Four financial institutions that manage Maryland's state employees' pension funds have been replaced, in what state Treasurer Richard N. Dixon hints is a continuing shake-up of the $28.7 billion retirement system's management.
The trustees of the State Retirement and Pension System approved the firing of Mercantile-Safe Deposit & Trust Co. of Baltimore and two other fund managers last week, and accepted the resignation of another city firm, Investment Counselors of Maryland.
The $451 million in pension funds affected by the shake-up have been redistributed to four other firms that already manage portions of the system's portfolio, including BT Alex. Brown Capital Advisory & Trust of Baltimore.
Dixon, who became pension board chairman in July after the death of longtime Comptroller Louis L. Goldstein, said the fund managers were not earning expected returns. Any managers who do not meet the system's investment benchmarks will be replaced, he warned.
"I'm just bringing about a new management," Dixon said. "In this business, you either perform or you're out."
The state pension system administers death, disability and retirement benefits for more than 250,000 active and former employees, teachers, state police, judges, correctional officers and legislators. More than 100 local governmental agencies also participate in the system.
Mercantile lost a contract it has had since 1984 to manage $39 million. The other fired consultants were Putnam Investments of Boston, hired in 1993, which managed $192 million, and Alliance Capital Management of New York which has been overseeing $117 million in pension money for about two years.
Investment Counselors resigned the contract it has had for 15 years to handle $103 million in pension funds.
Didn't meet benchmark
Robert McDorman, a principal with Investment Counselors, said the firm decided to surrender the account last month because of the recent departure of that fund's manager.
But McDorman also acknowledged that his firm had not met the state's investment benchmarks lately. "It was a mutual parting of the ways," he said.
Spokesmen for Mercantile, Putnam and Alliance declined to comment.
The pension fund shift is the second big account loss for Mercantile in recent weeks.
Baltimore's Board of Estimates shifted nearly $3 billion in city employee retirement funds in February from Mercantile to Mellon Bank in Pittsburgh. City officials said the move would save $300,000 a year in fees.
Mercantile's handling of state pension funds earned it $95,000 in fees last year. Investment Counselors collected $217,000, Putnam $450,000 and Alliance $977,000.
Riskier investments
Alliance's fees were greatest, because of the riskier nature of the small-capitalization investments it made and the need to do more research before investing in relatively unknown firms, explained Peter Vaughn, executive director of the state retirement agency.
Funds managed by Investment Counselors and Mercantile were shifted to Pacific Investment Management Co. of Newport Beach, Calif. The money handled by Putnam was transferred to Rothschild Asset Management of London.
The money managed by Alliance was split: $58.5 million was transferred to TCW Group of Toronto and $58.5 million to Alex. Brown Capital Advisory & Trust.
This is the retirement system's largest shake-up of fund managers in recent years, Vaughn said.
Dixon, who spent 26 years with Merrill Lynch & Co., said he plans to review the fund managers' performance every year and replace any that are not meeting their investment benchmarks.
"There's going to be more information in the future -- big changes," Dixon said. He declined to elaborate.
Each fund manager is expected to achieve benchmarks pegged to various investment indexes.
Investors and Mercantile, for example, had to be at least 50 basis points over the Salomon Brothers BIG Index, which averaged 7.8 percent over the past three years. Investment Counselors earned 7.3 percent for the funds. Mercantile made only 6.7 percent in the same period.
Pub Date: 3/11/99