Pension Risk Matters

Leverage - I Love You, I Need You - Don't Hurt Me

Susan Mangiero — Mon, 08 Feb 2010 22:38:19 -0500

If institutional investors thought of leverage as a bouquet of daisies, they'd be playing "(S)he loves me, (S)he loves me not" and hoping to still be respected in the morning. Now that the worst economic recession of modern times might be abating somewhat, more than a few buy side executives are looking for a sweetheart to help them replenish diminished portfolio values. Let's just hope that the love affair is not fickle, causing more hurt than help.

In "Wall Street's New Flight to Risk" (February 15, 2010), Bloomberg BusinessWeek reporters Shanon D. Harrington, Pierre Paulden and Jody Shenn write that investors are on the prowl for yield. With over $150 billion allocated to U.S. bond funds, returns are low and the only way to add some excitement is with exotics such as "payment-in-kind" bonds that encourage the issuance of more debt than a borrower's operating cash flow would ordinarily support. Derivatives are another Valentine, with banks "again pushing" collateralized debt obligations ("CDO's) that can increase in value (depending on the trade) as defaults increase.

On January 27, 2010, Wall Street Journal reporter Craig Karmin writes that public pension funds are borrowing money to enhance returns rather than allocating to alternatives such as hedge funds and private equity pools. According to "Public Pensions Look at Leverage Strategy," funds can turn in a good performance with the use of leverage without having to resort to "volatile stocks" or illiquid assets. Others quoted in this recent piece suggest that risks exist and must be acknowledged.

Heartbreak hotel - here we come.

Call me crazy but a move towards leverage (possibly excessive) seems scary UNLESS and UNTIL asset managers and institutional investors alike can demonstrate that they know how to properly measure and manage. For every person who is asked to define investment leverage, the answer is seldom the same. AIMA Canada makes a good effort to add clarity to this important topic. See "An Overview of Leverage" (Strategy Paper Series Companion Document, October 2006, Number 4).

Does anyone have a good example of a risk management policy manual that expressly addresses how leverage is defined and managed accordingly? If so, please email Editors@InvestmentGovernance.com.

L'amour with leverage - how sweet it is, until it isn't. Then what?

Social Media Meets Institutional Investing as FiduciaryX

Susan Mangiero — Mon, 08 Feb 2010 00:10:10 -0500

According to "Survey: Social media wins followers" by Gregory Crawford (Pensions & Investments, February 8, 2010), institutional investors and their service providers will continue to embrace the marriage of technology and community building. The article reports that 324 respondents express a belief that social networks are likely to become an important part of the job, going forward.

As Investment Governance, Inc. founder and chief enthusiast for web-enabled best practices tools that deliver cost and time savings, I say "hooray." Why? About a week ago, we quietly launched a combination online library, Q&A clearinghouse and business network for institutional investors and their attorneys, advisors, actuaries, asset managers and other service providers. Check out http://www.fiduciaryx.com/video_tour for a short demo video.

We will soon issue a press release about all of the neat functions that comprise this exciting research and education website. I can't wait to tell you about all of the terrific experts we have at the ready to answer your questions!

If you are a buy side executive, I am inviting you to provide feedback about content and features. In exchange for a few hours of your time over the next several months, you will be given complimentary access to www.FiduciaryX.com for a period of one year.

FiduciaryX is owned and operated by Investment Governance, Inc. and has been designed for busy professionals who, like you, want: (a) independent, bias-free and actionable information on over 100 topics (b) the opportunity to share lessons learned (c) the ability to download document templates (d) a chance to ask questions of experts via the FiduciaryX Virtual Reference Desk (e) a way to search a comprehensive Service Provider Directory and rank vendors (f) the ability to connect with each other in a secure place and so much more.

Email CustomerCare@InvestmentGovernance.com or call (203) 929-0011 for more information.

Just a Spoonful of Sugar Makes the Medicine Go Down...

Susan Mangiero — Thu, 04 Feb 2010 00:46:04 -0500

Mary Poppins came to mind the other day during a panel discussion about governance and the role of the institutional investor.

Part of a conference about fiduciary obligations, I joined Mr. Stephen Davis (Executive Director of the Millstein Center for Corporate Governance & Performance - Yale School of Management) and Ms. Janice Hester-Amey (Portfolio Manager, Corporate Governance - CalSTRS) for a discussion about governance. I believe we were successful in kicking off the day long event with some thought-provoking tidbits. We covered new rules that, if passed into law, should empower pensions, endowments and other asset owners. We opined on regulation versus voluntary action. We had a lengthy exchange about what motivates institutions and whether governance was now considered a "must do" that contributes to return versus a "try to ignore" because it is seen as a drain on resources.

In the words of this famous nanny, find the fun and the job's a snap. I'm not sure that governance will ever top the list of jollies but one does wonder when best practices will stop getting lip service and instead merit the attention it so richly deserves. Chief Governance Officer anyone?

I added commentary about what I believe fervently is an inevitable industry move towards scoring with respect to process (not the same as outcome). Several legal professionals in the audience suggested that any type of benchmark would necessarily offer limited value because of subjective bias (their words, not mine) on the part of those who construct the ABC report card.

I don't necessarily concur. There are MANY points on which rational investment stewards would agree as no-brainer elements of what is right.

For those readers who want to get my specific take on what they are and how to monetize what I think is a great opportunity, contact me. Our firm is looking for solid partners on a few initiatives that we believe break the mold in anticipation of the brave new world of indexing procedural prudence.

Benchmarking the Investment Industry

Susan Mangiero — Sat, 30 Jan 2010 10:00:00 -0500

In my September 11, 2008 testimony before the ERISA Advisory Council, I described two buckets of organizations - those which deserve a gold star and those who don't. I went on to explain that the size of the "everybody else" bucket might be very large but that current reporting requirements make it nearly impossible to know about red flags in advance. This is cold comfort for shareholders and taxpayers who would prefer to know about financial runaway trains beforehand.

