Transparency in crisis

Michael Alan Hamlin

Posted on October 1, 2008

Not many of us are laughing…

Like investors all over the world, I have closely followed the value of the international funds we are invested in as well as a small portfolio of equities we manage directly over the past several weeks as the subprime mortgage crisis grotesquely morphed into the largest global financial crisis in history. This has been a pretty morbidly depressing experience for most of us. As one associate told me last week, “virtually no one has been unscathed.”

It’s important to understand that most managed funds are not exposed to the toxic mortgages and derivatives that are responsible for the crisis. The funds that I am familiar with, for example, are almost exclusively invested in European, Asian, and to a substantially less degree, U.S. equities. But the crisis has universally spooked investors, and as a result no fund and no investor have gone unaffected. A colleague quipped in conversation as I prepared this column, “I told my wife I had learned how to lose a small fortune – start with a big one.” At least, I responded, we can still laugh about it.

Many, however, aren’t laughing. They face a gloomy set of stark choices: 1) Cut and run; 2) Continue to invest and hope for the best; and, 3) Do nothing and wait for things to turn around. Of course, a great many investors don’t even have those choices: Private-equity firm TPG for example saw its recent $1.35 billion investment in Washington Mutual evaporate when government seized that bank last week.

Despite the bleak choices and non-choices investors are presented with, they deserve to know where they stand. In most cases, fund managers have responded. In the Philippines, Banco de Oro Unibank (BDO) and Metropolitan Bank & Trust Company (MetroBank) quickly disclosed their exposure to bankrupt U.S. investment bank Lehman Brothers the Tuesday following its Monday, September 15 collapse. The Bangko Sentral ng Pilipinas (BSP) subsequently said that the two banks and four other financial institutions, including state-owned Development Bank of the Philippines (DBP), had combined exposure to Lehman of $386 million.

Although investors and depositors weren’t happy with this news, the institutions’ quick disclosure provided an eerie calm. A state pension fund was also quick to assure members that their funds were safe, despite having no exposure to Lehman or other troubled investment banks. Romulo Neri, president and CEO of the Social Security System, said the pension fund still expects to earn P26.1 billion in 2008, and that all its P216.9 billion in investments are “in the local markets.”

That wasn’t the case for another state pension fund, the Government Service Insurance System (GSIS). According to GSIS, the pension fund has P441.9 billion in assets and earned P41.3 billion last year. It paid out P87.4 billion in loans and claims to its members and pensioners in 2007. Although these achievements are impressive and undoubtedly generated substantial goodwill among member beneficiaries, GSIS has been strangely opaque when it comes to its performance this year.

At issue are the status of a high-profile international investment initiative GSIS recently undertook; and domestically, the wisdom of continued investment in the Manila Electrical Company (Meralco) despite a 14 percent drop in that company’s stock price over the past year. According to a statement issued by GSIS, the agency has placed $600 million in member funds with ING Investment Management and Credit Agricole Asset Management. Each fund manages $300 million.

It is estimated that 80% of GSIS members are teachers, and they are understandably interested in the impact of the latest financial crisis on their funds. No one reasonably expects the $600 million investment to have emerged without at least a few scars. But, “government employees have a right to be informed as to how our hard-earned contributions are being managed, here and overseas,” former Senator Ernesto F. Herrera said in a statement last week. “And GSIS officials have a duty to fully disclose.”

Disclosure would relieve the pressure GSIS is feeling from Herrera, who is secretary-general of the Trade Union Congress of the Philippines (TUCP), teachers and other members, and now, senators. “GSIS must be transparent, not secretive,” Senate minority leader Aquilino Pimentel Jr. reportedly said earlier this week. “This money belongs to its members who deserve an accurate accounting.”

I was not happy when my own fund manager sent me a status report within hours of a request last week. As expected, my fund had lost money. But I would have felt much worse if the manager had refused to be upfront with me. If GSIS expects its members to be supportive and pull together in this difficult time, then it must be as transparent as private- and public-sector Philippine banks and its sister agency.

Nothing less will convince worried members that while their funds might have taken a hit, they are in the right hands during this troublesome period.

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