Reading Feb 21 editorial, "Lessons of failure," might lead one to conclude that The Travelers' failure as an investment managers was due almost entirely to its inability to achieve the size necessary to benefit form economies of scale.
Examination of the history of The Travelers' management of its investment subsidiaries would lead one to a different conclusion.
Your opinion article fails to mention that since late 1988 The Travelers has experienced massive losses of capital as the result of problems in its real estate investment group. Employees were told, after the fact, that these losses were caused by a lack of diversification as to type and location in the real estate investment portfolio.
Also, your article doesn't mention the reasons for the sale of the Keystone Management Group in 1989 (The Travelers' active bond manager) or the reasons for the sale of Dillon Read in 1990 (The Travelers' active equity manager).
Perhaps it is true these subsidiaries were sold to raise capital to maintain The Travelers' "core business," as Edward H. Budd, chairman and chief executive officer, likes to say, or maybe not.
However, these subsidiaries did not seem to be thriving under The Travelers' management. These sales look like admission of failure to me.
I submit that The Travelers' departure from passive management is merely one more in a succession of failures.
As an ex-employee of The Travelers, I think its failure as an investment manager has more to do with a lack of necessary corporate management skills and a corporate Culture dominated by underwriters and insurance product salespeople than the inability to achieve economies of scale.
William T. George
Studio City, Calif.
Graef Crystal's Dec. 27 Commentary Page piece, "Big shareholders wimp out on exec pay issue," poses the question of who is left to protect shareholders if they won't protect themselves? In short, the answer is many of the same pension funds that were raising compensation and other corporate governance issues a decade ago, when Mr. Crystal was a corporate executive compensation consultant. It appears the only measure Mr. Crystal uses to judge the advocacy of shareholders is whether those shareholders are breaking down boardroom doors and bludgeoning open-handed boards over the issue of excessive executive compensation. It's not that simple. As a single-issue advocate, Mr. Crystal seems to lack a proper perspective from which to judge the quality of shareholder activism.
While I cannot address the broad range of shareholders, I can speak clearly to Mr. Crystal's inaccurate characterization of Taft-Hartley or union pension funds' actions on executive compensation and other corporate governance issues. Mr. Crystal indicates the union pension funds opted not to assist him in preparing a study on CEO-to-worker pay differentials because of a desire to stake a modus vivendi with corporate officers. Such a collaborative effort was never undertaken, for three reasons. First, a number of well-researched studies documenting CEO-to-worker pay differentials in numerous countries already were in circulation. Second, a study that used collective bargaining data as its basis for compensation comparisons by design would exclude a broad range of low-wage non-union companies where CEO-to-worker pay inequities often are the most pronounced. Third, Mr. Crystal wanted compensation for the project, a point he failed to note in his commentary.
While pay for performance is an important issue, our shareholder advocacy has concentrated on creating a corporate governance system that improves management accountability and long-term corporate performance. Issues of director independence and qualifications, confidential corporate voting, unjustified golden parachutes, "poison pills," and other management entrenchment mechanisms have been the focus of our activism. The ability of U.S. corporations to generate long-term returns while contributing to job growth and an improved standard of living is what is critically important to the retirement security of American workers. To this end, our funds will undertake appropriate and necessary forms of shareholder advocacy on a broad range of issues.
Edward J. Durkin
Special Programs Department
United Brotherhood of Carpenters
and Joiners of America
Washington
In regard to the Dec. 27 Portfolio Management article on page 24 about stable-value funds and traditional guaranteed investment contract funds:
I feel the authors' position was biased in favor of traditional GICs.
Let's consider the one year period ending Dec. 31, 1992 - coincidentally, the one where the ostensible advantage (230 points) of traditional GICs was the greatest, according to the article. If plan contributions are assumed to start in 1992, as the authors did, the duration of the traditional GIC portfolio would have averaged 6.7 years over the performance period in question. It would not be fair to compare the performance of a 6.7-year portfolio with a 4.4-year portfolio (the average modified effective duration of the Lehman Aggregate Bond Index during 1992). Furthermore, the index is comprised of more than 50% in Treasury and agency issues with a higher average credit quality than a hypothetical portfolio of GIC issuers and, of course, much lower coupons. Finally, the most critical difference between the two portfolios is the fact that GIC spreads over Treasury issues have tightened significantly. This tightening contributed a significant amount to calculated total return of the GIC portfolio, particularly for the longer analysis periods.
If we were to substitute the Merrill Lynch intermediate term (5-10 year maturity) high quality finance sector (average quality Aa1) for the Lehman aggregate, a much more comparable index to GICs, the mark-to-market return for 1992 would have been reported as 10.47% vs. the 10.8% reported for traditional GICs. If we had substituted the Merrill Lynch intermediate term (5-10 year maturity) high quality finance sector (average quality Aa1), the return for 1992 would have been reported as 10.79%. By choosing a sector of the fixed income universe with more similar characteristics to a portfolio of GICs, we basically close the gap between GICs and mark-to-market portfolios. The performance numbers don't really tell the whole story, though.
The authors mentioned the significant secular trend in GIC spreads over the last five to 10 years but do not reflect this fact in their historical analysis. As insurance company investments have shifted from the wider spread sectors such as commercial mortgages and lower quality private placements toward more liquid investment-grade alternatives, the spreads offered on GICs have converged to and traded through that of comparable fixed-income investments. There is little question that GICs issues over five years ago had a significant yield advantage over investment-grade bonds. However, that advantage is not present today, and until insurance companies revert to less liquid higher yielding assets once again the current condition will prevail.
In light of this fact, any conclusion drawn about the relative performance advantage of investment grade fixed-income portfolios vs. GICs from looking at past performance is rendered totally meaningless.
Joel I. Levine
Vice president,
insurance asset management
global investment management
Bankers Trust Co.
New York
The page 1, Jan. 24 article "IBM offers workers financial advice" bestows "first" status upon IBM Corp.
Specifically, "IBM might be the first U.S. company to actually provide corporate-sponsored financial planning services for its U.S. work force." And, "... possibly the first ... U.S. company to step over the boundary between educating employees to make the right investment choices in their defined contribution plan and providing investment advice through third-party financial planners."
To be sure, IBM may be the first large company, but several of our clients across the country preceded IBM and were the "first U.S. companies" to sponsor investment advisory services to their clients, beginning last September.
We don't know if our clients were preceded by anyone else, but we doubt it.
The employees of our clients have access to all of the services cited in the IBM situation, and then some. For example, employees can have a personal financial plan done, but it's not necessary for them to make that commitment right off the bat. They simply call our "800" telephone numbers and get quick, on-demand answer to relatively straightforward questions about any aspect of their personal financial situation.
Importantly, our clients are most comfortable with the fact that Money Minds' only products are information and advice. We don't deal in any other investment products such as mutual funds, stocks or insurance.
IBM and others are correctly perceiving the problem. Money Minds was created to be part of the solution. Developing and implementing solutions is the primary goal for all of us - IBM, Money Minds and others. "Firsts" are secondary.
Darryl M. Reed
Executive vice president
Director of Financial Planning
Money Minds L.P.
Glenview, Ill.
Graef Crystal in his March 7 commentary has reached up to attack John Welch, CEO of General Electric.
Mr. Crystal is the paradigm of Chomsky's ideological equivalent of the one-fingered typist. He plays the same tune over and over and over.
He has turned one op-ed piece into a cottage industry and the readers of P&I have seen it all.
Why expose us continually to this audible toothache? If you want to know what the bottom of the barrel looks like, read Crystal on Welch.
Michael D. Robbins
'Solo Practitioner'
New York
