Get a new manager, but not Merrill
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Dear Mr. Berko:
I own a large company, and we have a pension plan with a market value of $86 million. The current manager has done moderately well in the past year (up 8.2 percent) but was down 26 percent last year, so we still have a long road to travel home. We recently discussed his market philosophy for the next year, and he is bearish on equities so he intends to keep 85 percent of our portfolio in long-term corporate bonds. I disagree and feel that interest rates are headed higher, but he may be right about our economy.
I would appreciate your thoughts on long-term interest rates and employing Merrill Lynch to manage this account. We’ve been talking to Merrill for the last six months, and they seem to have the investment style that we are comfortable with.
CEO, Cleveland
Dear CEO:
I believe your current manager may be right about the stock market but is definitely as wrong as Corrigan concerning the direction of long-term interest rates. If this ninny-hammer keeps 85 percent of your company’s pension in long-term bonds, I’m as certain as sunset that in the coming 18 months, those bonds will fall like coconuts from tall palm trees.
Interest rates are headed higher, and anyone is a fool to own long-term bonds in this market. South Korea recently raised interest rates, and so have Australia, Norway and India. These rate increases are the tip of the iceberg and may soon become the norm. Many of our institutions have recently and very quietly raised rates by 5 to 10 basis points, and there’s more to come.
Of course, with higher interest rates, we will get their companion component — inflation. The TARP funds, the stimulus package and health-care legislation have tripled our national debt with no letup in sight. Prices will soon increase to reflect the continuing avalanche of new money in circulation. It scares the bejabbers out of me. And I’m willing to wager my entire mint-condition collection of Barbie dolls, all the way back to the original Barbie in 1959, that rates are now beginning to head higher.
Those folks at Merrill are so persuasive that they can persuade a shark to become a vegetarian. But “no,” not in a hundred, not in a thousand and not in a million years would I allow them to manage your pension plan. Early this year, the Securities and Exchange Commission accused Merrill of manipulating investment procedures for many Florida pension fund clients to significantly boost its commissions, which hurtfully lowered pension fund returns. I expect that Merrill will be facing multiple lawsuits by some 40 to 60 Florida pension plans and will find it impossible to defend its self-serving behavior.
According to a recent article in the St. Petersburg Times, the St. Petersburg firefighter pension fund claims that Merrill promoted “aggressive trading over index funds because active trading generated higher commissions, recommended weaker-performing money managers when the payoff for Merrill was better, and misled customers about their fund’s performance,” and this is just in Florida. There’s a law that requires child molesters and sex offenders to alert the public of their movements. In order to protect millions of pension fund investors, I think the same law ought to apply to Merrill.
For the future of your employees (and your future, too), I’d steer away from the Merrill boys. Fool me once — shame on me! But I would recommend that you find a new money manager and be hasty about it.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, Fla. 33775 or e-mail him at mjberko@yahoo.com. © 2009 Creators.Com
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