Flanigan responds
Denise L. Nappier's Jan. 22 letter to P&I ("Defending dismissal"), in response to your Jan. 8 editorial, is disingenuous at the very least. Ms. Nappier has not responded to a similar editorial by The Hartford Courant, but the facts, in my opinion, are exactly the same. In fact, ironically, the problem between Ms. Nappier and I was caused because of perfect communications between us, although the media did question her own general communications skills.
My letters to Ms. Nappier, dated Dec. 10, and to Steven Hart, chairman of the Investment Advisory Council, dated Jan. 3, both covered by the media, continue to directly counteract Ms. Nappier's statements.
As stated in my letter especially to Mr. Hart, there was only one issue that raised a disagreement between Ms. Nappier and myself. There were two sets of corporate bonds in the fund: one from Mitchell Hutchins, a management firm that retreated from its own business, and Triumph Capital, a Boston firm that was under federal indictment. Very shortly after my arrival as chief investment officer, Ms. Nappier insisted that certain bonds be sold, and the assets deployed to a new minority manager program.
I disagreed because the market for corporate bonds was in decline and most likely could have caused serious losses to the fund. My fiduciary obligations demanded that I protect the interests of the beneficiaries and taxpayers, many thousands of whom are working-class minorities. Plus the strict due-diligence policies and processes to hire any new managers, which I was developing, were not possible to be put fully in place in so few weeks at a highly troubled fund, which also suffers currently and for the foreseeable future from a negative cash flow problem.
I was stunned to discover that Triumph Capital had sold a significant amount of bonds, and immediately started an investigation as to the source of the instructions. In discussion with the court-appointed receiver for Triumph Capital, we considered issuing a subpoena for the records and a profit-and-loss statement from Triumph. Additionally, I requested detailed information from the treasurer's office regarding all persons who were being compensated, directly or indirectly, through the pension fund management budget.
Within a matter of days, and before any of this critical information was received, Ms. Nappier summarily dismissed me, without notice, warning, cause, or any explanation that made any sense whatsoever. Dismissing me without any reasonable explanation defeats her claims to personnel discretion, and some officials have been known to use the umbrella of personnel policies to try to mask their wrongful actions, and then cast innuendoes about others.
Thomas E. Flanigan
Albany, N.Y.
Sharpe's real view
In a Jan. 8 letter to the editor, Ron Surz stated, "According to William F. Sharpe ... point-in-time style analysis is superior to the method he created." As you might imagine, this blanket statement came as a surprise to me since it misrepresents my thoughts on the issue.
My consistent position concerning various methods of style analysis has been that different questions may call for different technologies and that a method is only as good as its underlying economic model and the estimation of its relevant parameters. In a great many applications, returns-based style analysis proves superior to a point-in-time analysis based on composition data, given the difficulty of identifying the underlying economic influences on a security-by-security basis. This is especially true when the focus is on the choice of investing with a fund or manager for a future period of more than a very few months.
I covered these matters in substantial detail in a 1995 interview published in the Dow Jones Fee Advisor, "Setting the Record Straight on Style Analysis." It is available on my website at www.wsharpe.com/art/fa/fa.htm.
I examined the slides from that presentation and have reiterated my thesis directly to Ron. He has indicated that he was indeed mistaken and apologized for the error. I thank him for doing so.
William F. Sharpe
STANCO 25 professor emeritus
Stanford University
chairman
Financial Engines Inc.
Palo Alto, Calif.
Surz mistaken
I was mistaken in my Jan. 8 letter to the editor in writing that William F. Sharpe had stated that point-in-time style analysis is superior to the returns-based method he created. My sincerest apologies.
Ronald J. Surz
president
PPCA Inc.
San Clemente, Calif.
Free-float adjustment
As the effect of prospective changes in international index composition are now being debated, it may be a good time to reassess the wisdom of indexation as an international equity strategy (Pensions & Investments, Nov. 27, "MSCI's proposed index changes could roil stock markets").
Domestically the case for passive management is clear, though not necessarily agreed, and index turnover is modest. Internationally factors such as free-float treatment are causing a reassessment of the composition of some indexes.
The theory behind the passive approach argues that the index is the market. This makes certain assumptions that, although arguably reasonable domestically, do not stand up internationally. The most obvious fracture is the free-float adjustment. How can parts of the market be there one moment and not the next? Beyond this, though, are such factors as the extent of free flow of capital and economic management in different countries. If global market participants have to play by different and changing rules, the theoretical underpinning of the passive approach seems to weaken.
Active management, focused on individual company selection, can add value, not only in the evaluation of companies but also in the avoidance of inefficiencies in international index construction. It is an active manager's dream that "fundamentally overvalued" companies with large index weightings be reduced in size in the index. Who buys the shares that must be sold? It is admirable that changes are introduced in stages, but what sense did it make in the first place to be forced to buy more stock than was actually available?
Robin Norton
manager, institutional marketing
Harding, Loevner Management LP
Somerville, N.J.