Unfortunately, those who attempt to provide more sunlight about their activities are not always rewarded. In a recent conversation with the CEO of a major asset management firm, I was told that this firm had provided detailed information about its fee structure to institutional clients. Instead of being rewarded, and because there are wide variations with report to how asset managers present performance data, sunlight led to storm clouds. Endowments, foundations and pensions responded by asking why the fees were so high. The reality was that the costs were in fact lower than those of comparable traders but, since competitors were not providing more than basic feedback, their costs were interpreted as lower and therefore "better." It's no surprise that the executive with whom I spoke expressed frustration. Here they were trying to do what they thought was the right thing and come clean with a detailed decomposition of what they charged. Instead of a reward, they were kicked in the proverbial shins.

In "Type-A-Plus Students Chafe at Grade Deflation" (January 29, 2010), New York Times reporter Lisa W. Foderaro describes a similar phenomena in the university sector. Where Princeton sought to minimize grade inflation by limiting the number of A's, top quality students found it harder to compete for jobs when graduates from other schools flashed their scores. Never mind that Princeton arguably tried to impart higher integrity data.

Is the message that transparency is window dressing and that no one really wants to have the low down on "true" outcomes? Alternatively, should we conclude that heightened disclosure rules are inevitable but it is incumbent upon providers of information to educate their recipients, i.e. make sure that underlying assumptions are clearly explained? If that does not occur, might well-intended parties (those who provide more detail than necessary) be impugned instead of rewarded for their forthrightness?

Editor's Note: Click to read "Testimony by Dr. Susan Mangiero to ERISA Advisory Council Working Group on Hard to Value Assets," September 11, 2008. (Note that Pension Governance, LLC is now part of Investment Governance, Inc.)

Wives and the Checkbook

Susan Mangiero — Mon, 25 Jan 2010 00:14:28 -0500

According to "New Economics of Marriage: The Rise of Wives" by Pew Research Center analysts Richard Fry and D'Vera Cohn (January 19, 2010), women are besting men "in education and earnings growth." Their statistics are noteworthy for countless reasons.

An observation that "marriage rates have declined for all adults since 1970 and gone down most sharply for the least educated men and women" suggests that those with degrees (and therefore statistically likely to earn more over their lifetime) are walking down the aisle.
For Americans between 30 to 44 years of age, there are more females than males with college degrees.
Three out of ten unmarried women with college degrees realize greater economic gains versus only fifteen percent of unmarried male who had gone on for higher education.
Household incomes grew for three out of ten married men with only a high school diploma. Less than two out of ten unmarried males with no college under their belts saw their checkbooks get bigger.
In both 1970 and 2007, 53 percent of survey-takers report that husbands and wives had the same level of education. In 2007, 28 percent of households declared that wives had more education versus 20% in 1970.
When the wife earns more money, only 21 percent of the respondent households claim the husband as the primary financial decision-maker versus 46% of situations where the Missus gets to choose. When the husband earns more, the number climbs to 35% in terms of final say on investments and purchases. In 36% of homes, the female better half decides.

In "She Works, They Are Happy" (New York Times, January 24, 2010), Tara Parker-Pope offers that divorce rates have dropped from 23 per 1,000 couples thirty years ago to 17 today, in part due to the ability for women to earn a living without help from a spouse. The result, she avers, is a change in how much time men spend on domestic chores and earning the bacon. While not yet an equal split, today's "to do list" at home is a far cry from the plaudits of Arlie Hochschild. In her still popular book, The Second Shift, this University of California - Berkeley sociology professor laments the imbalance between working men and women when it came to childcare and housework.

Demographic research about men, women and money always provokes thought and is great fodder for cocktail party chats. That's not all. The ramifications for individual financial planning, retirement plan policy-making and industry-wide sales and marketing efforts are immense. Women tend to live longer which necessitates a large enough piggy bank to pay bills over a longer period of time. Then there are all sorts of studies about how lifetime decisions are influenced by gender, age, education and income. Marketers cannot ignore the fact that their pitches must encompass the "who" and "how" of sales for IRA, mutual fund, annuities and insurance.

As the female earnings landscape is altered, office dynamics are not immune to change. In The Male Factor: The Unwritten Rules, Misperceptions, and Secret Beliefs of Men in the Workplace (December 2009), author Shaunti Feldhahn describes the results of a large-scale survey of men to better understand how they judge the opposite sex in a business environment. Not surprising perhaps, she finds that emotions and long-winded discussions (not getting to the point) are looked upon poorly by respondents. This begs the question - Will women change by being more like their male counterparts or will men learn to go with the flow and willingly accept communication differences? Will it depend on whether the boss wears a skirt or gets the coffee instead?

As always, your opinions count. Email Editors@InvestmentGovernance.com or add a comment to this post.

Editor's Notes:

Click to read the full report entitled "Women, Men and the New Economics of Marriage," published by the Pew Research Center, January 19, 2010.
Click to access life expectancy tables as provided by the U.S. Census Bureau from the 2010 Statistical Abstract.

Glass-Steagall Redux: A Gift to M&A Bankers?

Susan Mangiero — Sun, 24 Jan 2010 10:16:45 -0500

There are few things in business that are outright bad for everyone. Usually someone, somewhere is a winner when the rules change. In the case of proposed new bank regulations, merger and acquisition ("M&A") deal makers may be about to enjoy a bonanza.

On January 21, 2010, the White House issued a press release entitled "President Obama Calls for New Restrictions on Size and Scope of Financial Institutions to Rein in Excesses and Protect Taxpayers" in which the 44th U.S. President proposes to limit banks from owning a hedge fund or a private equity fund or "proprietary trading operations unrelated to serving customers for its own profit." Additionally, unfettered deposit-taking growth would be strictly curtailed in order to avoid another federal bailout on the basis of "too big to fail."

