Idaho board fires Strong

Endowment fund fears investors may bail

By KATHLEEN GALLAGHER kgallagher@journalsentinel.com, Journal Sentinel

Thursday, November 13, 2003

The Idaho Endowment Fund Investment Board said Wednesday it has fired Strong Capital Management Inc. as one of its investment managers.

In announcing the decision, a board official said he was concerned that mutual fund investors may pull large amounts of money from Strong’s funds and hurt the remaining shareholders.

Strong had lost about $750 million through October — less than 2% of its nearly $43 billion of assets — since New York Attorney General Eliot Spitzer in early September accused Strong and three other companies of giving special trading opportunities to a hedge fund.

“We remain focused on delivering value-added investment performance to our clients,” Strong spokeswoman Stephanie Truog said Wednesday.

But Idaho’s move to yank $32 million out of Strong is a chilling reminder of the damage investors acting out of psychological, rather than fundamental, motives could inflict on the Menomonee Falls- based company.

Strong has found itself in the center of an ever-widening probe of the $7 trillion mutual fund industry since Spitzer’s office on Oct. 30 singled out founder and Chairman Richard S. Strong. Spitzer’s office said it plans to take action — it didn’t rule out criminal charges — against Richard Strong over accusations of profiting by about $600,000 for himself, family and friends from making improper trades in and out of funds managed by his company.

“The real irony here is that the same thought process Dick Strong was allegedly applying to his own funds in trying to get an incremental edge has the potential to cause real disruption to his funds as investors attempt to get an incremental edge over one another by trying to get out before anyone else, without regard to the portfolio manager or any fundamentals of the fund,” said Michael R. Bostler, senior consultant at Alpha Investment Consulting Group LLC in Milwaukee.

Idaho had $32 million of its $700 million endowment fund, which benefits public schools and other educational institutions in that state, invested in Strong’s small company value investment product managed by Charles Rinaldi, who runs the Strong Advisor Small Cap Value Fund.

Rinaldi’s fund has been one of the best performers in Morningstar Inc.’s small-value category, gaining nearly 17% a year from its 1997 inception through Aug. 31.

Matthew J. Haertzen, manager of investments for the Idaho endowment fund, said the threat of investors pulling money out of Strong funds, rather than the accusations against Strong directly, prompted the decision to bail out of Rinaldi’s fund.

“The problem is no one wants to be the last one there,” Haertzen said. “If you stay and everyone else leaves and the funds have to sell securities to meet redemptions, there’s a chance the stocks you own will be depressed.”

Said Bostler: “It’s a tough call because you end up evaluating the situation based on what you think other people will do. But cash flows do have some meaning in this business, and you have to realize that.”