Ka Wai Ola - Office of Hawaiian Affairs, Volume 22, Number 6, 1 Iune 2005 — Auditor's report: OHA's money-managers come at a high cost [ARTICLE+ILLUSTRATION]

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

4 \. no ai kākou. /\ On Jan. 16, 2003, the board A. A.hired Goldman Sachs and Frank Russell to serve as OHA's two financial managers. Eaeh company was given half of OHA's Native Hawaiian Trust Fund, whieh at the time amounted to $125 million eaeh. 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 first and second 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. 1 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 eame out with her audit of OHA in April. 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 1,032 reporting funds in 2002 was 0.274 percent. Smaller

funds (such as the Native Hawaiian Trust Fund) with assets helow $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 1 1 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 and the net of the fees paid, and that it explore alternative means of investing portions of its portfolio - all of whieh 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 eolumn. Stay tuned. I mua Hawai'i nei. You ean see the full version of the 2005 OHA Audit on the State Auditor's website at www.state.hi.us/auditorWears/ 2005reports.htm. For more information on this article, please eall Trustee Akana at 594-1860.

Rowena Akana

Trustee , At-large