A record of paltry pension returns

Investments: Nathan A. Chapman's firm has had subpar performances while managing some state workers' retirement funds. Now his company faces a make-or-break review.

November 30, 2001|By Jon Morgan, Michael Dresser and William Patalon III | Jon Morgan, Michael Dresser and William Patalon III,SUN STAFF

During the almost five years he has invested money for the state pension fund, Nathan A. Chapman Jr. has endured almost nonstop scrutiny - over his high fees, his lackluster investment returns and his use of a money manager accused of bilking clients.

Come January, Chapman and his troubled Baltimore-based investment firm, eChapman.com Inc., are likely to face some of the sharpest questions yet from State Retirement and Pension System trustees. That's when the trustees will undertake their annual review of the system's hired money managers, looking to cull the laggards.

This review has particular urgency after a disastrous 2001 fiscal year in which the Maryland pension system lost $3 billion on investments - one of the very worst performances in the nation by a big public pension fund.

And with eChapman's investment record for the state near the bottom of all its pension fund managers in the past year - and below the firm's assigned benchmark over the past three years - the company is highly vulnerable. Said trustee George R. Tydings, "He's on the bubble."

G. Bruce Harrison, a trustee representing the state police, declined to comment directly on Chapman but said he's not interested in hearing excuses from underperforming managers. "`The dog ate my lunch' won't cut it," he said.

If the trustees decide to drop eChapman, it would be a serious blow to a company once considered a Maryland - and African-American - success story.

While eChapman oversees a mere sliver of the state's $29.5 billion in retirement savings - $157 million as of Sept. 30 - that business equals roughly a fifth of the firm's dwindling revenues this year.

Wall Street has concluded that eChapman is likely to lose the state's pension business, said Bjorn Turnquist, an analyst with SNL Securities LC in Charlottesville, Va., and has given the firm's stock a haircut in the past year, from almost $7 a share to a close of $1.18 yesterday.

"The market has already factored in that they're going to lose the account," Turnquist said.

Chapman did not respond to numerous requests - by phone and fax beginning early last week - for comment for this article. However, in a Nov. 15 interview concerning his firm's third-quarter financial results, he told The Sun: "The market went down, we went down with it. But now the market has come back ... investment management fees are coming back with the market."

A week earlier, he struck an optimistic note in a letter to pension officials. "We have continued to grow our businesses across the board with new clients," he wrote. "We expect 2002 to be a good year for us based on signed contracts."

In the letter, Chapman added that his firm had been "able to minimize the effect" of reduced revenues from fees by increasing its commissions from municipal bonds and controlling its costs.

Chapman's firm has staved off one attempt by the pension trustees to cut in half the amount of money it invests for the state. Losing the state business entirely would be more than a major financial setback for Chapman, 43, the founder, chairman and majority stockholder of the nation's first publicly traded investment firm headed by an African-American.

The loss would represent a sudden shift in the fortunes of a man whose abilities and carefully cultivated connections - including a long-standing relationship with Gov. Parris N. Glendening - have elevated him to the power elite as chairman of the University of Maryland Board of Regents. Among the decisions regents will make next year is who will replace the school system's retiring chancellor; Glendening, whose term ends next year, has been mentioned as a candidate for the post.

Losing the state's business could also cast a shadow over Chapman's trademarked investment focus on "domestic emerging markets," designed to steer capital to women and minority-owned firms overlooked by Wall Street. That strategy, in particular, has been attractive to the Maryland pension board, which has tried to increase opportunities for minorities.

But for the system that oversees retirement income for 300,000 active and retired teachers, police officers, and other state and local government employees, eChapman has delivered a record of returns that - under the system's policies - is grounds for dismissal:

For the 2001 fiscal year, ending June 30, eChapman's portion of the state pension portfolio showed a loss of 21.6 percent. That performance was among the worst of all the portfolio's money managers for the year and, for the second year in a row, fell short of its assigned benchmark, which dropped only 13.1 percent. That benchmark is based on the Russell 3000, a widely watched measure of market performance.

For the three years ending Sept. 30, the most recent performance data available from the state system, eChapman also missed its benchmark, posting an average annual return of only 0.8 percent. Its benchmark for that period was 3.2 percent.

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