Tag: Frank Russell

Auditor’s report: OHA needs an outside consultant to watch over money mangers

By: OHA Trustee Rowena Akana

Source: Ka Wai Ola o OHA, July 2005

‘Ano’ai kakou… On January 16, 2003 the Board of Trustees voted to hire two investment companies, Goldman Sachs and Frank Russell, to handle all of OHA’s investment decisions. I abstained from the vote because I felt that it would be dangerous for the Board of Trustees to give up their direct oversight over the Native Hawaiian Trust Fund.

I had further doubts after I read the contracts OHA’s administration signed with Goldman & Russell. Our past contracts specifically stated that OHA, its trustees, and employees would be protected from all actions, suits, claims, damages, and expenses that arise out of a contractor’s errors, omissions, or acts. As you may recall, I wrote in my August 2003 article that since the contracts OHA signed with Goldman and Russell had no such language, OHA trustees are liable for any mistakes that they make, even though we don’t have any direct control over investment decisions.

In March of 2003, OHA hired R.V. Khuns & Associates, Inc. to come up with recommendations for OHA’s Investment Policy. One of their recommendations was that the Board should hire a separate and independent consultant to monitor both Goldman and Russell. I strongly fought for this when it was discussed at the Board table. Unfortunately, the budget committee rejected the idea.

While the budget committee may have disagreed with R.V. Khuns & Associates’ recommendation, State Auditor Marion Higa supported the idea of an independent consultant in her April 2005 audit of OHA. Here are a few of her findings:

(1) OHA has failed to create an independent function to oversee investment advisors. According to the auditor, basic things such as performance reporting, ensuring compliance with guidelines, and risk management were not being done because OHA doesn’t know how. The auditor wrote that OHA doesn’t have enough knowledge, experience, and expertise when it comes to overseeing investments. She stressed that OHA needs to hire someone (either in-house or an outside consultant) with experience in institutional investment oversight to make up for this deficiency.

(2) OHA’s lack of a standard report format has resulted in inconsistent reporting by the advisors. The auditor wrote that OHA did not create a standard format for Goldman and Russell to report how they were investing our money. The auditor said that this was because OHA did not know what information it needed to properly evaluate them. The auditor also pointed out that it was fundamentally flawed to depend on Goldman and Russell to decide what should be reported. Goldman and Russell are just as liable as OHA trustees for any losses (that come from not following OHA’s investment policy) so why would they report any violations to OHA? To solve this problem, the auditor recommended that OHA consider hiring outside experts to design the performance reports.

(3) Investment advisor compliance with certain guidelines cannot be verified. According to the auditor, OHA can barely make sure that Goldman and Russell are following OHA’s investment policy because we aren’t getting enough information from them. OHA doesn’t even have the computer software needed to screen important information. The auditor recommended that, for OHA’s protection, both Goldman and Russell should be required to sign a disclosure statement, on a regular basis, saying that they are following OHA’s investment policy. I believe her recommendation is added confirmation that the contracts our administration signed with Goldman and Russell did not contain proper safeguards for OHA.

I hope this proves, once and for all, that OHA needs an independent consultant to watch over our two investment managers.

Imua Hawaii Nei…

Auditor’s report: OHA’s money-managers come at a high cost

By: OHA Trustee Rowena Akana

Source: Ka Wai Ola o OHA, June 2005

‘Ano’ai kakou… On January 16, 2003 the Board  hired Goldman Sachs and Frank Russell to serve as OHA’s two financial managers. Each company was given half of OHA’s Native Hawaiian Trust Fund, which at the time amounted to $125,000,000.

In my March 2004 article, I wrote that while both companies made about the same amount of money for us, there was a glaring difference in what they charged us for their services. Frank Russell charged OHA $64,663 for their first quarter of service in 2003, while Goldman Sachs charged us $74,998 – a difference of $10,335. In the second quarter, Frank Russell charged us $200,712 for their services, while Goldman Sachs charged us $244,255 – a difference of $43,543.

While some people may argue that the $53,543 more Goldman Sachs charged OHA (for the 1st & 2nd Quarters) was not a significant amount, I argued that we could have helped many needy beneficiaries with that money.

