In your Sept. 2 edition in the section titled "One Year Later," you profile Jim Paulsen from Wells Capital Management on page 3. The heading of his 9/11 personal reflection is "Stranded in Denver ..."
Based on your story, I'm not surprised he was stranded in Denver. Your story says he was at Stapleton Airport and couldn't get a flight out. Not surprising, given that Stapleton closed in about 1994.
Unsure of AIMR mission
We'd like to think that, as the Congress, SEC, FASB and AICPA (heaven forbid the IRS) contemplate changes to the financial reporting system, they are not beholden to parochial interests. But the fact is, they are. And, we'd like to think the Association for Investment Management and Research is that one professional body of financial analysts that is in search of intellectual truth. But the fact is, it is not. Mr. Burr's Sept. 2 editorial regarding H. Gifford Fong's departure as editor of the Financial Analyst Journal illustrates another side of AIMR, which runs deep and broad.
In Mr. Burr's editorial, one AIMR official was quoted anonymously to say the Financial Analyst Journal is too academic and not practical reading to the average AIMR member. Clearly, this individual does not develop the CFA charter-holder body of knowledge, which is at the heart of AIMR's problem, and illustrates the Jekyll-and-Hyde nature of the organization.
Each year, the CFA exams contain a larger and larger body of knowledge that candidates are supposed to know, which now includes mathematical derivative functions of the Black-Scholes option pricing formula as just one example. What money manager or financial analyst uses mathematical derivative functions of the B-S option pricing formula? Does this ring of "too academic and not practical"? It is safe to say that individuals who received their CFA charters 15 years or more ago might not be able to even pass the Level I exam today. Indeed, these individuals might not be able to explain basic modern portfolio theory. What does this say about CFA charter holders?
Along this line, recently the issue of required continuing education for existing CFA charter holders caused a flap. A referendum from AIMR leadership to the AIMR membership requiring continuing education was defeated. Why? After all, lawyers, accountants, real estate agents, insurance agents, financial planners and even stockbrokers have required continuing education. Could it be the older charter holders are not up to the task of learning the oppressive body of knowledge they require newer charter holders to know?
AIMR seems intellectually dishonest, with a decidedly "fundamental analysis" bent. Many portfolio managers and analysts use technical analysis and charting in their decisions. These subjects are summarily brushed off, and the AIMR-approved study materials state they don't fit within the context of efficient market theory. (Who said the markets were efficient? Ask Jim Cramer.)
And, of the four market models that fall under the umbrella of modern portfolio theory, only the capital asset pricing model and arbitrage pricing theory are discussed. Merton's time-varying beta model is not even touched upon. Astonishingly, Barr Rosenberg's multifactor attribution model is dismissed in short order as "unproven." (As if APT works!)
The industry has placed tremendous emphasis on holding a CFA charter. But what does it really mean?
Todd C. Ganos
Doolittle Investment Counsel
EDITOR'S NOTE: Mr. Ganos notes he holds a doctor of business administration degree.
Holy grail of proxy ballot
Re: "Wisconsin fund could lead charge for open balloting," Aug. 19, page 4.
While I wish Keith Johnson at the State of Wisconsin Investment Board and Richard Ferlauto at the American Federation of State County and Municipal Employees luck raising the issue of open balloting at individual firms during the next proxy season, I fear the Securities and Exchange Commission will have a field day writing no-action letters. Rule 14a-(8)(i)8 prohibits resolutions relating to elections. That's why Les Greenberg and I have petitioned the SEC to amend that specific rule to require shareholder-nominated director-candidates to appear on corporate ballots.
We agree with Patrick McGurn; ballot access is the "holy grail of corporate governance," but disagree that our proposal would result in 1,000 names on the ballot. We don't see 1,000 resolutions on any corporate ballot, although we might get several on some next year.
We could have suggested rules requiring that nominees show the support of shareholders holding at least 1% of the firm. Of course, Mr. McGurn could then come back with the possibility of 100 names on the ballot. We welcome recommendations for improving the suggested wording.
One way to deal with multiple candidates would be to institute instant runoff voting. Using IRV there are no wasted votes because shareholders would rank the candidates, and their votes for losers would instantly be reallocated until a consensus winner is chosen.
