When Santa reviews his lists of who's been naughty and who's been nice in money management this year, it's going to be really embarrassing.
Managers who engaged in or permitted market timing in their mutual funds alone could force Santa to send his elves to Newcastle for more coal to put in their stockings.
On the nice side of Santa's balance sheet might be New York Attorney General Eliot Spitzer, champion of the little investor, revealing the dirty laundry of some major mutual fund companies.
To meet equal-time requirements, Pensions & Investments has kept the naughty and nice lists to 10 names apiece. What's more, we've limited the list of timing sinners, leaving open slots for other acts of perfidy, greed or small-mindedness. Plus, one nominee made both lists.
Putnam Investments: Six Putnam portfolio managers and a couple dozen plan participants market-timed Putnam mutual funds. When the industry scandal broke this September, ex-CEO Lawrence Lasser initially denied any-
thing was awry, and ended up being pushed out himself when the facts showed otherwise. Firing the errant portfolio managers and a rapid-fire settlement with the Securities and Exchange Commission so far have failed to stem desertions by investors. To date, the firm has lost $32 billion in assets under management.
Richard Strong: Hubris, not greed, appears to be Mr. Strong's sin. Accused by Mr. Spitzer of making $600,000 in profits by market-timing his own funds, Mr. Strong first relinquished his post as chairman of Strong Mutual Funds. But that failed to blunt criticisms: on Dec. 2, he gave up his jobs as chairman and CEO of Strong Financial Corp., the parent company, and plans to sell his 90% stake in the manager.
INVESCO Funds Group: Unlike other allegations of market timing, this one does not involve personal trading by the firm's portfolio managers. But, according to charges by Mr. Spitzer and the SEC, the Denver-based unit of AMVESCAP PLC made millions of dollars from allowing certain investors to market-time INVESCO mutual funds. INVESCO officials deny any wrongdoing, and say they will fight the charges.
Janus: Janus Capital Group so far has avoided a massive loss of clients, but an e-mail by Richard Garland, the chief executive of Janus International who has since resigned, provides a smoking gun. "I have no interest in building a business around market timers, but at the same time I do not want to turn away ($10 million-$20 million)," according to an e-mail he wrote concerning hedge fund Canary Capital Partners, news reports detail.
The SEC: OK, last year Mr. Spitzer took SEC officials to task for not ensuring that analyst recommendations are as independent as the Magic 8-ball. In 2003, it turns out the New York Stock Exchange is not the smooth-running engine of market efficiency investors had believed, as both its specialist system and internal governance procedures have come under tough scrutiny. Now, the SEC is again playing catch-up for not adequately policing mutual funds. Is anybody home?
Richard Grasso: Mr. Grasso's massive $187.5 million retirement package from the New York Stock Exchange caused even market specialists' eyebrows to soar. It's unclear whether he will forgo a $48 million chunk of that package since he resigned as the NYSE's CEO. It's a shame that the man who ensured the integrity of the U.S. stock market after 9/11 has now become a symbol of the greed of the past decade.
IBM Corp.: IBM plans to appeal a July 31 U.S. District Court ruling that found the conversion to a cash balance plan from a defined benefit plan discriminated against older workers. Even if Big Blue wins on appeal, the way the industry giant handled its 1999 plan conversion has given a black eye to the entire industry, and brought on the scrutiny of Congress.
Lancer Partners: Beauty may be in the eye of the beholder, but valuation is not. In July, the SEC shut down Lancer for allegedly overinflating the values of many penny stocks it held. The way the scheme worked, according to the SEC: Lancer bought huge stakes in worthless thinly traded companies, and then pushed the stock price higher with subsequent purchases.
Bill Thomas: Geez, Louise, it's one thing to pursue partisan politics, but calling the cops on the opposition? House Ways and Means Chairman Thomas, R-Calif., last July called the Capitol police to evict Democratic committee members from a library where they had retreated to discuss a complex pension reform bill. He later made a tearful apology to the House. California Democrat Fortney "Pete" Stark, also gets demerits for losing his cool, calling another member "a wimp" and "a fruitcake."
