AMERICAN MANAGEMENT ASSOCIATION ORIENTATION SEMINAR #1236-05 - FINANCIAL MANAGEMENT OF THE CORPORATE PENSION FUND

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78-03089R000100010028-4
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 4
• Document Creation Date: December 9, 2016
• Document Release Date: August 22, 2001
• Sequence Number: 28
• Publication Date: November 5, 1968
• Content Type: MFR

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SUBJECT: American Management Association Orientation
Seminar #1236-05 - Financial Management
of the Corporate Pension Fund
1. The undersigned attended the subject Seminar
during the period October 16 through October 18, 1968
at AMA's New York headquarters. Details on the material
covered are contained in the AMA binder provided to all
registrants which will be maintained in our office li-
brary. However, it was felt a memorandum should be
written to highlight a few significant points which may
have applicability to our
and probably even more importantly to the insurance om-
plex Investment Portfolio.
2. First, it should be emphasized that the
entire
Seminar was devoted, as the subject indicates, to
the
investment and financial management of corporate
pension
funds and did not cover pension benefits as
such.
Also,
the program was principally geared towards
large
corpora-
tions and financial institutions involving
funds
in the
$100 million to $500 million category. However, with this
caveat, it still appears that there are some investment
criteria that have applicability to us.
3. While most pension funds are still being actuari-
ally calculated at the 4-1/2 per cent interest rate, the
funds themselves are actually earning substantially more
through equity investments. Twenty-five years ago almost
all pension funds were in corporate and government bonds.
Now at least 50 per cent of the funds are in common stocks.
Most pension funds are managed by the trust departments of
banks and to a lesser extent by insurance companies. How-
ever, this may be because it is,only within the last five
to six years that insurance companies have been authorized
to operate pooled investment funds. While most companies
are not actually managing their own funds, there appears
to be at least a small trend in that direction. General
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Tire and Rubber Company self-administers their own
pension funds and their fund manager spoke.a.t the
Seminar. He gave a presentation on both the advan-
tages and disadvantages of this procedure. The self-
administered Goodyear Portfolio has averaged a 25 per
cent per year rise during the last five years. It was
his conclusion that if the fund is in the $25 million
to $50 million range, self-administration should be con-
sidered. Since this is definitely out of our range, I
will limit my comments to the standards and criteria
given for rating performance by outside fund managers
or investment counselors. '
4. A few of the speakers recommended more than
one investment advisor or manager on the theory that
competition improves performance. However, all of the
speakers were talking about very large funds'which could
be sliced up in numerous substantial portions. It was
the consensus of all speakers that it takes approximately
three to five years to evaluate the performance of the
investment advisor. It was also'strongly emphasized that
once the advisor is given the objective of the fund and
any appropriate investment restrictions, he should be
given complete discretion as to how the fund was invested.
An advisor cannot be rated on decisions that are not his
own. it also was the consensus of the speakers that for
efficient fund management the optimum amount is $100
million to $300 million. Beyond that the fund does not
have the flexibility of getting in and out of the Market
without a real impact. It was therefore recommended
that for those companies placing their funds with bank-
ing institutions and insurance companies, that they not
permit their funds to be placed in a pooled arrangement
that goes over this maximum.
5. Considerable time was spent in the Seminar on
performance measurement of advisors/fund managers. It'
was generally agreed that comparison should be made with
the Standard & Poor's Select 500 instead of the Dow Jones
Average since the SP.generally beats Dow by 1 per cent.
(In rating they all add dividend income to capital appre-
ciation and make a market to market comparison.) The in-
vestment officer of AETNA Life said it was their target
to get a return of two-thirds or 6 per cent more, whichever
is higher, than the SP. The investment officer from the
Wells Fargo Bank categorized funds by objectives and risk
levels. On a fund with maximum income objectives, he felt
that 6 to 7 per cent return should be realized. On a
fund where income is the primary objective and capital
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appreciation only a secondary consideration, the return
should be 8 per cent. On a balanced income/growth fund,
the income return should be in the 4 to 5 per cent bracket
.and the growth should be 10 per cent. On a growth fund,
the income return should be 2 to 3-1/2 per cent and the
growth should be 12 per cent., on a maximum growth fund,
the interest return should be 1-1/2 per cent to 2 per
cent and the appreciation, 14 per cent. (All of these
figures represent the return that should be anticipated
annually and computed annually.)
6. It was also the Wells Fargo man's position that
an equity portfolio should be divided approximately fifty-
fifty between what he categorized as strong basic holdings
and opportunistic holdings. For him, basic holdings must
have very sound management, above average growth and be
either technically or consumer service oriented. The
basic holdings should be kept for the long-haul growth.
Opportunistic holdings are made in "turn-around" compa-
nies and companies which are changing character of their
operations. The opportunistic holdings should realize a
30 per cent appreciation per year. Wells Fargo, in its
portfolio selection, operates against named securities;
whereas in contrast, AETNA establishes the criteria for
the stock it wants and then runs it through its computer
to get a stock that fits the criteria. It was also the
consensus of all the speakers that no one fund manager
should be charged with responsibility for more than 35
to 40 different issues. In fact, if anything, that num-
ber may be somewhat high and they were all talking about
very large portfolios. For example, Goodyear has 2/3 of
its over $100 million portfolio in 29 issues and the re-
maining 1/3 in 50 issues which they feel is much too
many. Everyone preached that concentration was much
better than wide-spread diversification. If the fund
manager/advisor has too many issues to watch, none can
be watched effectively. All the managers rely heavily
on Wall Street research and, I believe, inside infor-
mation. Commissions are their leverage to get the best
information. at was the opinion of most of the speakers
that while some mutual funds 11ave had spectacular record,
most of them suffer from the lack of consistency in per-
formance. While they recognize that a good mutual fund
may well deserve a place in the pension fund portfolio,
they warn against most of the go-go funds and. the too
big funds.
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7. During the final round-up with the Chairman,
as a rule of thumb guidance for judging pension port-
folio,performance, he felt that if the portfolio was
performing 2 per cent more than the SP 500 with 1/3
more risk than the Market and that the manager/advisor
was performing at 80 per cent consistency, it was a
good portfolio.
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