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March, 2000

Stephen H. Cypen, Esq., Editor

1. FLORIDA DEPARTMENT OF INSURANCE TO REPEAL ANACHRONISTIC RULE: Don't panic, we just don't often have the opportunity to use the word "anachronistic." Several years ago the administration of fire and police funds under Sections 175 and 185, Florida Statutes, was transferred from the Department of Insurance to the Division of Retirement. Prior to that time, the Department of Insurance had rules concerning distribution of fire and police funds. In reviewing its rules, the Department of Insurance discovered that it still had a rule, which obviously no longer applies since the Department of Insurance does not administer the program. Thus, the rule will be repealed, and the only thing you need to know is that the action will not affect your pension fund in any manner.

"Procrastination is the art of keeping up with yesterday."

2. RECORDS OF OUTSIDE ATTORNEY FEE BILLS HELD BY COUNTY RISK MANAGEMENT OFFICE NOT CONFIDENTIAL: According to the Florida Attorney General, records of outside attorney fee bills for defense of a county, as well as its employees who are sued individually, for alleged civil rights violations are public records subject to disclosure, even though those records may be maintained by the county's risk management office pursuant to its risk management program. Exemptions to the Public Records Law are to be construed narrowly. The Attorney General distinguished a recent trial court decision holding that records not delivered by an attorney to the county remain private. He also found that the exemption from disclosure for "mental impressions, conclusions, litigation strategies or legal theories" does not apply to bills (but if the bills contained such exempt information, it could be deleted). Finally, the exemption in Section 768.28, Florida Statutes, for "claims files maintained by any risk management program" applies only to tort claims and not to civil rights actions. AGO 2000-07 (January 27, 2000).

3. CIVIL RIGHTS ACTION WILL NOT LIE AGAINST DEPUTY SHERIFF WORKING AS PRIVATE SECURITY GUARD: Plaintiff filed suit, pursuant to 42 U.S.C. 1983, for damages resulting from alleged false arrest and illegal search by a deputy sheriff working as a private security guard for a private corporation. In affirming the lower court's dismissal, the district court of appeal held that in order to establish a cause of action against the sheriff in his or her official capacity on the theory that a facially lawful action led an employee to violate another's federal rights, plaintiff will be required to show that the sheriff's action was taken with deliberate indifference as to its known or obvious consequences. A showing of simple or even heightened negligence does not rise to an actionable level. The court found that plaintiff's allegation that the sheriff did not enforce a policy to disallow officers' off duty employment is insufficient to state a cause of action. Plaintiff cannot possibly establish the requisite direct causal link between the sheriff's conduct and an off duty deputy's alleged false arrest and illegal search. Calvert v. Collins, 25 Fla. L. Weekly D217 (Fla. 4th DCA, January 19, 2000).

4. NO RIGHT TO JURY TRIAL IN WHISTLE-BLOWER ACTION: Plaintiff brought suit under the Florida Public Employees' "Whistle-blower's Act," Sections 112.3187-112.31895, Florida Statutes. Plaintiff demanded a jury trial, which defendant moved to strike. In a case of first impression in Florida, a circuit judge granted the motion. To be entitled to a jury trial in Florida, either a statute or the Florida Constitution must provide for the right. Although the Florida legislature could have provided for the right to a jury trial (contrast the Florida Civil Rights Act), it did not do so. The Florida Constitution guarantees the right to trial by jury only in those cases where the right was recognized at the time of adoption of the State's first Constitution. In that the first Florida Constitution became effective upon statehood in 1845 - - and the statutory whistle-blower action was first enacted effective July 1, 1986 -- there is no constitutionally-guaranteed right to trial by jury. However, the constitutional right to a jury trial for a particular action requires further analysis to examine the remedy sought and determine whether it is legal or equitable in nature. Relief available to a whistle-blower plaintiff under Section 112.3187(9), Florida Statutes, includes reinstatement and compensation for lost remuneration. The relief is primarily equitable because it is designed to restore the employee to same position he or she would have occupied had the retaliatory action not occurred. It is well established that where the right or remedy is equitable in nature there is no right to a jury trial. Schierling v. Shore, 6 Fla. L. Weekly Supp. 692 (Fla. 12th Cir., July 27, 1999).