Phil Angelides: The California state treasurer seems to have an idea a minute. Unfortunately, not all of them are good ones. As an ex officio member of the boards of both the California Public Employees' Retirement System and the California State Teachers' Retirement System, this year he has pressured expatriated companies such as Tyco International Ltd. to reincorporate in the United States, regardless of the tax consequences. He also has pushed both funds to invest heavily within California under his "double bottom line" initiative. Lately, he has joined a group of public and union officials in urging the SEC to require environmental reporting. Question: How much is the treasurer focusing on fiduciary duty and how much on the governor's mansion?
Eliot Spitzer: It's hard to call the hard-driving Mr. Spitzer "nice," but he certainly scored major points for protecting the investing public. While the SEC slept, the New York State official first attacked self-serving investment recommendations made by analysts, and now has led the charge against market-timing allowed by many mutual-fund shops. What's next?
Jack Bogle: The perennial Mr. Clean of the mutual-fund industry looks smarter than ever. The founder of Vanguard Group Inc. for years has protested high management fees and firms that are more interested in salesmanship than stewardship. "In one fell swoop, the mutual fund industry has served up his arguments. He won. The debate is over," said Theodore Aronson, principal in Aronson + Johnson + Ortiz LP.
John Reed: Ex-Citigroup CEO John Reed came out of retirement to take the reins of the NYSE. In short order, he's already reduced the board to eight members from an unwieldy 27, and will create an advisory panel that includes Wall Street execs — all for the vast pay of $1. Despite pressure to split off the NYSE's regulatory function, the regulators will report to the new independent board. Now, to pick a successor.
Peter Bernstein: He might look unassuming, but his words pack quite a punch. Mr. Bernstein questioned the whole way institutional investors manage their assets. His assertion: Abandon the policy portfolio, and let managers market time (although not the mutual fund kind of timing.). While he has since revised his nostrums to say institutions should manage assets against their liabilities, his ideas provoked immense debate in an industry that had been resting on its laurels.
Robert Arnott: As the new editor of the Financial Analysts Journal, Mr. Arnott finally has a bully pulpit. Along with Mr. Bernstein, Keith Ambachtsheer and others, he points to the huge mismatch between pension assets and liabilities. What's more, he throws barbs at the ethics of professional investors. "Most portfolio managers are too lazy to dig through the numbers, and recognize that earnings as reported are flawed," he told P&I.
Jason Zweig: How do you make a classic better? Jason Zweig, a senior writer at Money magazine, has updated Benjamin Graham's "The Intelligent Investor." He reminds audiences of Mr. Graham's timeless lessons: find undervalued companies; protect oneself against serious losses; and aspire to "adequate" performance. Through a series of commentaries at the end of each chapter, Mr. Zweig pummels the excesses of the technology-stock bubble and reminds readers why inflation is important.
Michael Lewis: The author of "Moneyball" has given a gift to value managers everywhere. By examining the unorthodox strategies of Oakland Athletics General Manager Billy Beane, Mr. Lewis has demonstrated how to exploit inefficiencies of one of the most statistics-laden markets in the world: professional baseball. Mr. Beane ignores conventional wisdom by picking misshapen and supposedly used-up players and by placing emphasis on different sets of statistics.
100 Women in Hedge Funds: In these tight times, raising $2.4 million for charity is no small feat. 100 Women in Hedge Funds did just that, tripling the amount it had raised last year. Among the recipients of this largesse: the Right Start/Infant Academy, a program developed by the Robin Hood Foundation that focuses on early childhood programs in poorer neighborhoods.
Edward Tufte: The world's leading analyst of visual information lashed out at the evils of PowerPoint, decrying how speakers read every line in their presentations, mislead with bullet points, and obscure important information. "PowerPointPhluff" emphasizes format and not content, wrote the Yale University professor emeritus in a paper, "The Cognitive Style of PowerPoint." Money managers: take heed.
Phil Angelides: Together with the top officials from CalPERS and CalSTRS, Mr. Angelides launched a call for Mr. Grasso's resignation. A day later, Mr. Grasso was history. And, with the treasurers of several other states, including New York and North Carolina, he pushed for major reform at the NYSE. Not much later, new NYSE Chairman John Reed announced a series of reforms, reflecting some of the politicians' demands.