Employees' Retirement System, Baton Rouge, said trustees decided to initiate a search for its $250 million high-yield portfolio with W.R. Huff, but he said Huff is "welcome to participate."

Even pension funds and consultants that are considering dropping W.R. Huff concede Mr. Huff's return to greater involvement in managing the firm's portfolios could be a good thing.

Mr. Huff isn't shy about making that case. In a letter to the San Francisco system's board, Mr. Huff insisted his return to day-to-day management would produce "enormous benefit to the firm and our clients … These changes will show positive results even for the 10 days in October since I have resumed managing the accounts."

Clients and competitors looking to win business from disaffected Huff clients describe Mr. Huff as a talented force of nature: He's "a brilliant high-yield analyst" who, by intellect or intuition, has consistently identified superior investments in that asset class, said an executive with one pension plan that terminated the firm this year, who declined to be named.

This is not Mr. Huff's first run-in with his clients. Two years ago, clients such as the $43 billion Massachusetts Pension Reserves Investment Management Board and the $153 billion Florida State Board of Administration fired W.R. Huff over management fees that Huff executives received from two U.K.-based telecommunications companies in the firm's distressed debt portfolios (P&I, Sept. 6, 2004).

The latest brouhaha has some competitors smelling blood. One, who declined to be named, said his firm is engaging in "normal predatory behavior," with Huff clients on its "to call" list.

Consultants, who describe their relationships with W.R. Huff over the years as rocky to non-existent, predict the latest controversy could hit the firm hard. A senior executive with one nationwide consulting firm, who declined to be named, said W.R. Huff had $8 billion in high-yield portfolios going into the current brouhaha, and if the firm "doesn't lose half of that, I'd be surprised."

By his reckoning, Mr. Huff said perhaps 80% of the firm's clients have expressed support for his bigger role in managing portfolios.

The competitor said the firm's $2 billion to $3 billion in distressed debt and total return portfolios probably won't be as hard hit as its high-yield mandates. Not only do contracts for those mandates include multiyear lockups, but also W.R. Huff has continued to deliver yearly returns of 35% to 40% in those areas.

For some critics, the risks of Mr. Huff's "my way or the highway" business style more than offset his talent: He's a legend, but "clearly his business is feeling the effects of his management style," said one public pension fund executive whose fund fired W.R. Huff in the past two years.

Others who have dropped W.R. Huff say they wouldn't rule out coming back in the future. Mr. Huff is "a rough-and-tumble guy, not well polished, not a great communicator," and that continues to cause problems, said the pension executive whose plan terminated the firm earlier this year. Once the dust settles from the current reorganization, he said, his fund would consider hiring Huff again.

People who know Mr. Huff say he doesn't seem the least bit fazed by the latest bumps in the road. Mr. Huff agrees: "I'm upbeat. Nobody can be happier than I am," with control over the firm's portfolios again.

Mr. Banks said when he last saw Mr. Huff, the money manager seemed invigorated, talking excitedly about individual investments in a way that he hasn't talked in years. "I'd never bet against him," Mr. Banks said.