Not long after my article was published, Goldman Sachs reviewed their fee schedule, and gave OHA an annual savings of $50,000. I can’t say for certain whether my complaints had any impact on their decision, but I was pleased that Goldman Sachs quickly matched Frank Russell’s lower fees.

While OHA’s leadership at the time may have disagreed with me about how high the fees were, I finally felt some vindication when State Auditor Marion Higa came out with her April 2005 audit of OHA. Not surprisingly, she backed up what I had been saying all along. Here are a few findings from her audit:

1. Frank Russell averaged 0.57 percent in fees, in total, for all traditional assets managed, excluding real estate. Goldman Sachs averaged 0.74 percent of the assets it managed, excluding real estate and hedge funds.

2. The average investment management fee paid by all reporting funds (1,032 reporting funds in 2002) was 0.274 percent in 2002. Smaller funds (such as the Native Hawaiian trust fund) with assets below $500 million had higher average fees of 0.351 percent. OHA pays an average fee for investment management and oversight for the trust fund of 0.65 percent.

3. The “manager-of-managers” strategy employed by OHA has led to higher fees than fees incurred by its peers. In addition, OHA’s use of investment advisors to select investment managers, perform due diligence, and monitor the investment managers, has the effect of increasing the total fee, since the total fee represents more than just investment management fees. In other words, we paid less fees under our old financial management plan.

4. If OHA’s passive assets were in line with its peer median, fees would be reduced by 11 basis points, saving OHA more than $300,000 annually.

5. OHA has begun to review the investment management fees being paid, realizing that Goldman Sachs represents a premium cost for its services.

The auditor recommended that OHA continue to evaluate the returns it receives, net of the fees paid, and explore alternative means of investing portions of its portfolio – all of which I will continue to do on behalf of our beneficiaries.

The auditor also noted that OHA should recognize the inherent conflict of interest within the existing manager-of-managers structure and conduct its own evaluation of whether their investments fulfill OHA’s fiduciary duties and achieve prudent investor standards. Due to space constraints, I will have to take this issue up in another month’s column. Stay tuned.

Imua Hawaii Nei…

Reaching out to Hawaiians on the mainland

By: OHA Trustee Rowena Akana

Source: Ka Wai Ola o OHA, April 2004

‘Ano’ai kakou… On March 6-7, 2004, OHA sponsored a successful Hawaiian governance event in Las Vegas. The affair featured OHA’s Hawaiian Registry Program; workshops on Hawaiian culture, genealogy, and history; and a “Kau Inoa” registration drive. Kau Inoa is a separate program from OHA, and is the first step in identifying indigenous Hawaiians who want to be a part of the formation of a Hawaiian governing entity.

We have now established many valuable contacts within Nevada’s Hawaiian community, estimated to be 80,000 strong, and have made an important contribution to our goal of registering 100,000 Hawaiians nationwide.

This event would not have been possible without the hard work and dedication of the following OHA staff and volunteers:

* Administrator Clyde Namu’o who strongly supported the event from the beginning. I commend the Administrator for the latitude he afforded staff to explore new territories and gain new skills. His consistent positive attitude and encouragement of staff made the event a true pleasure.

* Public Information Officer Manu Boyd, who conducted workshops on hula, ka’ao, genealogy, and Hawaiian history. His command of the Hawaiian language and his musical talent are an invaluable resource to OHA.

* Luci Meyer, who conducted workshops on mo’oku’auhau (genealogy). I was impressed by the quality, depth, and insight of her presentations.

* Staff members Jennifer Chiwa, Lani Hoomana, Ruby McDonald, Gladys Rodenhurst, and Francine Murray.

* Las Vegas Volunteers Jeannie Wong, Ransen & Lehua Borges, Ladd Haleloa, Bruce Willingham, Lucille Calario, Lorna Andrade, and Paul Meyer.

* Special thanks to the Makaha Sons, Moon, John and Jerome who performed in concert and virtually assured a huge turnout.

This experience has left me very encouraged about coordinating future events and activities. I also appreciate Trustees Waihe’e, Dela Cruz, and Apoliona for making the trip and sharing their mana’o.

