WESTPORT, Conn. - The $18.4 billion Common Fund has turned the corner in recovering from a $138.5 million loss in a securities lending program just over two years ago.
Although the dollar loss was not great compared with the investment organization's assets under management, it shook the confidence of a number of schools for which The Common Fund managed endowment fund assets. More than 100 left, taking $1.1 billion with them.
But The Common Fund has added 75 new members since then, according to Robert L. Bovinette, president, and assets have grown by $1.4 billion, for a net gain of $300 million.
Since the losses were discovered The Common Fund has:
* Changed its top management;
* Appointed an independent risk control officer, William P. Miller, senior vice president;
* Revamped the risk and oversight structure, including creating an audit and risk management committee of the board of trustees;
* Simplified its menu of funds;
* Reorganized the private capital and real estate entities into two wholly owned subsidiaries; and
* Begun to report the investment performance of its funds in accordance with the AIMR performance standards.
The Common Fund uses both outside and internal managers. The loss occurred when a trader at one of the outside management firms, First Capital Strategies, York, Pa., apparently made unhedged investments with the collateral put up for the lent securities that went awry. The loss, although small initially, accumulated over a number of years.
The loss was discovered in July 1995; about a year and a half later, David K. Storrs, former president of The Common Fund, was replaced by Mr. Bovinette. He was no newcomer to The Common Fund, having served on the board while president and chief executive officer of the Albuquerque (N.M.) Academy.
Joining Mr. Bovinette was Todd E. Petzel, previously executive vice president of the Chicago Mercantile Exchange. He is executive vice president and chief investment officer, a new position at The Common Fund.
Messrs. Bovinette and Petzel spent four months visiting the trustees and chief financial officers of more than 300 of The Common Fund's member colleges and universities to outline the changes they planned.
Those changes included the hiring of Mr. Miller as risk control officer. He joined in September 1996 from General Motors Investment Management Co., where he was director, trading operations and asset mix management.
Mr. Miller reports to both Mr. Bovinette and to the board's audit and risk management committee.
"We have focused on the whole issue of risk control," Mr. Bovinette said, "and tried to provide infrastructure, both technical and human, and to be able to look at our risks and say in every way we are stronger today in risk management than we were."
The audit and risk management committee is an example of the new focus on risk management, he said. Before, risk management was just one responsibility of the budget and operations committee. Now, risk management issues get the undivided attention of the new committee each time it meets.
Although reviews of funds and managers were carried out informally on a daily basis in the past, there was not a formal process for reviewing each fund and each manager regularly against the policies set for each.
In fact, risk management is now a more formal, multistep process, beginning with the members of the investment staff in their daily contacts, then continuing through regular review by the internal risk management committee, and finally by the board committee.
Now, said Mr. Miller, each fund and manager is reviewed against its policies on a monthly basis. "In the past Todd's staff would monitor the managers. Now we have centralized the records so I can monitor them as well."
While Mr. Petzel's staff will be involved in formally monitoring the managers on an ongoing basis, Mr. Miller said he and his staff will spot check every aspect of the organization.
The Common Fund also has introduced two systems to help in its risk monitoring and management process. One, Investment Monitor, is an investment guideline monitoring system developed by Mellon Bank that can quickly identify when a manager or a fund is approaching a guideline restriction.
The other is Ruleware, a system developed by Price Waterhouse L.L.P. that stores electronically key documents such as policies, procedures, supporting documents and staff responsibilities so they can be accessed easily and quickly.
Mr. Miller said The Common Fund also is working on simplifying the custody of its assets and reducing the number of prime brokerage agreements, replacing them with subcustodial arrangements.
The Common Fund now has 90% of its separate account assets under custody at Mellon Bank, Pittsburgh, and Bank of New York.
According to some reports, the fact that two separate custodians were involved with the securities lending program contributed to the failure to detect the problems that led to the loss.
Valuation of difficult-to-price securities, such as some foreign securities, also has been identified as an area where improvements can be made.
The Common Fund has cut the number of active managers it uses to 65 from 75 and added a Standard & Poor's 500 Stock Index fund, an international fund that tracks the Morgan Stanley Capital International Europe, Australasia, Far East Index; and a domestic bond index fund.
"We had a long history of believing in active management," said Mr. Petzel, "and for a lot of years we didn't have index funds. But many of our institutions are looking for index funds. We couldn't offer anything different, but we could collect hundreds of millions of dollars and pass down the aggressive fees we negotiated."
The Common Fund also simplified the structure of its funds by pulling private equity investments from the $2.85 billion Multi-Strategy Equity Fund and managing them separately in Endowment Advisers Inc., which invests in private capital programs.
The Multi-Strategy Equity fund was established to mirror the structure of the most sophisticated large endowments, but some members wanted the private equity investments broken out.
The Common Fund also has introduced Treasury Management Advisers Inc. to help schools improve their treasury operations. One of its first offerings is a purchasing card program allowing member colleges and universities to buy small-dollar items simply and inexpensively.
Instead of writing a check for each item, the institutions simply bill the purchases to the card, receiving discounts on the purchases and simplifying accounting.
