February 23, 2004 1:00 pm Pacific Time **** Draft Report for Comment, Updated 2/25/04 ****
SOURCE: Parish & Company.
@ Copyright and not for publication by media without written approval from Parish & Company.
PORTLAND, Ore., -- Today Parish & Company Breaks A Major Financial Story, with National Implications, Involving Oregon's Public Pension Investments and The Concentration of Foreign Based Investment Managers in Public Pensions in the United States. Gates foundation liquidating every share of Microsoft stock and impact on Linux development also discussed.
Based upon a national review of public pension systems and their related investment strategies, Parish & Company has identified a remarkable situation. While a national debate rages over jobs and the appropriateness of outsourcing government contracts to foreign suppliers, no one has noted that many of the biggest contracts of all, public pension asset management, have been aggressively outsourced to foreign based firms. These include Allianz in Germany, ABN AMRO in the Netherlands, AXA in France and Barclays in the United Kingdom.
Few would question a private firms right to outsource jobs to foreign firms yet outsourcing of public pension assets, whose source is exclusively tax dollars, raises numerous questions. These include the realization that numerous domestic firms can do an equally fine job, especially given the level of index based investment now followed by public pensions.
This is also not to say that public pensions should not make foreign investments, clearly they should. The issue is why are such investments not being made by investment managers based in the United States? Such managers could be based in California, Florida or Topeka Kansas. We are afterall the United States of America and even though state public pension systems are independent, there is significant interaction between overall federal and state budgets and related tax issues. In addition, large blocks of the public pension portfolios are indexed to key US based stock indexes, for example, the Standard and Poors 500. Why would such pensions hire foreign based managers when domestic managers are just as competitive on fees?
As one example, consider that in Oregon more than 50 percent of the $37 billion in public pension assets are managed by firms whose parent offices are located outside the United States (see detailed list by manager that follows). Much of this concentration occurred due to mergers that many public pension managers simply lost track of. At a minimum, this highlights a lapse in the oversight of such systems. Oregon's State Treasurer Randall Edwards has been provided this summary for comment.
Also noteworthy is that many of these same firms, including the French conglomerate AXA and Germany's Allianz have had major problems with the Securities and Exchange Commission, resulting in fines due to conflicts of interest. Many public pension officials have simply not adequately monitored the relationships between firms that underwrite securities and basic investment management.
Mr. Edwards also recently chose Oppenheimer over Vanguard for Oregon's College Savings Plan, after Strong was fired due to its CEO being indicted by the SEC. Most remarkable about this decision is that Oppenheimer was chosen based upon a lower cost plan when in reality the costs are clearly higher. Oregon State Treasurer Edwards has since been provided updated data with the hope that he will overrule his staff, based upon its flawed analysis, and reverse the decision.
Parish & Company has communicated the results of this analysis to Oregon's largest newspaper, the Oregonian, in addition to the NY Times given the intensely political nature of these funds. In addition to leading reporters, Glenn Kramon, editor of the NY Times business section, and Seymour Topping, Columbia University School of Chair of the Pulitzer Prize Commission are also copied. Public pensions now represent 8 of the 10 largest investment funds in the country.
Parish & Company's analysis of public pension assets included a review of private equity and hedge fund transactions. One example here in Oregon involves the Texas Pacific Group's offer to purchase bankrupt Enron's largest subsidiary, Portland General Electric, with mostly public pension assets, including $300 million from Oregon, and run it from a Cayman Island based partnership. More than $1 billion of Oregon's private equity portfolio is now invested with the Texas Pacific Group. The following link details Oregon's private equity portfolio, many investments of which also maintain foreign based parent firms. Summary of Private Equity Investments in Oregon Public Pension System (Note PDF File)
The Texas Pacific Group's purchase of PGE is particularly controversial given that the local figurehead and Chairman of the Board will be Neil Goldschmidt. Eight days before the Texas Pacific announcement was made the five person Oregon Investment Council that manages Oregon's $40 billion in public pension assets, one of whom is Neil Goldschmidt's wife Diana, allocated an additional $300 million to Texas Pacific. Neil Goldschmidt was also simultaneously acting as a lobbyist and leading an effort to defeat a public utility ballot measure. Also included in Parish & Company's public pension analysis are specific recommendations made to the Securities and Exchange Commission regarding new disclosure requirements for public pension board members.
It may be perfectly appropriate for public pensions to invest in private equity, if more transparency were available. The problem is that these firms now completely escape SEC oversight by being based offshore. Conceptually, the public pension system is therefore igniting the removal of a major part of our economy and related free market system, a system predicated upon full disclosure. Based upon these findings, public pensions will clearly be a major topic of debate in the presidential election.
Also of significant debate should be the activities of other tax-exempt investment pools, in particular trusts and foundations. A prominent example is the $24 billion Gates foundation and its ability to liquidate every share of Microsoft stock unnoticed.
Microsoft Foundation Liquidates all Shares of Microsoft
Parish & Company provided this story to the NY Times several months ago yet it is yet to be published. This is of course a story of enormous significance to every one of Microsoft's 70,000 employees. The obvious question is, why didn't the foundation retain 25 percent in Microsoft, or even 5 percent. Clearly, employees have been betrayed and left, along with the public pension system, with inflated stock.