Another day, another mandate, another perverse outcome.

Risk transfer requires a willing party to accept the uncertainty that is anathema to someone else. Companies cannot hedge unwanted price risk if there is no one on the other side of the equation. Restrictions on proprietary trading, otherwise referred to as Volcker's Rule, could arguably (and significantly) depress liquidity in numerous financial markets around the rule.
Lumping all hedge funds into one category is a mistake. Some hedge fund portfolios are highly liquid, with net asset values being reported to investors every day. Forcing a "one size fits all" solution to a financial market sector that varies in terms of strategy, scope and risk factors is a recipe for disaster.
Private equity funds tend to adopt a longer view than a trading operation. Is the suggested federal grab for power meant to discourage this source of capital at the same time that bank credit is limited at best and cost-prohibitive at worst?
Why would Fannie Mae and Freddie Mac be exempt, especially given their stated track record in the area of risk-taking?

Not everyone is a sad sack. Think about all the equity carve outs and spin-offs that will result if banks are forced to shed their prop trading portfolios. This type of forced corporate restructuring will be a huge boon for investment banks, law firms and accountants who earn considerable fees for fairness opinions, buy-sell matchmaking and papering the deals.

Don't get me wrong. Excess in the trading room is bad news for everyone. Instead of binding limits introduced by regulators, why not encourage banks to increase capital reserves, evidence better risk management policies and procedures and let the market punish those organizations that get it wrong?

Perhaps not so coincidental, sales of Atlas Shrugged by Ayn Rand are skyrocketing. In its January 21, 2010 press release, the Ayn Rand Institute cites that more than seven million copies of this 1957 novel have been sold. The premise of this international best-selling book is that captains of industry who create wealth walk away from those who take, leaving the city of Gotham in the dark, unable to survive.

Law Degree, PhD or Gamer?

Susan Mangiero — Mon, 18 Jan 2010 00:28:22 -0500

When I was a doctoral student, there were invariable jokes about spending lots of time in school, only to find myself out on the street, competing with other PhDs to deliver pizza and otherwise under utilize what I had learned along the way.

Keep in mind that my situation is somewhat unique. I grew up in industry before I went back for my doctorate in finance with a minor in math. I had already worked over a dozen years on various trading desks. As a result, my objectives for higher education focused more on understanding the link between theory and practice. I was not disappointed. The experience has served me well in countless ways. I honed my abilities to model, test assumptions, ask questions and connect sometimes disparate dots. Time in the classroom at many levels (undergraduate, graduate, executive, professional) gave me a firsthand crack at realizing the importance of clear communication.

Unfortunately, not everyone is enjoying the graduate school experience. According to "Another Reason to Just Say No to a Ph.D." by Gabriela Montell (The Chronicle of Higher Education,January 14, 2010), real earnings for those with a professional or doctoral degree have dropped between 1999 and 2008. Taking a look at an article by Professor William Pannapacker who writes under the name of Thomas H. Benton ( "Graduate School in the Humanities: Just Don't Go, The Chronicle of Higher Education, January 2009), it strikes me that there is a great need to drill down into what the employment statistics truly mean.

Salaries in the arts may be depressed but those with deployable skills and experience for commercial endeavors such as finance and medical research have alternatives not available to everyone.
Some schools pay more than others. Refer to "Top 500 Ranked Universities for Highest FT Faculty Salaries."
Not surprisingly, compensation varies across disciplines. See "Faculty Median Salaries by Discipline and Rank (2006-07)" or "Murky Picture for Faculty Salaries" (Inside Higher Ed, January 17, 2010).
In "Business-School Professors Learn a Hard Lesson in Competition, Study Finds" by Peter Schmidt (The Chronicle of Higher Education, November 5, 2009), private universities tend to pay more than public organizations. Whether an academy is seeking accreditation is another factor with respect to the mix between research and teaching and the related size of one's total paycheck.
In "Harvard to offer first retirement plan for professors," Boston Globe writer Tracy Jan (December 3, 2009) 127 liberal arts, medical and education professors have been offered a chance to wind things stand in the form of a lighter teaching load, as a precursor to eventual cessation of their duties.
While some universities and colleges are scaling back, others are enjoying a boom in students. According to "College Enrollment Hits All-Time High, Fueled by Community College Surge," Pew Research Center's Richard Fry (October 29, 2009), two-year colleges are beneficiaries of fears about being sufficiently skilled to get work in today's intensely competitive workplace. Their tuition has risen at a relatively modest rate of 4.9 percent per year "beyond general inflation."

In the legal world, associates share the glum factor with those in the humanities. New York Times reporter Alex Williams writes that changed expectations are the reality these days. With bad economic times unduly impacting industries such as financial services, real estate and high tech, legal professionals are hard pressed to keep driving the fee train forward. In "No Longer Their Golden Ticket," Williams cites a survey by the New York City bar association that found that one out of every two attorney respondents were "seeking counseling from its lawyer-outreach program list" for mental health reasons.

Returning to my December 28, 2009 post, entitled "'Up in the Air' - Stark Reality About the Employee - Employer Relationship?". work is a four-letter word. If we stay current with sought after skills, there is a good chance that angst may not ever come to visit. MSNBC reports that accountants and compliance officers are likely to win the jobs growth lottery. That includes financial examiners, with projected growth of "more than 40 percent from 2008 to 2018." Complexity, added accounting rules and new government mandates could contribute to a rosy future for some. Click to read "Next hot job? Keepings on financial firms" (December 11, 2009). Interestingly, salaries for game programmers are not too shabby either.

Of course, besides the ability to earn a living, some posit that doing what one loves and enjoying it at the same time is a worthy notion. As a European colleague once said to me, "Americans live to work. We work to live." Love what we do and get paid for it as well? La Dolce Vita indeed!

