Pension Fund Demands Will Reform Market

December 27, 1987|JAMES FLANIGAN

The federal government just before Christmas named Wells Fargo Investment Advisers to manage the retirement money of more than a million of its employees, lending significant weight to the growing belief that investment managers can't beat the market so they might as well stop trying.

The Wells Fargo group specializes in index investing, which means it doesn't attempt to pick stocks or bonds that will outperform the market but invests instead in stocks and bonds that precisely mirror Standard & Poor's 500-stock index and the Shearson Lehman bond index. It plays for a tie, and that's a trend.

Elsewhere in the business of managing $2.1 trillion in pension fund assets, index funds are growing rapidly and now account for almost 20% of all stock investments, reports Michael Clowes, editor of Pensions & Investment Age, the trade paper.

What's going on? One of those seemingly obscure developments that could have important consequences for the stock market. The trustees of pension funds--the corporations and state and local government agencies--are pushing for reform. They are impatient with money management fees, and costly trading of pension portfolios, because the evidence says they're not getting the performance they are paying for.

A recent study by Wilshire Associates, the Santa Monica research group, found that from 1979 to 1986, money managers added no value to the average portfolio over and above what could be achieved by index investing. The average manager did make some extraordinary gains, the Wilshire study reported--perhaps 0.4% of portfolio value--but that was eaten up by fees, and brokerage commissions.

Talk about the Emperor's New Clothes. The institutional investor subjects of the study have the finest in research backing them up and charge high management fees--$75,000 a year to manage a $10 million pension portfolio.

They are also the institutions that trade stocks and bonds continuously. The typical professional turns over 80% of a pension fund's portfolio every year, generating ample brokerage commissions but less than extraordinary returns for pension clients.

Want Less Turnover

The clients are angry. It has not escaped their notice that outfits like Wells Fargo, since they don't do any stock picking, charge fees that are less than half those of the performance funds.

And the clients want less turnover. The trading is doing them no good and it is unsettling industry, causing prominent people to talk of regulation to force pension funds to hold stocks for longer periods.

It all adds up to a reforming trend that will tend to slow the market's pace and make it more hospitable to investors who buy and hold securities for the long term.

What does that mean for small investors? That their accounts will be pursued even more aggressively by brokerage houses; with professional customers questioning the bill, the commission-paying amateurs look all the more appealing. Yet, conversely, because big investors will be less willing to pay for it, there may be less brokerage house research to help the small player.

So what should small investors, who cannot buy all the stocks in the Standard & Poor 500, do as the market and the economy head into an uncertain year? The simple answer remains, try to buy a good company at a low price.

There just may be a lot of value around now, says market analyst Michael Metz of Oppenheimer & Co. Metz sees value in companies with high cash balances and low stock prices, mentioning examples such as Bethlehem Steel, the advertising agencies Foote, Cone & Belding and Interpublic, Murphy Oil, Boeing.

Boeing Co., the world's leading aircraft maker, is the standout there. The Seattle-based company has almost no debt, more than $4 billion in cash, and a net current asset value (current assets minus current liabilities) of $2.8 billion. Boeing, in fact, can be bought today for less than the value of its assets and cash.

True, aerospace is going into a downturn, and even Boeing can have problems. But you don't have to be a professional to take a second look when such a company sells for less than the price of its assets.

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