The Sarbanes-Oxley-New York Stock Exchange-Nasdaq reforms do little to change the fact that in most corporations the chief executive officer effectively nominates or vetoes directors, controls preparation of the proxy statement, manages the election process, determines or vetoes director compensation and expenses, develops the budget, pays for the director-and-officer insurance, and sets the agenda at board meetings.
Shareholder access to the company proxy is the holy grail, and our petition for democracy in corporate elections, Rulemaking Petition File No. 4-461, is the only proposal now under consideration to restore trust by creating truly independent boards.
Elk Grove, Calif.
Your article "Wisconsin fund could lead charge for open balloting," page 4, Aug. 19, contains many unsubstantiated claims by naysayers and unchallenged conclusions. Suggestions of "strengthening nominating committees" or having "independent nominating committees and independent directors" present circular arguments. The problem is that directors who are beholden to management for their selection, proxy solicitation costs and retention cannot be truly independent. Use of gatekeepers is a code for keeping the status quo. We already have gatekeepers. They are members of the boards. They keep the gates shut.
Asking companies to permit open access to the ballot is pipe dreaming.
It is pure fear-mongering to suggest there might be 1,000 director-candidates or to claim, without substantiation, that the process is "potentially very unwieldy" or might produce "conflict and confusion." One should not worry about the long lists of director candidates. To cut the potential threat of long lists of director candidates, corporations' bylaws could set the minimum standard for candidacy, e.g. Ph.D. rocket scientist; however, the candidates sponsored by management will, also, have to meet those elevated standards.
Most persons know that, if elected as a director, they will expose themselves to potential liability, which will tend to cut the pool of those willing to be director candidates. Further, Rule 14a-8 sets forth a laundry list of procedural hurdles. Using those hurdles, corporations now fight tooth and nail to keep shareholder proposals off their ballots. They would do even more to keep independent outsiders from entering into the exclusive country club called the board of directors.
The shareholder proposal procedure has been around for many years. It is not an experiment in some newfangled system. When was the last time you saw a proxy statement with thousands of shareholder proposals? Six proposals is usually a lot.
Culver City, Calif.
Gradante's faulty view
Charles Gradante's July 22 Other Views commentary draws entirely the wrong conclusion from his well-considered fact pattern and research effort.
Hedge funds of funds, when well diversified, may in fact be one of the most prudent and responsible ways for fiduciaries to gain exposure to the many attractive alternative investment strategies now available. With the assistance of their consultants, prudent fiduciaries can evaluate numerous qualitative and quantitative factors prior to selecting one or more diversified funds for investment. In fact, the manager of a hedge fund of funds is no different from the investment manager of a traditional stock or bond portfolio. In each instance, the fiduciary appoints a manager to purchase and sell securities because that manager has a proven level of expertise in such an area. We know the delegation of these functions is quite normal, customary and prudent when that delegation occurs in an open and transparent manner with proper thought, consideration and diligence.
The notion that somehow the prudent standard is unilaterally compromised with funds of funds is simply mistaken. If Mr. Gradante's position is that investment in a fund of funds is a direct investment in an equity security, without proper transparency, then the argument collapses alongside investments in mutual funds and similar pooled structures. If his position is that fiduciaries have the duty to fully understand all the underlying securities purchased by an investment manager, we also know this argument fails since the purpose of delegation is, in fact, to appoint an expert to handle matters the fiduciaries are inexperienced or uncomfortable with. This is particularly applicable to hedge funds, since they often employ extremely sophisticated trading strategies and utilize complex securities. Total and absolute transparency, in the case of hedge funds, is a slippery slope and not a standard that all experienced fiduciaries agree upon.
The article's repeated reference to Long-Term Capital Management is, in fact, an excellent example of how direct hedge fund investors, as well as funds of funds, may have made investments they didn't fully understand. Unfortunately, this is true for the vast majority of traditional investors, as well. The recent Nasdaq collapse clearly supports this notion.
Kenneth S. Phillips
Ventana Capital Partners, LLC
Pensions & Investments welcomes Letters to the Editor and submissions of commentaries for the Other Views page. Letters and other submissions may be sent by mail to the attention of Barry B. Burr, Pensions & Investments, 360 N. Michigan Ave., Chicago, IL 60601; by fax, to (312) 649-5228; or by e-mail to [email protected] crain.com.