Reading, Riting and the Rithmetics of College and University Salaries

Susan Mangiero — Sun, 17 Jan 2010 22:05:38 -0500

Not everyone is hurting when it comes to take home pay. According to "Ranks of millionaire college presidents up again" (Associated Press, November 2, 2009), higher education compensation toppled $1 million for "a record 23 presidents" with Rennselaer Polytechnic Institute ("RPI") and Suffolk University leading the way. Critics should be wary however if they think that life in the ivory tower offers a walk in the park or that numbers should be sliced downward. Recruiting experts suggest that good candidates are tough to find. Additionally, executives can add to a school's endowment which in turn impacts research projects, scholarships and renovations.

As much ado is made about how much people get paid, with the financial sector taking it on the chin big-time, consider the numerous factors that influence the nexus between supply and demand for a particular bundle of skills.

Hail to the Chief - Risk Officer That Is

Susan Mangiero — Fri, 15 Jan 2010 00:15:38 -0500

In "Risk Redux" by Kristin Fox, founder of Fox Inspires, LLC (Private Wealth, January 7, 2010), I am quoted extensively on the topic of risk management. I'm happy to note that others interviewed for the article reiterate many of the points I made.

Given the changed landscape, post Madoff and so on, the life of a Chief Risk Officer ("CRO") is even more harried than ever before. He or she is often expected to save the ship without impeding the traders' ability to turn a profit. Applied to hedge funds, the task is arduous indeed as the threat of global regulation looms closer and investors clamor for heightened transparency about fees, concentration of positions and overall risk-taking.

Since so many pensions, endowments and foundations are adding to their hedge fund allocations, the article is worth a read. Some of my talking points are listed below:

Risk management is an integral part of a firm’s culture and one of the keys to its success. “Instead of looking at risk management as a roadblock, it should be promoted as part of your culture and viewed as the best way to ensure the firm’s longevity.”
There is no one size fits all approach to hedge fund risk management. It depends on the size of the organization, strategy, type of clients, risk tolerance, to name a few items.
A CRO must ask tough questions about the risk "cost" of every expected dollar in return.
Compensation must support the notion of a risk culture or any other efforts to mitigate risk are doomed to fail.
Kick the tires on models. Ask if underlying assumptions prevail.
Make sure that everyone understands the nature of leverage, from the back office clerk to the front room trader.
Acknowledge that risks seldom live in isolation. One of the unpleasant surprises of 2008 and 2009 had to do with the convergence of risks. The traditional reliance on correlations had no place in the volatility maelstrom that created heartburn for a lot of investment professionals. "For example, with structured products, liquidity risk was arguably greater than anticipated because the quality and quantity of supporting collateral was sometimes wanting. For any financial institution that had hedged part of its structured product portfolio, it may have found itself with another risk in the form of counterparty defaults. The risks are often not additive, and a good CRO needs to truly understand the interrelationships among financial, operational and legal risks, to name a few."
Figure out a way to overcome the resistance of those who are already burdened with their own work but who are nonetheless critical to the risk management process. A good CRO must make friends and motivate accounting, legal, systems and trading to hold hands and come together to properly manage the R word.

Though written in 2003, my article entitled "Life in Financial Risk Management: Shrinking Violets Need Not Apply" is still relevant. I describe the building block concepts as well as the skill set required for an effective CRO.

Business Etiquette: Handshake or Kiss?

Susan Mangiero — Wed, 13 Jan 2010 15:58:41 -0500

Etiquette is important but sometimes more an art than a science. Consider my close encounter today with a gentleman whom I respect and like as a perfect example of trying to figure out what to do, without offending anyone or seeming "uncool."

Here's what happened.

In between meetings, I stopped by a local cafe to pick up a sandwich. To my delight, I spied said gent having lunch with colleagues, deep in conversation. When he saw me, he signaled to his colleagues that he was taking a break, came over to say hello and gave me a kiss on my cheek. If memory serves, I think my face grazed his, I passed him a business card (reflecting new contact information), offered a 60 second update on our business and held out my hand for an exit that may have been, in hindsight, anything but graceful.

Paying for my take-out order, I wondered if his buss, followed by my handshake, was an insult. Keep in mind however that this is suburban CT, not Paris. Should we have pecked cheeks again as a more appropriate sendoff, simply said goodbye or nixed the face action to begin with?

It's all so complicated.

I'm sure Jerry Seinfeld could get a lot of chuckles with this topic. Apparently, he had an episode about the "Kiss Hello" though I did not see it.

According to New York Times reporter Elizabeth Olson, "the cheek, or social, kiss is displacing the handshake, once the customary greeting in American social and business circles" but just make sure you get the positioning right. See "Better Not Miss the Buss" (April 6, 2006).

In "Do you shake hands, hug or kiss?" (April 12, 2006), Today Show anchor Al Roker and now prime time news gal Katie Couric acknowledge that a kiss is okay when you know the colleague well but head for the right cheek. Leaning left is outre. Their guest Peggy Post suggests a firm grasp of the hands instead, but "no pumping." Grasp the hand and be done with it. Other suggestions include an air kiss or double peck.

I'm not sure I will remember all of these greeting "do's and don'ts."

It was a special surprise to bump into this smart, funny and high integrity colleague, even if I didn't get the hello and goodbye parts down right.

Linking this topic back to investment matters, is there a protocol for the buy side - service provider reviews that take place every quarter? For example, if an asset manager has lost money for an institutional investor, does that nip any chance of a hug or smooch, no matter how long the relationship? Are puckers prohibited for service contracts above a certain amount or when a discussion is unduly serious? When is the double or triple cheek kiss appropriate? What if two parties are from different countries and the buss rules conflict with each other?

Let's see if Miss Manners can help.

