COLUMBUS, Ohio — The investment staff of the Ohio Bureau of Workers’ Compensation believes the worst is behind them.
The $17 billion fund fired all 69 of its managers and moved all of its investments into index funds nearly two years ago after several scandals rocked the fund.
Those scandals included the bureau’s CFO accepting bribes from money managers, other investment staff accepting gifts from money managers and an investigation by an independent investment consulting firm that found bad investigations cost the bureau $1 billion in investment gains. Another scandal involved $50 million investments into rare coin funds run by former Republican fundraiser Thomas Noe, in which millions of dollars in rare coins came up missing. Mr. Noe is serving 18 years in prison for stealing from the fund.
But the bureau is moving on and about to make its first foray into active management since moving to index funds. As early as July, three to five managers will be sought to run long-duration fixed income as well as another three to five high-yield managers. The bureau will earmark a total of $4.4 billion to its long-duration managers and $800 million to its high-yield managers.
Later in the year, the bureau will hire three to five active international equity managers and three to five small-cap and midcap equity managers. The bureau will allocate a total of $800 million to its non-U.S. equity managers and a total of $500 million to its small- and mid-cap managers.
Even with the hires, 47% of the fund’s total assets will stay in passive fixed income and 12% in passive equity from Northern Trust Corp., Chicago.
No alternatives
The current investment policy does not allow for alternative investments, but “that doesn’t mean that won’t change,” said Bruce Dunn, chief investment officer of the bureau. “I would like to consider alternatives.”
The bureau has also made some major changes to improve the way it selects and monitors managers in the future. The bureau plans to have no more than 20 to 25 managers overseeing its investments, a stark change from 69 managers it had before the investment scandals.
“It’s somewhat unwieldy to manage 60 or more managers,” Mr. Dunn said. “We’re going to get to know these managers extremely well. Staff will be involved with those managers on a daily basis.”
A smaller number of managers means larger, more significant allocations to each firm, said Chris Meyer, managing principal and chief investment officer for the consulting firm Fund Evaluation Group, LLC, Cincinnati. (FEG is not an adviser to the bureau.)
If funds the size of the bureau would have had such small allocations that the impact of a few top-performing managers would not affect the overall portfolio.
“You’ll also know them better and can do proper due diligence,” Mr. Meyer said. “I’d rather have fewer managers that you know well than a lot you didn’t know well.”
The Ohio bureau will have a sophisticated investment staff getting to know those managers. Everyone on the investment staff now is certified as a chartered financial analyst or is well on their way to getting certified. “That’s much more stringent than the requirements at other funds in Ohio,” said Lee Damsel, director of investments for the bureau.
Right now four members of the Ohio bureau’s investment division have their CFA certification and two are in the process of obtaining certification.
That represents a lot of investment staff members with CFAs for a fund of that size, said Richard Holbein, president of the consulting firm Holbein Associates Inc., Dallas. (Holbein also is not a consultant to the bureau.) “Typically, you’ll see some (funds that size) having one CFA, but it’s different to say everyone has it.”
Another change involves greater transparency. Mr. Dunn, who was hired after the scandals broke, said there “was a political aspect in the selection of those managers in the past.”
To avoid this, the firm will use its consultant, Wilshire Associates Inc., Santa Monica Calif., heavily in the search for new active managers. A member from the audit team also will be included in the RFP process to ensure better oversight, Mr. Dunn said. Previously, the audit team was not part of that process.
The bureau’s website will also explain why finalists were not chosen. “A reader would be able to understand why firms were not selected,” Mr. Dunn said.
‘Additional screening’
Consultants said most funds do not list why a manager is not selected. Listing those reasons “could be an additional screening device” for the fund, FEG’s Mr. Meyer said. He explained that management firms with organizational or personnel issues would be less likely to apply with the bureau, knowing those issues could be uncovered in the search process and listed on the website.
Amid the investment changes being made, a broad investigation of the bureau by the Ohio Ethics Commission continues, while other people involved in those scandals were recently sentenced.
Terrence Gasper, former CFO who pleaded guilty to accepting bribes, was sentenced on May 9 to 64 months in prison by U.S. District Court in Akron, Ohio. Mr. Gasper admitted to accepting bribes.
Clarke Blizzard, an independent marketer who represented management firms seeking business with the bureau, was sentenced May 3 to three years and one month in prison for offering bribes to bureau officials.
Three former bureau employees in April were sentenced to community service and ordered to pay restitution for receiving gifts from potential vendors seeking to do business with the bureau.
“We do anticipate further charges,” said Paul Nick, chief investigative attorney for the Ohio Ethics Commission. He said the commission is investigating money managers to see if any of them paid bribes to bureau officials to get business.
