The Connecticut treasurer's hiring of money managers for investment and trading assignments for the state pension fund raises questions on whether there was an expectation of a quid pro quo for pro bono investment work they performed. Based on what we've seen so far, Christopher Burnham has done a superb job since being elected state treasurer in 1994, trying to rein in investment management costs and paring a long list of money managers for the $12 billion pension fund. But all of his work for the pension fund should be open to public scrutiny, including the due diligence for using the money managers in question. The public has to be able to judge whether the state has gotten a good deal for the work performed by the managers.
Morgan Stanley & Co., for one, received a $20 million fee for doing a principal trade in a restructuring of the fund. The deal raises the question whether Connecticut favored Morgan Stanley because of its previous gratis consultation for the pension fund to analyze the restructuring. The pension fund hired Morgan Stanley for the trade without a competitive bidding process. Besides the trade, Morgan Stanley Asset Management received an assignment from the pension fund to manage a $700 million international equity portfolio.
RCM Capital Management received a money management assignment after providing free consultation to the pension fund. State Street Global Advisors and J.P. Morgan Investment received an additional $2.5 billion and $1.9 billion respectively after volunteering consultation.
No one does nothing for free for a potential client in the investment business, especially investment managers. That is, they use their goodwill in anticipation the favor will somehow sometime be repaid. There's nothing wrong with trying to get that sort of an edge. In turn, for the state to receive free services raises questions of how free the services were if the very same providers get contracts down the road.
In these cases, the information has to be open to public review to be sure a reasonable fee was paid. Mr. Burnham ought to release the state's due diligence analysis on Morgan Stanley and provide any transaction figures from other broker dealers he said he contacted for the trade.
How is accountability measured? Mr. Burnham is the sole trustee of the fund. As treasurer, he is elected, serving at the behest of the voters. Do you measure his performance based on the overall returns of the fund? Or do you also look at details, analyzing costs of trading, including principal trades and money management fees?
The overall returns matter most. But the public has to look at details of the fund's management. With so much money being contracted out, there is too much potential for conflicts of interests. Money managers and broker dealers that do good work for the state ought to be compensated appropriately anyway. In the long run, conflicts will eventually damage the competitive performance of the fund, resulting in paying high charges for mediocre work.
As a public officeholder, Mr. Burnham needs to address not only fact but perception. The deals involving the money management firms, however proper, create a justifiable perception of conflicts. There's no reason for the public to feel such unease.
He should release the appropriate records and quell disturbing perception that anyone received an unfair advantage in getting business and that the treasurer, and the taxpayers, paid more than necessary for the work.