Happiness and the Zen of Work

Susan Mangiero — Mon, 11 Jan 2010 00:34:46 -0500

Work is a four-letter word so can it ever be fun? According to the Conference Board, maybe not. In a recent survey, nearly half of respondents expressed dissatisfaction about doing work that was neither meaningful nor engaging. In contrast, six out of ten survey-takers declared themselves happy in 1987. Somewhat disturbing for would be recruiters is that angst and disappointment was not unique to any particular age group or income level though persons under 25 expressed "the highest level of dissatisfaction ever recorded by the survey for that age group."

As many on the hiring side know already, finding talent can be time-consuming and sap energy from even the most ardent employers. Now add the challenges of retaining productive workers while adding bright-eyed team members in a sad sack era of layoffs, mistrust and diminished budgets. Besides turnover costs, the bottom line could be impaired if few cheer lead for their company, collecting a pay check and already planning for the next gig.

Click to read more about "I Can't Get No...Job Satisfaction, That Is: America's Unhappy Workers," The Conference Board, January 5, 2010 press release entitled "U.S. Job Satisfaction at Lowest Level in two Decades. Click to read "Where America Stands: The State of America and Its Future," CBS News Poll, January 4, 2010 which echoes the observation that not everyone is optimistic about what the future holds.

In an attempt to end this blog post on an upbeat note, I invite interested readers to take a look at the work conducted by best selling author Marcus Buckingham. Rather than dwell on employees' weak points, he urges organizations to focus on strengths. According to his website, this author of "Go Put Your Strengths to Work" and "Now, Discover Your Strengths" urges that "individuals and teams playing to their strengths significantly outperform those who don't in almost every business metric."

The discussion that needs to take place now is one of responsibility.

Who should properly motivate and on what basis?
Do happy, satisfied workers self-select by joining companies that provide "thank you" goodies such as great benefits, bonuses and opportunities to retool?
How much should and can employers do to make work fun or at least a place where people want to be for a reasonable period of time each day?
What can organizations do to overcome the survivor worries that accompany any recession?
How should benefit plans be modified, if ever, to marry together financial pressures with the part of the bottom line that is attributable to human capital?

We may never emulate Snow White's seven friends ("Hi Ho, Hi Ho, It's Off to Work We Go") but obviously something has to give if one out of every two workers is unlikely to stay put for more than a few months.

Two New Experts for Advisory Board and Creation of FiduciaryX User Group

Susan Mangiero — Fri, 08 Jan 2010 00:58:54 -0500

Investment Governance, Inc. is pleased to announce the addition of two leading investment industry experts to its advisory board and the creation of a senior executive user group to further enhance its governance and risk management content and database offerings with the mid-January 2010 launch of www.FiduciaryX.com.

Members of the Investment Governance, Inc. Advisory Board bring depth, experience and a vast knowledge of critical industry "must know" topics. "Besides the amazing array of individuals currently serving as advisors, Ms. Marlys Appleton and Attorney Richard Slavin join us in our efforts to showcase fiduciary leaders and provide educational information to buy side executives such as trustees and board members and their advisors. I am delighted to have an opportunity to work with these two luminaries, both of whom have built careers around investment best practices and ethics advocacy," says Dr. Susan Mangiero, CEO and founder of Investment Governance, Inc.

As Vice President and Chair of the Sustainability Steering Committee for AIG Asset Management, Ms. Marlys M. Appleton oversees the governance structure for integrating environmental, social and corporate governance ("ESG") considerations into the investing process. Previous positions include leadership work with BlackRock Financial Management, MSCI Barra and UBS Securities. Ms. Appleton is an Advisory Board Member to the Association of Climate Change Officers and is a prolific contributor to leading financial texts.

Attorney Richard Slavin is the managing partner of the Westport, Connecticut office of the law firm of Cohen and Wolf, P.C. and chair of their securities group. Mr. Slavin practices in the areas of securities compliance, banking regulation and federal court litigation. Prior to joining Cohen & Wolf, Mr. Slavin served as the Director of the Connecticut Banking Department's Securities and Business Investments. Previously, he worked with the Ohio Division of Securities and the United States Securities and Exchange Commission.

Regarding the newly created FiduciaryX^SM User Group of buy side executives, Dr. Mangiero explains that "more than two years of market research and technology prototype design work will now be augmented with the invaluable feedback of pension, endowment and foundation decision-makers who have a clear idea as to what they need and want with respect to actionable information. We are grateful to the individuals who are committing their time to help us continue to improve what we think is already an exciting productivity tool."

As a combination one-stop shop for independent information and connecting with experts and peers, FiduciaryX offers a wide array of easy-to-use features for investment decision-makers and investment service providers alike. Subscribers can access the FiduciaryX Knowledgebase, Document Archive, News Archive, Virtual Reference Desk, blogs and chats with experts on over 100 different topics. Qualified buy-side executives can share lessons learned and tips on what works with new and existing colleagues around the world. Visualize a 24/7 conversation about topics such as reviewing an asset manager's performance, setting up a derivatives overlay program, choosing a new investment consultant, assessing 401(k) fees or purchasing fiduciary liability insurance from the comfort of your office. No airport delays. No budget overruns for one-way information. No aggressive sales pitches. FiduciaryX offers convenient, credible and comprehensive knowledge-sharing at a time when actionable information is essential for every investment executive.

To learn more about FiduciaryX, visit http://www.fiduciaryx.com/video_tour, call (203) 929-0011 or email Press@InvestmentGovernance.com. To read the full bios for the Investment Governance, Inc. Advisory Board members, visit http://www.fiduciaryx.com/advisory_board.

About Investment Governance, Inc.

Investment Governance, Inc. (formerly known as Pension Governance, Incorporated) is an independent research, analysis and training company. Our corporate mission is to empower institutional investors and their service providers with information, data and educational products that allows for improved decision-making, with the fiduciary perspective in mind. Our services include consulting, conferences, communities, data analysis, workshops and benchmarking technology. Visit www.InvestmentGovernance.com, www.FiduciaryX.com and www.PensionRiskMatters.com for more information.

