You've done the investment community a great service by publishing the graph "Pension funds' real returns" on page 14 of the Feb. 5 issue. It helps investors focus on reward and risk in the best perspective, namely real return on investment and variability.
It might be interesting to take some additional steps, i.e., adding a domestic indicator and looking at the significance of real returns by dividing real ROI by standard deviation as shown on the accompanying table.
The result of this division is the T-value, which indicates how many standard deviations the mean is away from zero. It's a nice higher-the-better read-out which is easy to understand.
Out of this table emerges the conclusion that international exposure can provide access to more attractive investment opportunities than what we have at home. Germany leads the pack with a highly significant real rate of return.
The U.S. has been hampered by the savage 1970s, although the 1990s seem to be making up for it. The past 95 years, however, have seen a 4.8% real ROI with a standard deviation of 14.5%, resulting in a 0.33 T-value. These statistics show a 60/40 stock-to-bond index mix enjoys a 63% chance of exceeding inflation in any year. Because time diminishes the effects of risk, the probability of outperforming inflation rises to 77% for a five-year time frame, 85% for 10 years and 93% for 20 years. Patience has its rewards.
William P. Marshall
Copper Beech Capital Services Inc.
In the March 18 article on page 42 on Oaktree Capital Management L.L.C., its chairman, Howard S. Marks, cites the inefficiency of the market for international convertible bonds. He claims that the asset class had "no history, no benchmarks and no databases available, 'the hallmarks of an inefficient market.'"
BAii Asset Management has been managing institutional funds in the asset class for more than 13 years and has an almost comprehensive database of more than 7,000 equity-linked securities, 2,000 of which are convertible bonds. The firm's research department created the World Convertible Bond Index (WCBI) in July 1991 as a collection of benchmarks for the asset class, and this is currently made up of over 500 liquid convertible securities.
In the four years to December 1995, the WCBI (EAFE) showed a total return of 11.45% in local currency terms compared with 6.78% return on the MSCI-EAFE index. With full exposure to foreign currencies, the WCBI (EAFE) returned 13.5% in dollar terms, compared with 8.69% for the MSCI-EAFE index during this period.
We agree with Mr. Marks that these figures can begin to demonstrate an inefficient market, but must disagree with his statement on the lack of benchmarks and history. The maturing of our database has begun to provide historic figures that are now near to covering a full market cycle, and demonstrate the great attractions of this asset class.
BAii Management Ltd.
In Todd A. Tibbetts' Feb. 5 Others' Views commentary, "Secrets of enhanced indexing, securities lending," he indicates that if a securities lending program invests in anything other than Treasuries, it has generated leverage. I agree securities lending generates leverage in the larger portfolio, however this credit risk is not the key source.
Properly viewed, securities lending is simply an asset/liability model. This model is created out of an existing asset base. You have assets where before you had none. You generate a liability (a loan collateralized by the existing assets), and use the borrowed funds to create a new asset (a portfolio of new investments).
If the new assets are invested longer than the new liabilities, the amount by which they are longer is incremental duration created out of the original portfolio. This is the true leverage of securities lending. Thus the real risk is not lending Treasuries to invest in higher risk commercial paper, rather it is in creating a duration mismatch between the assets and liabilities: lending securities (i.e., borrowing) for a couple of days and investing for a couple of weeks or months. The hierarchy of bond risks - in order of importance: duration, the curve, volatility, sector and finally credit - applies equally well to a securities lending portfolio as to any longer dated portfolio, and credit risk is far less important than duration mismatch risk.
The "leverage" used to create a securities lending portfolio is not an evil. It is entirely possible to generate incremental income by lending securities in a prudent low-risk manner. It simply requires recognition of the risks taken, how they impact the "original" portfolio and full disclosure thereof.
Paul J. Selian
Aetna Investment Group
Minnesota Mutual was not included in the April 1 directory of defined contribution plan service providers. I will look for the request for the information with the survey next year.
Minnesota Mutual is located at 400 Robert St. N., St. Paul, Minn. 55101. The phone number is (612) 223-4286; the fax is (612) 298-3793.
The total number of participants Minnesota Mutual serves exclusively is 120,000; of that 100,000 are for bundled services and 20,000 for investment management only.
The services provided are: plan design, employee meetings, generic and customized employee investment education, generic and customized employee communication, compliance and reporting, consulting services and a toll-free automated voice response system. Toll-free services include: account balance, foreign language capability, account transfers, changes to contribution allocations, performance data, fund information and financial strength information.
In-house investment management total defined contribution assets managed are $2.3 billion in internally managed separate accounts and general accounts. It provides daily valuation for in-house accounts for plan participants. The firm also offers external investment management services for separate accounts.
Minnesota Mutual provides services for more than 1,800 clients nationwide: 1,300 bundled; 500 investment management. We have 11 regional offices dedicated to providing local sales and service support exclusively for qualified retirement plans. We have investment management partnerships with Fidelity, Janus, Warburg Pincus, PBHG, Scudder, Vanguard, Templeton and Parnassus. It offers interactive software on public online systems. I am client contact.
Joan M. Curtiss
Manager-Pension Marketingand Field Development
We read the March 4 PIPER fixed-income returns with great interest.
Our high-quality active duration composite return of 1995 of 44.43%, net of all fees and produced without leverage, was beaten only by the No. 1 firm in overall managed fixed income.
Our fourth-quarter return of 8.26% after all fees would have been well within the first quartile.
We filed our organizational data with PIPER after the mid-December deadline, hence our results didn't appear in the March 4 listing.
William G. Greenbaum
Senior Vice President, Marketing
Pine Tree Capital,
Nakagama & Wallace L.P.