Tag Archives: New York Times

New York Times book review of The Fund Industry

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Demystifying the Fund Industry

Paul B. Brown reviews the latest book by Bob Pozen, The Fund Industry: How Your Money is Managed

It is amazing how little many of us really know about our mutual funds.

We may have a handle on the investments they hold — large-cap stocks or bonds or whatever — and some understanding of how they work: our money is pooled with a lot of other people’s, and we share the gains and losses proportionately. Continue reading →

For Social Security, a Birthday Makeover [NYT]

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The NYT Op-Ed page editors asked six experts to recommend specific fixes that could be part of a comprehensive reform package for the nation’s largest social insurance program.
Cut Benefits, But Do It Fairly by Robert Pozen.
How do we maintain Social Security in the fairest way? Consider progressive indexing, which would preserve benefits for the bottom third of wage earners who rely on the program for almost all of their retirement income, but recalculate the benefits of higher-paid workers who have other sources of retirement income — including 401(k)s and IRAs — that are tax-subsidized by the federal government.

To calculate initial benefits at retirement, Social Security currently takes workers’ average career earnings and increases them by the rate at which average wages rose during their careers, a mechanism called wage indexing. Once workers start receiving benefits, they are increased annually by the amount that consumer prices rose in the prior year, called price indexing.

Under progressive indexing, by contrast, the initial benefits of the top earners would be calculated by price indexing, while the initial benefits for the bottom third would still be calculated by wage indexing (a grace period would be put in place for workers within three years of retirement). The initial benefits for the middle third would be calculated by a blend of price and wage indexing.

Progressive indexing would reduce the long-term Social Security deficit from $4.7 trillion to between $1.2 trillion and $1.7 trillion, depending on the design of the middle-income blend. Why? Because over the span of a worker’s career, wages tend to rise about 1 percent faster than prices.

In short, progressive indexing would preserve Social Security benefits for the neediest workers while allowing the benefits of other future retirees to grow at the rate of consumer prices or higher.

— ROBERT C. POZEN, chairman emeritus of an investment management firm and senior lecturer at Harvard Business School

They’ve Got It: Fixes for the Financial System [New York Times]

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By SEWELL CHAN and BINYAMIN APPELBAUM. Robert C. Pozen, chairman of MFS Investment Management and author of “Too Big to Save? How to Fix the U.S. Financial System” (Wiley, 2010), wants to require banks to issue an existing kind of bond known as long-term subordinated debt. “Subordinated debt is bought by very sophisticated investors who insist on conditions like capital requirements and covenants to make sure that banks don’t take on too much risk,” he says.

Since their investment is not guaranteed and their time horizon is long term, such creditors have interests closely aligned with those of government regulators, says Mr. Pozen, who is also a lecturer at Harvard Business School.

Financial Crisis Reading List [New York Times - Economix]

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By David Leonhardt. “One book that may deserve more attention than it’s received is “Too Big to Save,” by Robert Pozen, a former vice chairman of Fidelity Investments. I found Chapter 6 — on capital requirements — especially useful. As Mr. Pozen writes, these requirements are ‘the most criticial component of any regulatory system for commercial banks or investment banks.’ “

Does the Public Care About the Public Option? [New York Times]

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By Katharine Q. Seelye.
What is the Public Option?
“Some see it as having the government act as a provider of last resort,” Robert C. Pozen, a senior lecturer at Harvard Business School, wrote online in Harvard Business, arguing in favor of state-based public options. “Others mean a national one-payer system based on the Medicare model. Still others mean health care cooperatives, though they do not exist in most of the U.S.”

Whatever the public option may actually be, the public itself seems fairly flexible on the matter — even if those in Washington are not.

Inventing a Better Patent System [New York Times]

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Op-ed by Robert C. Pozen.
Congress shouldn’t make the best the enemy of the good. If it avoids the tricky question of damages measurement and adopts these five amendments, it would weed out low-quality patent claims, reduce the number of expensive lawsuits and reward our best innovators.

Think First, Bail Out Later [The New York Times]

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Congress should extend the 1991 bailout law for banks to all financial institutions. In addition, any institution that lacks F.D.I.C. insurance for small depositors should be bailed out only if the Fed determines that its failure would materially jeopardize the entire financial system. In that case, the Fed should be required to evaluate, and document for subsequent review, whether a bailout is truly the least costly way of protecting the financial system. This is the only way to ensure that bailouts of securities dealers are rare instances.

Reporting for Duty [New York Times]

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EXECUTIVES of publicly traded companies complain bitterly about American investors’ undue emphasis on short-term results. Yet paradoxically, two-thirds of the companies in the S.&P. 500 project what their next quarter’s earnings per share will be — and then spend huge amounts of time and resources in a dubious effort to meet that projection.

Evidence is mounting that giving what’s called quarterly guidance (for example, “next quarter the company is expected to earn $2.42 to $2.44 per share”) is detrimental to a company’s long-term performance. A survey by the National Bureau of Economic Research of 401 senior financial executives found that 80 percent were willing to forgo spending on research and development to meet their predictions, while 55 percent were willing, for the same reason, to delay projects that promise gains in the long term for their company.

Similarly, an empirical analysis of companies that regularly provide such guidance concluded that even though they are more likely to meet their projections than those that use the practice only occasionally, they are less likely to achieve long-term earnings growth.

This month, the United States Chamber of Commerce commission on which I serve will urge all public companies to stop giving quarterly guidance. Many chief executives will be reluctant; they fear that not issuing predictions will hurt their company’s stock price. These fears, however, are not supported by a 2006 McKinsey study of 1,200 companies that compared those giving quarterly guidance to those that did not. This study showed no statistically significant differences between guiders and non-guiders when it came to valuation multiples, stock price volatility and the number of analysts following the company. Trading volume did initially drop when a company abandoned the practice, but that difference disappeared within a year.

In fact, according to a membership survey by the CFA Institute, 76 percent of investment analysts who issue their own predictions about company earnings support the elimination of quarterly earnings guidance in favor of more extensive disclosures about long-term business strategies.

Yet most companies that stopped giving quarterly guidance did so because they missed their own projections and, according to a recent study by three business school professors, 25 percent of them resumed the practice as soon as their earnings improved. As a result, the stock market tends to view a company’s decision to stop as a negative signal about its future performance. That signal would be eliminated if more American companies announced a permanent end to the practice — ideally, immediately after a quarter in which the company met or exceeded its projections for earnings per share.

At the same time, the company should provide more information to the public in three key areas.

First, companies should disclose more on long-term plans for acquisitions or divestitures, capital expenditures and research investments.

Second, after companies disclose their actual earnings per share for the quarter, they should meet with Wall Street analysts to explain any mistaken assumptions or facts by analysts — and post the explanations on the company Web site. This practice was instituted by Exxon after it stopped giving quarterly earnings guidance.

Third, between quarterly disclosures of actual earnings, companies should publicly report, using the Securities and Exchange Commission’s expanded Form 8-K, any material changes in the company’s situation — an officer’s resignation, a significant patent victory, an accounting change — so investors aren’t taken by surprise.

If we want American companies to take a long-term approach, we must help chief executives free themselves from the tyranny of projecting quarterly earnings. Of course, American executives will still feel pressure to meet the Wall Street consensus on quarterly earnings. But that pressure will be much lower if company chiefs are not trying to meet their own public predictions.

Robert C. Pozen, an investment manager, is a member of the United States Chamber of Commerce’s Commission on the Regulation of the United States Capital Markets in the 21st Century.