Press
Recent Media Coverage Puts Spotlight on CSG
ANDY MEEK | The Daily News
June 02, 2009
Memphis-based Consulting Services Group, a major player in the pension consulting business, has been tied to the outer edges of the so-called “pay-to-play” pension consulting scandal unfolding in New York.
The firm has not been charged with any wrongdoing. But the link is causing some decision makers in CSG’s hometown, where the company manages Shelby County’s pension fund, to start asking pointed questions.
An article in the current issue of Forbes magazine is giving local officials a lot more to think about. Part of it was based on a 2006 consultant’s report criticizing the local arrangement with CSG.
Little attention appears to have been given to the report at the time, because its mention sent some county officials scrambling for a copy over the past several days.
Now that questions are mounting in the national press and elsewhere, one county official described Shelby County Mayor A C Wharton Jr. as “very engaged” in scrutinizing CSG’s arrangement with the county’s pension fund.
Shelby County Commissioner Mike Ritz, who for months has been looking into the health of the fund, is researching best practices for pension consultants. And he intends to draft a list of proposed changes for the county.
“The Forbes article shook some trees,” Ritz said.
Money and trust
CSG and its critics probably agree on that point, but for different reasons.
For companies in the pension consulting business, trust is everything. Advisers such as CSG have influence over vast sums of public money and provide advice about complicated financial deals.
For relationships to work, clients have to believe the guidance they’re getting is sound and untainted by conflicts of interest. But CSG’s trustworthiness now is under direct assault.
CSG’s executives say the questions and criticism have been unfair.
They argue the relationship with Shelby County has been successful. The industry publication “Money Management Letter” in March named the Shelby County Retirement System the Small Public Plan of the Year.
It attributed part of the fund’s success to CSG.
“The plan’s willingness to hear about new ideas and venture into asset classes where very few of their peers invest can be attributed to the relationship between David Pontius, its manager of investments, consultant Robert Longfield of Consulting Services Group and the board,” according to MML.
The size of the county’s fund was around $1 billion in the middle of 2008. By the end of the year, it had dropped to less than $700 million.
At a meeting earlier this year, county officials nevertheless said the pension plan remains 100 percent funded. If every county employee retired at the same time, their pensions and benefits would be secure.
Definitely ‘storied’
Meanwhile, the scrutiny of CSG’s performance comes at an inopportune time.
In an Internet presentation to clients Friday, CSG’s CEO, Lee Giovanetti, said his firm is catching the fallout from recent investment scandals like that of Bernard Madoff.
“In today’s environment, with all the national press focused on improprieties and the negative press CSG has received due to reckless and unprofessional journalism, we determined it was essential to protect our firm and our clients to make a public statement as to how our firm is managed, how it’s structured, its historical facts and the programs we have undertaken,” he said.
The Forbes article, which has been read widely inside the Shelby County Administration building Downtown, was one thing Giovanetti seemed to be criticizing.
“CSG has a long and storied history and is deeply rooted in the alternative and hedge fund arena dating back to the mid-1990s,” Giovannetti said.
Much of his presentation addressed the New York events. But the Forbes writers also noted a litany of supposed red flags surrounding CSG’s arrangement with Shelby County.
Titled “Tainted Pension Fund Advice,” the article cited a 2006 report from an outside consultant Shelby’s pension officials brought in to review the setup with CSG. They paid $65,000 to Benchmark Financial Services to conduct the review.
It described the arrangement as riddled with conflicts of interest and non-transparency.
Among the claims:
“The board of the (county’s pension) fund has been relying upon an investment consultant subject to myriad conflicts of interest for objective advice. … These conflicts of interest, as well as the compensation derived by the investment consultant from money managers the consultant is responsible for evaluating for the fund, have not been adequately disclosed to the Board.”
“As detailed throughout the report, the investment consultant’s advice and recommendations … has been found to be deficient.”
“The contract between the consultant and the fund (at the time the report was prepared) does not stipulate the fiduciary standard of care to which the consultant will be held and does not detail the professional responsibilities or duties of the investment consultant.”
CSG prepared a written response shortly after the report was issued. The company struck back hard.
“The report does not contain any allegations that the fund suffered losses as a result of any wrongdoings of the fund fiduciaries,” CSG’s response reads. “The report is used as a platform by Benchmark to publish its obviously biased views against investment consultants, alternative investment strategies and active management strategies.”
No knee-jerk decisions
The company’s response to the assertion its advice has been deficient was to note Shelby’s pension fund had an average annual return of 7.4 percent from September 1999 through September 2006.
The company’s response to the claim that its duties and responsibilities weren’t clearly spelled out is, while it did not have a comprehensive document listing manager guidelines and an investment policy, the fund’s decisions were made after intensive periods of study and research.
Responding to the conflict of interest assertion, a memo prepared by Shelby County staff answering the Benchmark report conceded that certain facts about CSG and its subsidiary broker-dealer were not disclosed and should have been.
The Shelby County response says the county should have been told more about CSG’s broker-dealer. But the county response adds that the broker-dealer’s involvement doesn’t appear to have hurt the fund in any way and may have saved it money.
The Benchmark report also represents a basic philosophical difference over some of the ways CSG does business. It suggested CSG was steering too much of the county’s pension assets – and subsequently collecting more than necessary in fees – into what are called “fund of funds” investments.
A fund of funds investment is comparable to a mutual fund. A mutual fund is like a basket with many investments inside. The hope is that if one investment in the mutual fund starts to slip, enough bright spots are elsewhere in the basket to make up for it.
The Benchmark report argues the county’s pension fund was involved in too many fund of funds arrangements and their elaborate nature made CSG’s fees difficult to analyze.
“While the fund of funds approach permits diversification into a greater number of funds than the direct approach, five fund of funds appears to be an unnecessary diversification,” the Benchmark report reads. “It is impossible for any one manager to significantly add value, and it seems likely the vast number of managers will result in, at best, a market rate of return net of fees, with significantly greater investment and operational risk. In our opinion, at most, one fund of funds would be advisable.”
CSG’s response was that those issues were talked about with the pension staff and the decisions were made cooperatively.
“The report concludes that five fund of funds appears to be an unnecessary diversification,” CSG’s response reads. “CSG and staff concluded that the added diversification was appropriate in view of the board’s inexperience with hedge fund investments.”
Not over yet
That scrutiny is reflected in recent coverage of CSG in Forbes, The New York Times, The Wall Street Journal and elsewhere. And it’s an unwelcome visitor for a company that operates in a complicated corner of the financial industry.
Giovannetti told The Daily News his firm has never sought much press coverage.
“We’re sick and tired of all this publicity,” he said.
When Forbes called, CSG was told the magazine wanted to write an article about the pension industry. The company was told CSG would be the centerpiece of the story.
“We were told it wouldn’t be a flattering article because of a lot of (questionable) things going on in the industry. And that is a fact,” he said. “So we said we’d participate on one condition: They come down to Memphis, spend some time with us, and show us they’re interested in our operation.
“Our position is we didn’t see much new (criticism) in there.”
Rehash or not, one result of the article is it appears to have set a larger chain of events in motion. Those events include tough questions about CSG and whatever action could come next.
