In your Nov. 28 Opinion Page column, "Election link to corporate governance," you refer to Champion International Corp.'s chief executive officer, Andrew C. Sigler, as a "dinosaur in business"! I disagree with your assessment of Mr. Sigler.
As you know, Wall Street has never been known for taking a long-term view; therefore, during the past seven years, as Champion has been upgrading its paper mills, Wall Street has been complaining that Champion's capital improvements were killing earnings. Now, since the capital program was completed last year, production is up at Champion, and costs are down. Because new capacity is years away, Champion's mainstay, printing and writing paper, should prosper as paper prices are finally rising. Mr. Sigler's long-term view and strategic planning were right on track.
Through the years, Mr. Sigler has been very supportive of the corporate governance movement. During the late 1980s and early 1990s, Mr. Sigler and the then-treasurer of Connecticut, Francisco L. Borges, arranged meetings between a group of five public pension fund officers and four corporate chief executive officers to discuss the role of the board of directors.
One of the key accomplishments of these sessions was the unanimous agreement by participants with regard to the acceptable number of inside directors on boards and the near unanimous agreement on the definition of an independent director.
The group addressed many corporate governance issues, including the relationship of the board to management, monitoring the board, evaluation of chief executive officer, interlocking directorships, independent directors, size of boards, and committee structure. Also, there was much discussion on how performance should be measured and evaluated, and how public pension funds and corporations should communicate.
In retrospect, these meetings were a good beginning for a number of reasons. There was a willingness to listen and the development of genuine trust among those present - they were willing to work together! After these meetings and through the ensuing years, constructive dialogue continued on corporate governance among members of the group.
The corporate governance movement has forced closer examination of executive compensation - trying to link management pay with share-price performance. In addition, the movement has led to proxy rule changes to improve corporate communication with shareholders, including comparisons of shareholder returns with equity benchmarks.
Andrew Sigler is a leader in facilitating the discussion of corporate governance issues and in personally proposing and accepting changes for the benefit of corporations and shareholders.
Maryellen F. Andersen
Investor and corporate relations
State of Connecticut
Office of the Treasurer
Both Jon Cristopherson and William Sharpe raise valid points in the Nov. 14, page 35 news story on style analysis and are right in their own way. Here are some thoughts on style analysis and its use.
Mr. Christopherson observes that if a large number of explanatory indexes are included in the style analysis, some assets not contained in the portfolio will almost certainly be implied by the analysis. As Mr. Sharpe correctly points out, this is caused by style analysis determining the effective asset allocation of the fund. In practice, this issue is best dealt with by an appropriate choice of explanatory indexes. For example, the returns of the domestic equity portfolio of a large pension plan will be almost always be well explained by four indexes - a large-cap growth index, a large-cap value index, a small-cap growth index and a small-cap value index. A value manager's portfolio is best explained by a number of economic sector indexes that can be agglomerated into a value index, etc.
There is an unfortunate tendency among purveyors of quantitative technologies to attribute magical properties to these technologies - and in particular to engender the belief that the use of technology obviates the need for critical thinking. We are in complete agreement with Mr. Christopherson's view that style analysis is not a substitute for a thorough understanding of a manager's investment process. However, when used intelligently, the results from style analysis are surprisingly close to what can be achieved by a security level examination of the portfolio, and consequently style analysis can be a very useful step in the investigation of a manager's process. One important caveat is in order: some implementations of style analysis are better than others. A simple test of the quality of a program is to input an index as the portfolio to be analyzed and then maximize the size of the set of explanatory indexes while ensuring that the index under examination is included in this set. A well-written program will attribute all the return to the index itself. A more refined version of this test constructs portfolios using linear combinations of index returns. The analyzer should return the appropriate linear combination.
We have seen at least one program that could not pass this simple test, and we wonder if Mr. Christopherson's results can in part be explained by this phenomenon.
The question of how much history to use can be dealt with in one of two ways. One is to weight observations so that recent observations are weighted more heavily than old ones. The other is to use higher frequency data - 60 weekly returns instead of 60 monthly returns - though in reality weekly and daily data are harder to get than monthly data.
The use of style analysis often enhances communication between an investment manager or consultant and a client because some types of fundamental analysis, such as that derived from factor models of security returns, are inherently difficult to communicate.
More than 30 years ago the great numerical analyst Richard Hamming wrote: "The purpose of computing is insight, not numbers." The wisdom of this simple adage is as relevant to style analysis as it is to numerical analysis. We advocate the intelligent use of style analysis, but urge users to ensure that the results can be corroborated by the systematic application of common sense.
Thomas K. Philips, Ph.D.
RogersCasey and Associates
In his Dec. 12 letter in support of continuing the Social Security program, Mel Aaronson states it isn't helpful to talk of civil war between father and son (a phrase William G. Shipman used in his Oct. 31 Commentary Page article). Yet in the same letter, Mr. Aaronson appears to be mustering troops for the older generation.
He argues in favor of the program because it provides a more handsome return on investment than that generated by traditional investment vehicles available in the open market. This is a great argument if you're a recipient. It's not so great if you are one of the may working people whose families do without because the government takes money out of your pocket to generate artificially high returns for someone else.
Mr. Aaronson points out the system is the most popular entitlement program in the country. This is easy to understand because its phenomenal returns are enjoyed by a large number of recipients. However, his conclusion that it will be with us forever is incorrect. The people of intelligence and good will that he believes can continue funding it in a sound manner know full well that the program is, at its core, incredibly unsound. Those who truly understand it recognize it for what is a government handout - not a retirement and insurance plan as described by Mr. Aaronson. Handouts continue to add to the annual budget deficit and our national debt, which in turn threaten the future of our nation. If we are to eliminate these burdens, we must stop fostering the expectation that the government owes its citizens a living.
Mr. Aaronson may not want to talk about it, but the troops are rallying on all sides. Making the Social Security system voluntary, as advocated by William Shipman in his commentary, is the only way to prevent the situation from escalating to all-out war.
The Nov. 14 investment management consultant directory did not include Institutional Property Consultants Inc.
IPC clients are endowment funds and public, corporate and Taft-Hartley pension plans, representing $250 billion in total assets and $12 billion in real estate assets.
The firm tracks virtually all real estate investment managers in its proprietary in-house database.
I'm the client contact at (619) 458-1120.
Barbara R. Cambon