WASHINGTON - Wedgewood Capital Management Inc. is regrouping following a series of high-profile terminations by clients and high-level staff turnover that could imperil its future.
The fixed-income manager has lost almost a third of its assets this year, about $272 million.
According to figures the firm submitted for Pensions & Investments' annual directory of investment advisers, Wedgewood had $850 million under management as of Jan. 1, of which $823 million was tax exempt.
Clients terminated the firm for such reasons as underperformance, staff turnover and engaging in transactions outside of the approved list.
And Wedgewood - an affiliate of Philadelphia investment bank Pryor, McClendon, Counts & Co. - recently lost its chief investment officer, Darryl Dennis, and three other key professionals. Mr. Dennis left the firm this month; Wedgewood has informed clients it is in negotiations with a candidate to replace him by June 30.
The three other departing executives formed their own firm, Trias Capital Management Inc., Chicago. They are: James A. Casselberry Jr., chief operating officer; Michael L. Lucas, marketing director; and Nora J. Bustamante, client service manager. (See story on page 58)
After Mr. Casselberry left, PMC principals Malcolm D. Pryor and Raymond McClendon joined Wedgewood as acting president and acting chairman, respectively, of the firm's investment committee. A spokesman for the firm said new management will be announced shortly.
The new management is expected by its parent to stem the loss of assets at Wedgewood.
According to the Pensions & Investments Performance Evaluation Report, Wedgewood's active duration aggregate composite returned -2.9% for the first quarter of 1996, 9.3% for the year ended March 31 and a compound annual 5.1% for the three-year period. By comparison, the Salomon Broad Bond Index returned -1.74% for the quarter, 10.87% for the same year and an annualized 6.09% for the three-year period.
A Wedgewood spokesman said second-quarter performance will be markedly better than the first quarter's. Performance has been much better in the first two months of the quarter, he said.
The firm applies a conservative style using sector analysis and security selection to produce total return portfolios; it plans to stick to that strategy.
The firm recently was terminated by the Philadelphia Municipal Pension Fund over concerns Wedgewood was dumping unsalable securities into the fund's portfolio. Wedgwood had managed $144 million for the city's municipal employees' fund and $18.5 million for the city's gas works employees' pension fund.
According to the minutes of the fund's investment committee meeting April 25, fund officials were concerned Wedgewood was "deteriorating, with them losing clients." Additionally, Chief Investment Officer Sandra Parker said Wedgewood had placed two positions of private placement debt in Philadelphia's portfolio against the fund's investment guidelines, according to the minutes.
The minutes said Wedgewood officials had been told to liquidate the positions and make the fund whole, but the market was too thin to sell everything; committee members reportedly were concerned the firm was liquidating other accounts by dumping the securities into Philadelphia's portfolio. The securities in question were part of a portfolio Wedgewood managed for the Virginia Retirement Systems, Richmond, which previously had dismissed the firm.
"Quick action will be taken against them so that the fund will not get stuck with all the 'junk'*," the committee concluded.
A spokesman for Wedgewood said the situation is under control and the fund's account will be made whole. Ms. Parker did not return calls.
Other funds that terminated the firm so far this year:
Shortly after the Philadelphia vote, the Public School Teachers' Pension & Retirement Fund of Chicago voted to terminate Wedgewood's $14 million allocation and reassign it to Miller, Anderson & Sherrerd, West Conshohocken, Pa. The fund was concerned Wedgewood did not have the depth and operational structure to support its portfolio management when performance was suffering. Officials of the Chicago fund had noted the firm was badly damaged in the first quarter by the departures of the Trias team, and weakened by the earlier departure of Dana Maller, marketing director, who joined Llama Asset Management Co., Fayetteville, Ark. last year.
In January, the firm was terminated during the restructuring of the State of Connecticut Trust Funds, Hartford, for which Wedgewood managed $23.5 million in domestic fixed income.
In the same month, it was terminated as manager of a $13 million domestic fixed-income portfolio for the Virginia system and a $14 million portfolio for the New York City Employees' Retirement System. The Virginia and New York City portfolios were part of a funds of funds run by Progress Investment Management Co., San Francisco, which the funds dropped.
The Massachusetts State Teachers' & Employees' Retirement System, Boston, reassigned a $20 million allocation this quarter from Wedgewood to a bond index fund managed by BZW Barclays Global Investors. Wedgewood was not terminated due to performance problems, but because of organizational issues, said Colette Chilton, chief investment officer; she would not elaborate.
The $7 billion State Universities Retirement System of Illinois, Champaign, terminated the firm in March as manager of a $25 million portfolio and reassigned the assets to an index bond fund run by BZW Barclays. The fund was both concerned about the staff turnover and the performance problems, said Kenneth Codlin, chief investment officer.
Industry observers noted Wedgewood has followed what had been a typical development pattern in the 1980s, evolving from a minority-owned brokerage firm and taking advantage of emerging manager programs set up to foster minority- and women-owned firms. But those programs are under attack today, and many firms are scrambling to find new business, which the observers note is exposing the seams in the firm's structures.
Mr. Casselberry, a former fixed-income investment officer at the MacArthur Foundation, joined Wedgewood as part of an effort to expand the product line and build its foundation and endowment business, but he was not successful. The firm remained centered on core fixed income and heavily dependent on public fund money, which is drying up as funds freeze or dismantle their emerging manager programs.
"This firm seems to have failed to develop the investment process and personnel stability that a firm that is beyond the start-up stage needs to develop in order to prosper in the institutional marketplace," said Edward A.H. "Ted" Siedle, president of Anvil Institutional Services Inc., New York, who advises a number of public funds on emerging manager searches.
"The firm's personnel turnover and operation problems are more consistent with a newly established firm rather than a firm that's been in business since 1987," he said.
Remaining Wedgewood clients are watching the situation.
Mary Kirby, executive director of the Washington Suburban Sanitary Commission, Laurel, Md., said the consultant Evaluation Associates was looking at Wedgewood and the board of trustees will make a decision on the firm at its meeting June 26. Wedgewood manages $16 million for the $361 million fund.
Paul Henigan, executive director of the $112 million City of Pittsburgh Comprehensive Municipal Pension Fund, said his fund has been monitoring both the turnover and the performance, but has not placed the firm on probation so far. The fund's board will discuss the situation at its meeting June 27, he said. Wedgewood manages $13 million for the Pittsburgh fund.