WASHINGTON - The nation's top pension cops need a class in investing.
An analysis of their personal investment portfolios suggests they've learned little about such concepts as diversification, or long-term investment planning.
When Pensions & Investments asked independent financial planners to analyze the latest annual financial disclosures filed by Pension Benefit Guaranty Corp. Executive Director David M. Strauss, Assistant Labor Secretary E. Olena Berg and Labor Secretary Alexis M. Herman, their comments weren't pretty:
Mr. Strauss' investment portfolio is "higgledy-piggledy" and lacks design.
Ms. Berg's is so conservative you would think she'd be counting on Social Security to finance her retirement.
Ms. Herman seems to lack confidence in stocks.
Mr. Strauss' portfolio of between $247,000 and $1.2 million is split almost evenly between stocks and bonds. He has a large assortment of large and midsized stocks, as well as fee-based and no-load mutual funds, but very little exposure to small-capitalization stocks, virtually no exposure to emerging markets, no real estate and no international bonds.
"There is no design here. He has just bought higgledy-piggledy," said Lynn Hopewell, president of The Monitor Group, a Fairfax, Va.-based financial planner. "No investment adviser I know would design a portfolio like this."
Ms. Berg invested largely in conservative money market accounts and bank certificates of deposit, which typically don't keep pace with inflation.
"It is ironic that the government official who is in charge of (overseeing) the nation's pension plans doesn't have a greater percentage of her pension assets invested for the long term in equities," said Susan G. Freed, president of an eponymous Washington-based financial planning firm.
"She should know as well as anyone that Social Security might not be there to bail us all out and, even if it is there, it won't provide enough income," she observed.
Ms. Herman, in contrast, has about 80% of her investment portfolio (assuming the midpoint of the ranges shown on her disclosure form) valued between $588,000 and $1.3 million, in a single, illiquid commercial real estate limited partnership in Washington, 7.5% of the remainder in life insurance, and the balance in money market accounts and short-term bond funds, with just a sprinkling of stocks.
"She will either get rich or poor," through her dependence on that one investment in one city in one element of the the economy, said Harold Evensky, principal with Evensky, Brown, Katz & Levitt, a Coral Gables, Fla.-based financial planning firm.
"If she is lucky and gets rich, it won't make a bit of difference on how the other 20% has done. If the real estate tanks, it makes a huge difference on how her nest egg performs."
Mr. Strauss' portfolio
Many of the mutual funds in the collection of the 47-year-old Mr. Strauss, who rents an apartment in Washington, not only overlap each other, but also are more expensive than their peers, noted Jim Raker, a spokesman for Chicago-based Morningstar Inc., the mutual fund rating service.
To be sure, Mr. Strauss' disclosure form reveals such stellar names as the Oakmark fund, the Dodge & Cox Stock fund and Third Avenue Value fund, as well as dozens of blue-chip stocks such as General Electric Co., Microsoft Corp., Intel Corp., Merck & Co. Inc., McDonald's Corp., Gillette Co. and Johnson & Johnson Inc.
But it also shows he might be attempting to time the market. On just one day last year, March 15, he unloaded 16 stocks valued between $16,016 and $240,000, including several he had purchased just weeks earlier.
"As much as I am against an individual holding individual stocks, I am 10 times more against trading," Mr. Evensky said.
A PBGC spokeswoman said Mr. Strauss has used Merrill Lynch & Co. to manage his investments for the past 20 years, primarily through a couple of wrap accounts. In March 1996, Mr. Strauss' account executive at Merrill Lynch had "liquefied some of his stocks to set up a new wrap-around account," she said.
"If anyone audits an ERISA plan, they would expect to see an investment policy. I would think he would want to see the same on his own portfolio," Mr. Evensky noted.
Irony for Ms. Herman, Ms. Berg
The irony is that Ms. Herman, who took office earlier this year, has said she wants to use her position as a bully pulpit to improve retirement security for women.
Ms. Berg, who has headed the Labor Department's pension office since June 1993, also frequently stumps for employers to better educate their workers on financial planning for their old age. The 1996 disclosure form filed by Ms. Berg, the nation's top pension cop, shows she has virtually no personal savings invested in stocks, which have proven to be the best investment for the long run.
Instead, Ms. Berg's investment portfolio, estimated between $348,000 and $795,000, including several individual retirement accounts, is locked up in money market accounts. In addition, she has between $15,001 and $50,000 in a checking and cash management account, which she probably uses as an emergency stash.
Ms. Berg, whose top five holdings include a home in Sacramento, Calif., valued between $250,001 and $500,000, has only one investment in the stock market - the Wells Fargo Stagecoach Asset Allocation Account - outside of her two employer-sponsored retirement plans.
It was not possible to tell if Ms. Berg has any exposure to the stock market through the Federal Thrift Savings Plan, in which she has assets valued between $50,001 and $100,000, because she did not disclose how she has invested that money. That plan offers a Standard & Poor's 500 Stock Index fund.
State fund coverage
Ms. Berg does have exposure to the stock market through her previous employer's retirement plan. Previously the deputy treasurer for California, she is covered by the California Public Employees' Retirement System, which has more than 60% of its $119.7 billion in assets invested in stocks. Her account balance was valued at between $15,001 and $50,000 at the end of 1996, according to her disclosure form.
"If anything, her familiarity with the markets, and her level of sophistication . . . should make her very comfortable in investing in stocks," Ms. Freed commented. She noted stock mutual funds would allow Ms. Berg to get exposure to the stock market without risking any conflict of interests as a federal regulator.
Ms. Berg was on vacation and could not be reached for comment.
7.5% in life insurance
Analyzing Ms. Herman's portfolio, Mr. Evensky noted that based on the median value of her holdings, she has 12.9% of her assets in fixed-income and money market accounts (including 7.5% in a whole life insurance policy) and only 7.4% in stocks, through two individual stock holdings and investments in five mutual funds.
Moreover, most of the mutual funds she has selected - Berger 100 Fund, Founders Blue Chip Fund and the Lord Abbett U.S. Government Securities Fund - are rated only two or three stars out of a possible five by Morningstar.
"These funds tend to be for the most part mediocre . . . and not performing particularly well compared to their peers," Morningstar's Mr. Raker said.
Her one international mutual fund, the Phoenix Worldwide Opportunity Fund, has a four-star rating by Morningstar, but Mr. Raker noted that because the fund can invest worldwide, including the United States, "she might not be getting much diversification." The fund has 25.8% of its assets invested in North American stocks, according to a July 31 Morningstar profile.
Ms. Herman "comes across as someone who doesn't have much experience in investing in equities. She may not have a great deal of confidence in stocks, or her ability to select equities," Ms. Freed noted.
She also noted Ms. Herman's lack of attention to her financial affairs is evident from the 9.125% mortgage she is paying on her home in Mobile, Ala., even though interest rates have dropped and she could knock off a couple of percentage points by refinancing. But, Ms. Freed noted Ms. Herman might have missed the opportunity to refinance because she converted her home to a rental property in January last year, and interest rates on rental properties tend to be higher than on owner-occupied residences.