James L. Gammon confirmed Friday, that he will resign from Loews/CNA Holdings, effective June 25, and may join a mutual fund company.
Gammon, 51, a senior vice president and senior portfolio manager of the Loews Corp. unit, said he would not disclose his new role until after his departure from Loews.
The portfolio manager said he will be replaced by Lisa W. Hess, a senior vice president of Loews/CNA. Hess, who manages mortgage-backed and asset-backed securities, will continue in her current role. She will begin management of the municipal portfolio late next week, Gammon said.
Officials at Loews Corp. in New York, declined to comment on Gammon's departure or his replacement.
Changes in Loews/CNA's strategy in managing municipals played a key role in his decision to leave the company, Gammon said.
After Jan. 1, because of changes in the company's accounting and tax rules, it was "not desirable to be in long bonds that can and do" have price volatility, he said.
In addition, Loews/CNA believes that interest rates and inflation are on the uptick in the near-term, Gammon said. This has led the firm to shorten the duration of its tax-exempt portfolio, he added.
The portfolio currently consists of high-coupon bonds with an "extremely short duration" of about five years, he said.
Gammon, who spent more than 20 years managing municipals at General Electric Co. before joining Loews, has traditionally been known as an aggressive buyer of long-term bonds and an active trader of those securities.
"It became obvious that for an extended period of time, the portfolio would be managed extremely conservatively," Gammon said.
"What I'm good at is not what they need anymore, so we came to an amicable parting of the ways," he said in a telephone interview from the Four Seasons Olympic Hotel in Seattle.
"It's simply something that's not going to be done at Loews for a long time. That type of risk is not appropriate for an insurance company," he said.
Gammon, who was attending the National Federation of Municipal Analysts' annual conference in Seattle last week, was awarded the group's 1993 Career Achievement Award for "consistently superior performance in portfolio management and his fundamental support of credit research in that process," at a ceremony last Thursday.
In the five years ended Dec. 31, 1992, the Loews/CNA municipal portfolio posted a total rate of return of 67.5%, Gammon said.
This compares with an average total return of 57.29% for the 85 general municipal bond funds tracked during the period by Lipper Analytical Services Inc. In the 10 years ended Dec. 31, 1992, Loews/CNA posted a 279.97% total return compared with an average total return of 172.97% for the 38 general municipal bond funds tracked by Lipper for the period.
Because Loews/CNA's portfolio does not constitute a municipal bond fund, its total return performance is calculated in-house by Loews accountants based on the Lipper criteria.
Hess' expertise in the mortgage-backed arena led to her selection to manage the municipal portfolio, Gammon said.
"The majority of the bonds that we own are mortgage related and that is her expertise," Gammon said. He added that the other seven portfolio managers and analysts who worked with him on Loews/CNA's tax-exempt portfolio, are "very needed and very wanted. I'm told there will be no changes."
Rumors of Gammon's departure from Loews/CNA had been circulating the municipal market since the middle of last week. Some market sources speculated that Gammon was leaving because Loews/CNA was reducing its municipal holdings. Others said he was leaving to start up his own firm, and others attributed the move to an overvaluation of Loews' muni portfolio.
Gammon strongly defended the valuation of the municipal portfolio.
"Our portfolio is valued by the Merrill Lynch pricing service," said Gammon, who has been wit Loews since 1984. "I'm not involved. We don't price it ourselves It's done independently."
Since the beginning of the year Loews/CNA has sold more than $5 billion of municipal securities, decreasing the size of its portfolio from approximately $12 billion to about $6.5 billion, Gammon said.
Bonds included in those sales were sold at prices of 3% to 30% higher than their valuations. On average, the bonds were sold at prices of 8% higher than their valuation in the portfolio, Gammon said.
"It's just an inaccurate comment," on any valuation discrepancies, he said.
Asked whether he expected Loews to be a dominant player in the municipal market after his departure, Gammon replied: "The mutual funds are now the biggest players in the market and they will be the dominant factor."