Collins was at peak
We appreciate the considerable effort put in by the author of the page one article titled "Clients, staff flee Collins Associates," published in the May 15 issue of Pensions & Investments.
We do note, however, that assets under management and commitments were at an all-time high when we left Collins, and fund performance exceeded benchmarks on an inception-to-date basis across each of our five asset categories.
In 1999, performance was particularly strong: The asset-weighted aggregate across all asset categories exceeded the benchmark by 780 basis points net of fees.
Jim Berens and Jane Buchan
View of IBM challenger
Vineeta Anand's May 1 article, "IBM's 1999 pension income bump comes from earnings" is on track, but it vastly understates the vapor profit problem.
The article said IBM's pension fund contributed 5.4% of IBM's pre-tax earnings of $11.8 billion. Besides the article, an accompanying P&I editorial points out this money is "in a trust, not easily gotten at by the sponsor." Therefore, "pension income `is of lesser quality than the rest of . . . earnings'."
I only wish to point out that when year-over-year profit growth and after-tax profit is considered, the magnitude of the problem becomes enormous: 11.5% of IBM's after-tax profit and 39% of IBM's year-over-year profit growth are accounting rule vapor profit from the worldwide pension fund surplus after the one-time sale of IBM's Global Network to AT&T is excluded.
It is appropriate to consider what fraction of after-tax profit and after-tax profit growth pension income is providing. An actuary friend of mine who is an expert in FAS 87 says the pension money reported as income is not taxed along with other company income. Therefore, the report of profit from the pension fund goes right to the bottom line after taxes. FAS 87 income is the perfect form of income: No tax, no salaries, no expenses, no product to build, no sales to worry about, no inventory, no advertising, no workers. It's just income, right on the bottom line after taxes.
Of course, there is one problem. IBM can't touch the money. But as long as the stockholders don't understand that, management looks great.
Year-over-year profit growth is the key parameter for determining stock price-to-earnings ratio. Thus, the stock price is very sensitive to the report of vapor profit growth, and stockholders are at risk if companies pad the report of profit with money that must remain in the pension fund.
Since pension fund surplus is one of IBM's fastest growing units, the problem is compounded. For example, IBM's actual year over year profit growth was only 6.1% when the one-time sale of the Global Network and the vapor profit are excluded, and this is much less than the 22% growth IBM touted in the annual report.
The editorial notes that the SEC issued an accounting directive requiring IBM and other companies to fully disclose pension contributions in the management discussion section of the annual report. The editorial then notes that IBM failed to follow this directive and that the SEC shrugged off IBM's failure to follow the SEC directive.
I believe that if IBM clearly explained that 11.5% of its profit and 39% of its profit growth are not transferred to IBM and must remain in the pension trust fund, the motivation to slash pensions would be substantially eliminated. There is a $17 billion surplus in IBM's $73 billion pension fund, and the surplus nearly doubled in 1999. IBM has not added money to the trust fund in several years. The major driver for slashing retirement pay for employees is the fact that IBM can pad its profit and profit growth from the pension fund surplus while keeping the padding secret from stockholders. The cash balance plan conversion took at least $100,000 of retirement pay away from each of nearly 100,000 employees, or about $10 billion in all. IBM is robbing employees to deceive stockholders.
Although the profit IBM is reporting is a vapor profit, the damage to the IBM corporation and to IBM employees is real. Padding company profit with a report of money that still remains in the pension fund is not good reason for employees to be impoverished in their old age. Employee morale and IBM's reputation for honesty were both hurt.
Because of these considerations ISS, Proxy Monitor, Marco and Proxy Voter Services all recommended that their institutional clients vote for the stockholder resolution I wrote. That is why the resolution got a vote of nearly 300 million shares or 28.4%. This was one of the largest votes ever on any stockholder resolution at IBM.
I agree with P&I that the SEC must follow through on its requirement that management disclose the boost to profit and the contribution to profit growth from the pension fund. I would further recommend that the SEC and FASB eliminate reporting of pension fund money as corporate profit. I believe IBM's motivation to slash pensions would evaporate if it could no longer report pension fund money as IBM profit. IBM would then find value in using its huge self-funding pension fund as it was intended, as competitive advantage to attract and retain talented employees at no cost to the company.
James Marc Leas
advisory engineer, IBM Microelectronics Division
attorney, intellectual property
I am in writing in response to your March 6 Money Manager Scoreboard survey. Due to a misinterpretation, Gratry & Co. didn't fill out the questionnaire completely and, as a result, our figure was omitted from your ranking.
For the record, our net new business from U.S. institutional tax-exempt clients was $86.1 million, all in international/global equity. That figure would have ranked Gratry & Co. fourth in the table on page 26 for most new net international/global business for managers with $250 million to $1 billion in overall U.S. institutional tax-exempt assets.
William A. Spetrino
marketing & client services
Gratry & Co.
In the May 1 issue on Page 62 is a table detailing minority- and women-owned firms. Paradigm Asset Management, a prominent minority-owned firm, was omitted from this list. . . .I can't readily identify a reason for this oversight. Will you please explain?
associate, business development
Paradigm Asset Management
Editor's note: Paradigm Asset was omitted from the list because the question asking if the company was a minority- or woman-owned firm was not answered.
Excellent article on pension earnings in the April 17th issue ("Pension earnings lift bottom lines," page 3).
Donald J. Segal
The Segal Co.
Ariel Capital's co-CIOs
I am writing to clarify an error that initially occurred when we completed the Pensions & Investments investment adviser profile, appearing on page 36 of the May 1 directory issue.
We inadvertently listed Peter Q. Thompson, senior vice president, director of institutional marketing and client services, as Ariel's chief investment officer.
Our firm employs two chief investment officers. John W. Rogers Jr. is chairman and co-chief investment officer and Eric T. McKissack is vice chairman and co-chief investment officer.
Ariel Capital Management Inc.
The phone and fax numbers for Heritage Investors Management Corp. were not included in the May 1 issue. That information is: phone: (301) 951-0440; fax: (301) 951-4954.
Heritage Investors Management Corp.