On another note regarding the Native Hawaiian Trust Fund…

Trustee Mossman wrote in his article last month that he did not believe OHA has ever been in a better financial position and that it was all thanks to Trustee Stender. Before we begin to sing the praises of someone, perhaps we should first put things in their proper context.

OHA’s portfolio was over $400 million in 2000 and then took a nosedive in the following year to $250 million. Who was the chair of the Budget & Finance committee for most of that time? You guessed it, Trustee Stender. I pleaded with Trustee Stender for months to stop the bleeding, but nothing happened. OHA’s Chief Financial Officer finally came up with the idea of hiring “managers-of-managers” to do our investing. This was finalized by February 2003, but and by then, the damage to the Trust had long since been done.

The new managers-of-managers, Goldman Sachs and Frank Russell, make all of our day-to-day investment decisions and choose which money managers to hire. The Board’s role now is to simply set the investment policy and listen to quarterly report presentations.

There is no doubt that the growth of the Trust has more to do with our two manager-of-managers than any particular Trustee. The problem now is that OHA is forced to pay higher fees for Goldman Sach’s services even though they have consistently underperformed the Frank Russell Group.

While the total Native Hawaiian Trust Fund is still far shy of the $400 million OHA once enjoyed in its heyday, at least it is growing again.

Imua Hawaii Nei…

OHA paying more for the same service

By: OHA Trustee Rowena Akana

Source: Ka Wai Ola o OHA, March 2004

`Ano`ai kakou… On January 16, 2003 the Board hired Goldman Sachs & Company and Frank Russell Company to serve as OHA’s two “Manager-of-Managers.” Each financial manager was given half (50% percent) of OHA’s Native Hawaiian Trust Fund, which amounted to $125,000,000.

Before we voted to hire the two companies, I asked Trustee Stender whether we should give the two money managers a one-year limit. Trustee Stender thought that one-year would do and the Board approved hiring both companies for a one year period after their contracts were executed.

Both contracts were signed on February 13, 2003 and it is now time to evaluate their performances and decide whether to keep them and/or make some changes.

Instead of boring you with pages of financial comparisons such as “Market Valuation versus Strategic Benchmark” or explaining what a “hedge fund” is, I’ll get straight to the bottom line: 1) How much money did OHA’s two financial managers make, and 2) How much did it cost OHA for their services.

According to a memo dated January 22, 2004 from OHA’s Treasury department, Frank Russell Company “continues to slightly outperform[s] Goldman Sachs Company in total portfolio market value. At the end of November, the difference was over seven hundred thousand dollars (0.51%).”

A recent memo dated February 10, 2004 states that Goldman Sachs managed to increase their original $125,000,000 to $160,500,000 by December 31, 2003. During the same period, Frank Russell Company managed to do slightly better with $161,000,000 – a difference of $500,000.

Both companies did well during the nine-month period and they increased OHA’s portfolio by over $35,000,000 each. Our Native Hawaiian Trust Fund now stands at a combined grand total of $321,500,000 (as of December 31, 2003). There is now hope that we can once again reach the $400,000,000+ levels we had back in 2001.

While both companies made about the same amount of money for us, there was a glaring difference in what they charged us for their financial services. For example, according to the same 1/22/04 memo mentioned earlier, Frank Russell Company charged OHA $64,663 for their first quarter of service in 2003, while Goldman Sachs Company charged us $74,998 – a difference of $10,335. In the second quarter, Frank Russell charged us $200,712 for their services, while Goldman Sachs charged us $244,255 – a difference of $43,543. In the third quarter, Frank Russell charged us $217,087. Third quarter fees from Goldman Sachs were not available in the memo.

While some people may argue that the $53,543 more Goldman Sachs charged OHA (for the 1st & 2nd Quarters) is not a significant amount, I would argue that we could have helped many needy beneficiaries with that money. We could have given 53 Hawaiian families a $1,000 grant and still had money left over.

When you look at the bottom line, based on their performance as of December 31, 2003, Frank Russell Company made $500,000 more for OHA than Goldman Sachs and charged us $53,878 less for their services. Frank Russell did a better job and charged us less for it.