Contacts

Investment Governance, Inc.
Susan Mangiero, 203-929-0011
Press@InvestmentGovernance.com

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To Exit or Not Exit - That is The Question

Susan Mangiero — Tue, 05 Jan 2010 00:00:18 -0500

If a picture is worth a thousand words, limited partners will want to ask general partners a lot of questions about projected exits. According to "VC exits still not a pretty picture" (TheDeal.com - January 4, 2010), a dearth of liquidity events in 2008 and early 2009 cast a pallor over the private markets, depressing M&A activity and creating angst for anyone in search of cold hard cash.

The tide may be turning if late 2009 activity is a bellwether for 2010 initial public offering ("IPO") volume. Reporter Cara Garretson describes research conducted by Thomson Reuters and the National Venture Capital Association that hints at a recovery, albeit modest by historical comparisons. With 67 mergers and acquisitions and 5 IPOs for venture-backed firms in Q4-2009, coupled with at least 29 companies that have filed with the U.S. Securities and Exchange Commission to go public, life may be sweet indeed for some. (See "IPO, Acquisition Activity Raises Hopes for 2010," CIOZone.com, January 4, 2010).

Closer to home, Financial Engines has signaled its intent to raise $100 million by selling stock to the public at large. Self-described as a "leading provider of independent, technology-enabled portfolio management services, investment advice and retirement help to participants in employer-sponsors defined contribution retirement plans," this California company received private market monies from giants such as New Enterprise Associates and Oka Hill Capital Partners. (See "Financial Engines Inc files for $100 min IPO" by Clare Baldwin, Reuters, December 9, 2009.) A brainchild of Nobel prize winner Dr. William Sharpe, Financial Engines recently claimed $25 billion in managed accounts and nearly 400,000 participants.

For those in the investment industry, the Financial Engines S1 filing with the U.S. Securities and Exchange Commission makes for interesting reading. Cited risk factors include:

"Decline or slowdown of the growth in the value of financial market assets" which reduce revenues related to management
"Negative public perception and regulation of the financial services industry"
Elimination or decrease of sponsor 401(k) matches which could lower assets under management
Pressure to reduce fees charged for "portfolio management, investment advisory and retirement planning services"
New regulations that impact any organization that offers subadvisory work, etc.

Later pages of the Financial Engines regulatory report offer insight about the growth potential for those seeking to expand their presence as part of the U.S retirement savings industry. The commentary includes reasons why management account business is likely to grow.

Stay tuned for what could be a watershed year in terms of public filing reversals.

Return, Liquidity and Valuation

Susan Mangiero — Sun, 03 Jan 2010 12:14:18 -0500

More than a few of our recent conversations with pension, endowment and foundation decision-makers focus on hard-to-value investing. At a time when 2010 beckons with the hope of a buoyant market, institutions seek returns from alternatives such as hedge funds, private equity and venture capital. According to "The Endowment & Foundation Market 2009," put out by the Spectrem Group, about six out of ten organizations seek to rebuild by emphasizing non-traditional asset allocations. Other recent studies confirm the same sentiment with the caveat that liqudity is key.

Therein lies the rub.

Can you invest in "hard to value" assets and satisfy a need for ready cash at the same time?
Who should monitor valuation of "hard to value" assets?
What areas of concern are most acute from the investment decision-maker perspective?
What elements are "must have" with respect to effective policies and procedures?

In my September 11, 2008 testimony before the ERISA Advisory Council on the topic of hard to value investing, I emphasized the need to subsume pricing as part of pension risk management (though the concept transcends retirement plans, with full applicability to endowments, foundations, college plans, sovereign wealth funds and other types of buy side executives).

Click to access the United States Department of Labor Advisory Council report on hard to value investing.

Participate in a short survey entitled "Hard to Value Investing Policies and Procedures." The questionnaire consists of twelve multiple choice queries. For those interested in receiving survey results, be sure to include your name and email address before you hit the "Submit" button.

Pension Crisis - Fact or Fiction?

Susan Mangiero — Mon, 28 Dec 2009 22:38:46 -0500

With all the brouhaha about pension problems around the world, it is worth noting who is being held accountable for the woes and who is identified as being able to implement solutions. The results to date are intriguing to say the least and showcased below. Click to take the pension survey and add your voice. We will run the survey for awhile longer and then report final numbers.

Nearly 70 percent of respondents strongly agree that a pension crisis looms.
U.S. Congress (57 percent), board members (50 percent), Chief Executive Officers (43 percent), regulators (36 percent) and plan fiduciaries (36 percent) are identified as responsible for the pension crisis. Write-in answers point blame to lobbyists, Wall Street executives and those "who pushed the 401k lie."
When asked who can fix things, respondents express faith in U.S. Congress (36 percent), plan fiduciaries (36 percent), regulators (36 percent), governors and other state officials (29 percent), Chief Executive Officers (29 percent) and board members (21 percent). Write-in answers include a preference for a national solution, new regulation, ethical people and the securities industry to step up to the plate.
Nearly 70 percent of respondents fear a Social Security crisis. One respondent suggests the removal of the Social Security cap so that FICA contributions increase as taxable income goes up.
Eight out of ten respondents agree that "most people are ill-equipped to invest their own money for retirement planning purposes."
Only 14 percent of respondents support "generous pension packages" for corporate and government leaders during hard economic times. One person questions the use of the word "generous," adding that "decent pensions for time served" make sense. Another person writes that executives often get paid for failure. Yet another survey-taker said that lumping together corporate and government executives is not a good idea.

My first reaction is one of puzzlement. If certain decision-maker categories are identified as pension "culprits" and then subsequently classified by survey-takers as those likely to solve problems, what is preventing action now and why aren't people upset about supposed inaction?