At the same time Bill Gates has aggressively used his foundation to invest in defense and media related companies and thereby allow himself to leverage growth of the Windows operating system in new environments by being a major shareholder. One prominent example is the foundations investment in the Mexican media conglomerate Televisa. Via this investment and subsequent mergers Microsoft now indirectly controls the radio and television broadcasts in Spanish to more than 75 percent of all Latinos in the United States.
If foundations like the Gates foundations receive tax-exempt treatment for security sales, they should be required to be fully disclosed. Only then will the free market system work. Linux users in particular should be pressing for such disclosures because only then will the playing field be level. Thinking that a more superior product will prevail in such an environment is simply naive.
Naturally, many readers will question my source for this disclosure yet the source is most credible, Bill Gates Sr. himself, director of the foundation. I corresponded with Gates over a several month period in an effort to engage him without success in supporting key corporate governance issues. Gates specifically noted on more than one occasion, via email, that the foundations now owns no Microsoft stock.
In balancing the ethical issue of publicly discussing a private email with the general public interest I decided to disclose this with the sincere thought that both Microsoft and the foundation will be better off, long term, from such disclosures. To Gates Sr.'s credit, he was very responsive and thoughtful in his comments throughout our dialogue.
Oregon Public Pension Assets, Excluding $4 billion Private Equity Portfolio
Manager (Jan 31, 2004)
Amount (000's) Parent Country
ABKB Lasalle Advisors 403,761 Netherlands
Acadian Asset Management 707,085 United Kingdom - Parent is Old Mutual
Alliance Capital - Fixed 2,020,641 France - Parent is AXA
Alliance Capital - Lg Growth 751,844 France - Parent is AXA
Arrowstreet Capital 474,806 United States
Barclays EAFE Index 1,814,417 United Kingdom
Becker Capital 343,377 United States
BGI Alpha Tilt 982,297 United Kingdom - Parent is Barclays
BGI Growth Index 3,845,805 United Kingdom
BGI Value Index 2,984,943 United Kingdom
BGI US Debt Index 505,436 United Kingdom
BGI World Ex-US Index 1,187,509 United Kingdom
Blackrock - Fixed 1,988,903 United States
Brandes Investmetn Partners 633,431 United States
Clarion Partners 585,209 Netherlands - Parent is ING
Cliffwood 74,701 United States
Cohen & Steers Capital 179,148 United States
Fidelity Investment Mgmt. 2,018,292 United States
Froley Revy Investment 550,249 United States - Owned by First Republic Bank
Genesis Asset Managers 283,716 United States - Owned by Gencap
Goldman Sachs Asset Mgmt 658,206 United States
Grey Star Capital 145,106 United States
Lazard Freres Asset Mgmt 724,106 United States
Lincoln Property Company 142,984 United States - Based in Texas
Marvin & Palmer Associates 648,412 United States
Mazama Capital Mgmt. 211,700 United States
MFS Institutional Adv Inc. 499,285 United States
Nicholas Applegate Emerg Growth 111,811 Germany - Parent is Allianz
Nicholas Applegate Minicap 116,718 Germany - Parent is Allianz
Northern Trust 739,782 United States
Pacific Investment Mgmt Co. 640,182 Germany - Parent is Allianz
Regency Realty 167,907 United States - Owned by Capital Corp of West
Rowe, Price-Fleming Intl 651,233 United States
Sanford Bernstein - Lrg Value 714,420 France - Parent is AXA
Sanord Bernstein - Int. Value 664,099 France
Thompson Rubinstein 514,792 United States
TT International Investment Mgmt 651,430 United Kingdom
Veredus Asset Mgmt 163.973 Netherlands - Parent ABN AMRO
Wanger Asset Mgmt 894,613 United States
Wellington Mgmt - Sm Value 524,751 United States
Wellington Mgmt. - Fixed 2,024,177 United States
Wells Capital 185,031 United States - Parent Wells Fargo
Western Asset - Fixed 2,030,182 United States - Parent Legg Mason
Winslow Capital Mgmt 204,477 United States - Based in Minnesota
Total - Core Investments 37,067,640
Total - Foreign Based Parent 18,852,588 approximately 51 percent
Note: this is a very close estimate, within one or two percent, most likely higher than lower.
Bill Parish of Parish & Company is an independent Registered Investment Advisor. His work has been widely quoted in the Barrons, NY Times, Bloomberg, USA Today and other leading publications. He has also been featured as the keynote speaker at many leading conferences regarding investment and financial reporting issues. This includes an April 2002 keynote speech at Kent State in which the other contributors were Bob Herdman, Chief Accountant of the SEC, Bill Ezell, the Chair of the American Institute of Certified Public Accountants and Dennis Bresford, the former head of the Financial Accounting Standards Board or FASB. You can contact Bill at firstname.lastname@example.org if you would like to have him speak at your event.
Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, OR 97223
Tel: 503-643-6999 Fax: 503-221-3161
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