My PACTS and Their Fictions, 5: Hitting Bedrock, or Why This Isn’t an Investment Plan

We shouldn’t even need to have this conversation. The PACT isn’t an investment plan: it’s a purchased contract. It is because it says it is.

But let’s pretend it were an investment plan. IF it were, it would have customers it would want to keep, since they could go elsewhere if they weren’t pleased with services delivered.  [There's nowhere but the Alabama State Treasury where you can go and purchase a contract guaranteeing tuition at any Alabama public institution when your kid goes to college, but that's besides the point for our fantasy.] Real investment advisors let their investors know what they are doing with the monies entrusted to them — in theory.

The PACT customers aren’t extended this service. Try, just try, to figure out who has handled the monies since 1990.

First of course is the little problem of whether there are 8 managers, per the Nov. 2008 Investment Policy Statement, or 9, per the updated FAQs on the PACT site.

Let’s look at the 9: INTECH, Rhumbline Advisors, CS McKee, Earnest Partners, Turner Investment Partners, Acadian Asset Management, Principal Global, Sterne Agee Asset Management, Western Asset Management.

Scrap 1: This is a timeline I’ve come up with based on searches of  Pensions & Investments, Investment News, and Investment Management Weekly, periodicals that announce hirings of fund managers. Unfortunately, I haven’t found many scraps for prior to 2003.

2003   Hires:    Bank of Ireland, Callan Associates                                                                Dismissed: CRA RogersCasey

2004:  Hires:     State Street, Bear Sterns                                                                              Dismissed:  State Street, Bank of Ireland, Fox Asset Management

As of 12/31/04, these were the managers on board: Am-South, Sterne-Agee, Peregrine, Rhumbline, Earnest [Investment Managemet Weekly 04/25/05]

2005:  Hires:      Western, INTECH [rehired], Sterne-Agee [rehired], New Star, Turner.           Dismissed: Peregrine 

2006:  Hires:     Acadian

2009:  Hires:??? State Street Global.

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Scrap 2: The 2004 exit of Fox and entrance of Bear Sterns interests me. I don’t know when Bear Sterns left the line-up — if it has –, but Fox had been with the PACT for its first 14 years. The following, “Ala. PACT Nixes Fox for Bear Stearns” by Christopher Glenns is from Investment Management Weekly, 2004-07-19:

The Alabama Prepaid Affordable College Tuition plan has replaced Fox Asset Management with Bear Stearns Asset Management for a large-cap equity mandate worth $82 million.

The replacement followed a seven- month portfolio rebalancing aimed at improving performance and diversification, while targeting 46% toward domestic equity (See IMW, 1/26/04).

The $632 billion college tuition program also considered Capital Guardian Trust Co. and Wellington Management Co. for the account, said Anthony Leigh, the fund’s deputy treasurer.

He declined to say why the investment board chose Bear Stearns.

Peter Skirkanich, president and CIO of Fox, said a change in the plan’s investment board personnel seemed to contribute to the termination. Skirkanisch maintained that his firm had outperformed its S&P 500 benchmark each year of its almost 14 year relationship with Alabama PACT and added that at the point of termination the firm was up 230 basis points.

“I feel they looked at our March-to-March performance or measured our performance on a shorter term,” he said. “We are disappointed, obviously. When the people on a board change this can happen.” Skirkanich confirmed Alabama PACT listed performance as the reason for terminating Fox Asset Management.

Meanwhile, rebalancing has resulted in Alabama PACT entering the small-cap equity market as well, allocating $30 million each to EARNEST Partners and State Street Research & Management Co. for value and growth, respectively (See IMW, 5/17/04).

A 2003 asset allocation study conducted by Callan Associates convinced Alabama PACT to diversify its portfolio and improve large-cap equity return.

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Scrap 3:  It seems that Regions Bank was involved with the PACT through 1999 but was dismissed when an investment manager left for Sterne Agee. This is from a 2002 article, “Governor’s stockbroker nets profits from state contracts”  in the Mobile Register by Eddie Curran:

Going back years, to before Baxley was elected treasurer, an investments manager with Regions Bank, Jerry Harris, oversaw investments for the PrePaid Affordable College Tuition (PACT) Fund. In 1999, Harris left Regions to join Sterne Agee. In all the state contracts, Harris is named as the primary manager with Sterne Agee.

When Harris moved to Sterne Agee, the board that governs the PACT fund voted to move the fund’s investments with him, Baxley said.

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Scrap 4: This Sterne Agee has a rather dubious reputation in Alabama. Jeff Germany, the former Jefferson county commissioner convicted on charges of fraud and conspiracy involving public funds, “left office in November 2002. By January 2003 he was on the payroll as a consultant for Sterne, Agee & Leech, another county underwriter….When Germany was a commissioner, Sterne, Agee underwrote a portion of a $952 million sewer bond issue – at that time the county’s largest bond sale” [John Archibald, Birmingham News].

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Scrap 5: And finally, as promised, the sewers. Willie Huff, one of the board members who couldn’t make the Montgomery meeting last week, heads ABI Capital Management. On 2003 PACT documents, his term was noted as expiring 2005. Now it is 2012 — in other words, he is well entrenched in the PACT scene.

 Willie Huff’s ABI Corporation’s List of “Engagements” for 2000- 2006, posted on its website, shows ABI as the underwriter for a total of approximately  $1,855,000,000  in Water and Sewer Revenue Bonds alone. In addition, we find that in July 2003 it was  Co-Restructuring Agent – Jefferson County, Alabama, relating to $1,115,675,000 Sewer Revenue Refunding Warrants, Series 2003. Add those two figures and you are up to nearly 3 billion dollars deep in the sewer muck.

But I’m sure Huff understands the attitudes of the PACT buyers. After all,  just last December he served as a panelist at a “Roadmap to Economic Recovery” community meeting and he knew where to place the blame:  ”The problem is that mortgage brokers are unregulated,” said panelist Willie Huff, president of ABI Capital Management. “This financial crisis was caused by cheap money, high-risk mortgage loans and poor underwriting standards” [Birmingham News].

So Mr. Huff, tell us, what are the causes of this mess you’ve been overseeing for years and years?