In a related survey conducted by KPMG, analysts document a loss of purchasing power for many pensioners and a painful hit to the bottom line for UK sponsors. "The lost decade for pensions? " cites "growing life expectancies, disappointing equity returns and higher demands for cash" as some of the reasons that have led to almost a doubling of British defined benefit plans being closed or frozen when comparing 2000 to 2008. Authors of the study conclude that regulations can "help to ensure adequate future private sector benefit provision." While other studies suggest a similar panacea, I only invite readers to ponder whether excess regulation got us into this mess in the first place. Think perverse incentives, subsidized costs and compliance mandates that do not map back to economic reality.

Retirement plans, properly structured and managed, offer a lifeline to employees around the world. In contrast, poor governance could pit Jack against the giant but with no hope of a fairy tale ending.

Once again, let us know what you think. Click here to take this six question survey.

"Up in the Air" - Stark Reality About the Employee - Employer Relationship?

Susan Mangiero — Mon, 28 Dec 2009 00:08:38 -0500

Seeking a fun film over the holidays, I persuaded my husband to join me at a viewing of "Up In the Air" with George Clooney.This modern Cary Grant did not disappoint, doing a great job of conveying his own search for the meaning of life as he travels the United States, laying off workers at various companies. In an interesting twist, many of the actors are "real people" who had at one time apparently sat across the desk from a non-Hollywood version of a jobs terminator.

I recommend the movie but don't expect a romantic comedy. In fact, don't expect to laugh more than once or twice. It is a serious montage of human angst at a time of when unemployment is high and only the adventurous are popping champagne corks to celebrate the end of the recession.

I would however like to offer a counter to this Tinseltown intimation that management is always bad and labor is nothing but pure at heart. In today's mobile, global and less than long-term workplace, it is imperative for everyone to continuously evaluate their skill set, make sure they are adding value and can quickly adapt to change. Be part of the solution, not the problem. This is not to say that layoffs of hard-working individuals, due to incompetent leadership, are less than tragic. It's only to suggest that there are countless opportunities to retool and taking responsibility for one's ability to earn a living is paramount.

A former manager urged me to think of myself as a box of cereal and periodically ask whether I'm "new and improved" enough to compete with the other brands.

Are you doing enough to encourage your team to grow and learn?
Are you focused on being the best you can be in terms of wealth creation on behalf of shareholders and, by extension, yourself?

Can You Be Too Cautious When It Comes to Risk Management?

Susan Mangiero — Sun, 27 Dec 2009 12:48:12 -0500

This year has been tough for many investment professionals so it's no suprise that more than a few folks are hungering for January 1. Either 2010 is going to be "their year" or they figure that things just couldn't get any worse. Unfortunately, depending on Lady Luck, after months of tumult, is a high risk proposition and ill-advised. Add the fact that the governance benchmarking movement is gaining momentum around the world. Those who rely on a rabbit's foot or magic crystals are likely to be forced into action, regardless of their desires.

So what's on the governance "to do" list for coming months?

In its December 16, 2009 press release, the U.S.Securities Exchange Commission describes a new rule "that would help investors determine whether a company has incentivized excessive or inappropriate risk-taking by employees. Among other things, it would require a narrative disclosure about the company's compensation policies and practices for all employees, not just executive officers, if the compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company. Smaller reporting companies will not be required to provide the new disclosure." For more information, click to read "SEC Approves Enhanced Disclosure About Risk, Compensation and Corporate Governance."
Wall Street Journal writer Dennis K. Berman predicts that 2010 will usher in the "most significant regulation in 75 years" in order to "reset the financial industry's profitability, core oversight and connection to Main Street investors." (See "In 2010, Year of the Regulator" - December 22, 2009.) His view that "politics, populism and profits" are about to collide in the halls of the U.S. Congress is one that I share. When Joe Worker struggles to pay bills, let alone save for retirement, he becomes a vote-killer and that spurs lawmakers into action to create new mandates. (Whether "one size fits all" regulations work - and I contend that they induce their own set of problems - is a different discussion altogether.)
On December 15, 2009, the American Federation of State, County and Municipal Employees, AFL-CIO released what it describes as a "first of its kind report" entitled "Enhancing Public Retiree Pension Plan Security: Best Practice Policies for Trustees and Pension Systems" by Attorney Christopher W. Waddell. Focused on pay to play, insider trading, fiduciary duty, ethics and board assessment, the 40+ page file is worth a read. The fact that this document exists is yet another indication of the movement towards a nuts and bolts approach to staying out of trouble.

With these and countless other indications that the paradigm is shifting towards the documentation of accountability, one wonders if it is possible to be too cautious when it comes to risk management. This is not the same as asking whether someone can be too risk-averse with respect to investment management and thereby incur opportunity costs.

Frame your answer by asking yourself any of the following questions:

"Is there anything I could do now that would mitigate my risks in 2010 and help me avoid time-consuming and costly problems if I have to explain why I didn't do X, Y and Z?
Will I regret not taking the extra steps to notate my strategy, related internal controls and the general decision-making process?
What are the reputation-related consequences of inaction or undertaking an incomplete process with respect to enterprise risk management?
Will my personal and/or professional liability exposure go up if a problem arises and I am unable to explain why I did what I did?"

Will this new year be one of undue caution or simply a matter of committing to smart best practices because it is good prevention, not to mention a way to garner invaluable information and increase peace of mind?

Qualified Investment Decision Makers to Connect With Peers

Susan Mangiero — Fri, 18 Dec 2009 22:58:23 -0500

If you are an investment decision-maker and represent a buy side organization, Investment Governance, Inc. would like to extend an invitation to you to kick the tires on a new and unique website for, and designed by, investment professionals. In exchange for a few hours of your time over the next several months, you will be given a complimentary subscription to www.FiduciaryX.com for a period of one year.