Unless something drastic happens from January 1, 2004 to February 13, 2004, I’ll be arguing to have Frank Russell Company manage OHA’s entire Native Hawaiian Trust Fund. It only makes sense. Why pay more for less? I would, however, consider keeping Goldman Sachs onboard if they lowered their fees.

If you feel as strongly as I do about protecting the Native Hawaiian Trust Fund into perpetuity, I urge you to call the other eight Trustees and share your mana’o. Let them know how you feel about defending an important resource for our Hawaiian people.

Imua Hawaii Nei…

Native Hawaiian Trust Fund Update

TRUSTEE ROWENA AKANA

August 2003 Ka Wai Ola Article

`Ano`ai kakou…  In October of 2002, the Board of Trustees adopted the “Manager-of-Managers” approach to oversee OHA’s Native Hawaiian Trust Fund.  Basically, this means that an investment advisor would be hired to build a portfolio of the best investment managers and would share fiduciary responsibilities with the Board, or so we thought.

On January 16, 2003 the Board hired Goldman Sachs & Company and Frank Russell Company to serve as OHA’s two Manager-of-Managers.  I abstained from the vote because I questioned the hiring of Goldman Sachs.  What followed after that meeting can only be described as irresponsible on the part of the board chairman.

A contract drawn up by Goldman was signed by the administrative staff, with the board chair’s approval.  It gives Goldman full control over the assets that they manage and removes the Board’s direct oversight.  Also, the burden of liabilities was shifted to OHA.

Our past contracts specifically stated that OHA, it’s Trustees and employees would be protected from all actions, suits, claims, damages, and expenses that arise out of the contractor’s errors, omissions or acts.  Goldman’s contract has no such language.  OHA’s protection was further eroded when the budget committee chair rejected the recommendation of our investment policy consultant, who strongly advised the Board to hire a firm to monitor Goldman and Frank Russell.

According to the latest performance report, Goldman has been outperformed by Frank Russell in March, April, and May of this year.  Goldman made a total of $15,651,672 versus Frank Russell who made a total of $16,236,725 for a difference of $585,053.

The budget chair has pushed hard for Goldman since October of 2002, when he abruptly placed Goldman on the Board agenda for consideration, even though they missed the submittal deadline.  He continued to support them despite questions from Trustees over why other investment managers who missed the deadline were not considered.  He also dismissed the reports of serious indiscretions involving Goldman that were reported in the national media.

On February 9, 2003, a CBS’s 60-Minutes exposé reported that hundreds of former shareholders of Montana Power were suing Goldman, claiming that they were misled into transforming their power company into a telecom company.  They claim that Goldman brought Montana Power, once worth billions, to the brink of bankruptcy.

The plaintiff’s attorney said, “There would be memos in which Goldman Sachs would just keep pushing, ‘This has to be done now… The market for this can only get worse… They were definitely the driver.’”  He also stated that Montana Power’s CEO needed Goldman to pull off the deal and that it was Goldman that made most of the presentations to Montana Power’s board.

Goldman’s contract with Montana Power also required that, “Any advice provided by Goldman Sachs…is exclusively for the information of the board of directors and senior management of the company.”  The lawsuit claims that this basically means, “Don’t tell the shareholders.”

Goldman pocketed close to $20 million on the deal.  However, Montana Power employees lost their jobs, retirees lost their life savings, and Montana’s relatively low electric bills went through the roof.  Businesses that depended on the cheaper electricity were forced to shut down.  Goldman Sachs did not offer any comments for the report.

I distributed taped copies of the program to all Trustees and also asked Goldman for an explanation.  Unfortunately, since the case is still in court, they were not able to give me any details.

Finally, instead of continuing to invest only in different types of stocks, OHA should consider alternative investments such as natural gas or business ventures.

For example, Sealaska is a Native Alaskan owned corporation with over 16,500 shareholders.  In addition to financial markets, their principal investments are in forest products, telecommunications, entertainment, plastics, and minerals development.  For the past 30 years Sealaska has diversified through many businesses and has become a leading exporter and one of the strongest economic and political forces in Alaska. 

In order to keep the Trust in perpetuity for our beneficiaries, OHA must invest in land and other tangible investments as other Native peoples have done.  Mālama pono!