Set to launch in January 2010, FiduciaryX^SM is an added-value information portal and business network for analysts, executives, trustees and board members who are responsible for the financial well-being of pensions, endowments, foundations, college plans and so on.

FiduciaryX is owned and operated by Investment Governance, Inc. and has been designed for busy individuals who want: (a) an opportunity to search and retrieve independent, bias-free and actionable information on over 100 topics (b) the opportunity to share lessons learned (c) the ability to download document templates (d) a chance to ask questions of experts via the FiduciaryX Virtual Reference Desk (e) an easy way to search a comprehensive Service Provider Directory (f) a chance to rank vendors (g) the ability to connect with each other in a secure place and (h) so much more.

Our FiduciaryX User Group is nearly finalized. We would like to add up to fifty (50) more individuals who are excited to explore this indispensable problem-solving tool and be part of the efforts to make a difference in raising the investment "best practices" bar.

Click to watch a short video about FiduciaryX and learn more about the many benefits offered by FiduciaryX researchers, analysts, editors and subject matter experts.

If you have a few hours and are ready to receive and share information as a member of the FiduciaryX User Group, email Mr. Josh Lurie at JLurie@InvestmentGovernance.com or Dr. Susan Mangiero at Susan.Mangiero@InvestmentGovernance.com. If your schedule does not allow for a few hours a month for the next 12 weeks right now (as the FiduciaryX User Group explores this unique portal and business network even as subscribers do the same), click here to be notified when FiduciaryX launches in January 2010.

We'd love to hear from you!

Information Economics

Susan Mangiero — Fri, 18 Dec 2009 18:30:12 -0500

I sometimes forget that not everyone is familiar with my favorite idioms. For example, in speaking to one of our legal research consultants today, I told her that I would be "out of pocket" for a few days around the holidays. When she queried as to what I meant, I explained to her my use of the term and then, being curious, took two minutes to search the web as to where the expression originated. According to a blog entitled "the hubbub: Language, behavior, technology," this term had once only referred to tax deductible expenses but has morphed into meaning that an individual is unavailable. Indeed, in its October 7, 2006 blog post entitled "Office Talk: 'Out of Pocket'," the authors suggest that something more sinister may be afoot. Not only unavailable, "out of pocket" is a possible diss, a warning not to bother ... "you can use email, phone, IM, SMS, carrier pidgeon - there's nothing you can do to reach me at that time."

This got me to thinking about the implications overall for investment professionals for whom information is arguably the lifeblood of money flows.

Can we be over exposed to individuals or is there always room for more?
Is there such a thing as too much information?
How should we be sorting "good" information from "bad?"

In 1997, I published a doctoral dissertation about the information economics associated with high frequency trading. Entitled "Are Institutional Investors and Analysts Informed Traders? An Empirical Examination," I investigated trading volume and costs for "visible" exchange-traded stocks on one end of the spectrum in terms of institutional ownership and analyst following and "neglected" equity securities at the other extreme. As expected, I was able to document informational inefficiencies, leading to the conclusion that there might be "gold in them thar hills" if one is to pay close attention to micro data trends.

Expect more from me on the topic of information arbitrage. It is both mysterious and puzzling but certainly worth further investigation.

Investment Governance, Inc. Announces Northern Trust as Founding Sponsor

Susan Mangiero — Fri, 18 Dec 2009 00:18:38 -0500

Investment Governance, Inc. recently announced Northern Trust as a founding sponsor of FiduciaryX^SM – a new information portal and business network for institutional investors and their service providers that will launch in January 2010. With Northern Trust’s sponsorship and the participation of leading governance, legal and investment professionals, FiduciaryX establishes an exciting productivity tool for investment decision-makers who control over $25 trillion in global assets on behalf of pensions, endowments, foundations, sovereign wealth funds, mutual funds, 529 college plans and family offices.

“The Investment Governance team appreciates Northern Trust’s committed support of our mission to offer a unique, one-stop ‘investment best practices’ information portal and business network for investment decision-makers and their service providers,” said Dr. Susan Mangiero, founder and CEO of Investment Governance, Inc. “I applaud Northern Trust’s willingness to embrace our vision of buy-side empowerment, promoting transparency and encouraging investment professionals to seek out independent information and network with their peers.”

As a combination one-stop shop for independent information and connecting with experts and peers, FiduciaryX offers a wide array of productivity tools for investment decision-makers and investment service providers alike. Subscribers can access the FiduciaryX Knowledgebase, Document Archive, News Archive, Virtual Reference Desk, blogs and chats with experts on over 100 different topics.

Qualified buy-side executives can share lessons learned and tips on what works with new and existing colleagues around the world. Visualize a 24/7 conversation about topics such as reviewing an asset manager's performance, setting up a derivatives overlay program, choosing a new investment consultant, assessing 401(k) fees or purchasing fiduciary liability insurance from the comfort of your office. No airport delays. No budget overruns for one-way information. No aggressive sales pitches. FiduciaryX offers convenient, credible and comprehensive knowledge-sharing at a time when actionable information is essential for every investment executive.

“FiduciaryX leverages the exciting medium of social networking, dedicating itself to bringing the knowledge of a community of like-minded individuals to our clients with terrific precision and appropriate context. This is a pioneering application in our industry,” said Peter Cherecwich, Chief Operating Officer of Corporate & Institutional Services at Northern Trust. “Supporting this independent resource is critical to our strategy of providing trust and transparency to our clients. The more informed everyone in our industry stays, the better decisions they can make and the better off the ultimate beneficiary or shareholder will be. In line with that commitment, Northern Trust will help provide subscriptions and sponsor educational events for our institutional clients to participate in the debut of www.FiduciaryX.com in early 2010.”

To learn more about FiduciaryX, visit http://www.fiduciaryx.com/video_tour, call (203) 929-0011 or email Press@InvestmentGovernance.com.

To access the original 12/15/09 Business Wire press release, click here.