5. WORKERS COMP CLAIMANT WHO IS INJURED AND REACHES PTD BEFORE AGE 62 NOT ENTITLED TO SUPPLEMENTAL BENEFITS AFTER AGE 65: Our regular readers know that Section 440.15(1)(f)1, Florida Statutes, provides for supplemental benefits equal to 5% of compensation rate, as established pursuant to the law in effect on the date of injury, multiplied by the number of calendar years since the date of injury (see C&C Newsletter for December, 1999, Item 1). That section also provides that entitlement to supplemental benefits shall cease at age sixty-two if the employee is eligible for Social Security benefits under 42U.S.C. 402 (Social Security Retirement Benefits) and 423 (Social Security Disability Benefits), whether or not the employee has applied for such benefits. In this case, the employee was younger than sixty-two at the time of her accident and at the time she became entitled to permanent total disability (PTD). On these unique facts, a Florida district court of appeal affirmed an order of the judge of compensation claims determining that claimant was not entitled to supplemental benefits after age sixty-five. The Florida legislature could have legitimately assumed that in these cases a claimant would not continue to work after traditional retirement age. If claimant had reached PTD after age sixty-two, she would have been entitled to supplemental benefits after age sixty-five. Wilkins v. Broward County School Board, 25 Fla. L. Weekly D278 (Fla. 1st DCA, January 27, 2000).

"Always remember you're unique -- just like everyone else."

6. STATEMENT MADE IN CONNECTION WITH UNION REPRESENTATION-CERTIFICATION PROCEEDING ABSOLUTELY PRIVILEGED: In a 1994 Public Employee Relations Commission (PERC) proceeding involving 3,000 City of Jacksonville employees, attorney Ben Patterson represented AFSCME and non-lawyer Jack Daniels represented Association of City Employees. During the PERC proceeding, Patterson sent a letter to the Mayor that contained an "ambiguous statement" regarding Daniels. Daniels sued Patterson for defamation. The district court of appeal affirmed summary judgment for Patterson because even if statements in the letter were defamatory, they would nevertheless be absolutely privileged because they were relevant statements by an attorney, made in the course of an ongoing representation-certification proceeding that included an election between two competing unions and the City of Jacksonville. In fact, the appellate court ordered Daniels to pay Patterson's attorney's fees because the action was frivolous. Maybe Jack Daniels should have taken a shot of whiskey instead of filing suit. Daniels v. Patterson, 25 Fla. L. Weekly D273 (Fla. 1st DCA, January 27, 2000).

7. INVESTIGATION OF LAW ENFORCEMENT OFFICER "CONCLUDED" WHERE NOTICE INDICATES DISCIPLINARY ACTION WILL BE TAKEN: The Police Benevolent Association sought disclosure of information pertaining to investigation of a law enforcement officer. The sheriff, who contended the investigation was ongoing, appealed the lower court's granting the petition. Section 119.07, Florida Statutes, requires that all public records be produced unless there is an exemption provided therein or in a general or special law. The sheriff asserted an exemption under Section 112.533(2)(a), Florida Statutes, that makes a complaint filed against a law enforcement officer exempt until the investigation ceases to be active or until the agency head provides written notice to the officer that the agency has either concluded the investigation with a finding not to proceed with disciplinary action or concluded the investigation with a finding to proceed with disciplinary action. In a letter to the subject officer advising him of his right to a meeting with the sheriff, the sheriff stated that "the allegations have been sustained... . Subsequent to our meeting you will be notified in writing of the disciplinary action to be taken." The letter clearly indicates that the investigation was completed, the allegations were sustained and the sheriff intended to proceed with disciplinary action. Thus, the requirements of Section 112.533(2)(a), Florida Statutes, were met, and the appellate court affirmed. Neumann v. Palm Beach County Benevolent Association, 25 Fla. L. Weekly D255 (Fla. 4th DCA, January 26, 2000).

"All reports are in; life is now officially unfair."

8. ADMINISTRATIVE ACTION BY AGENCY IN RESPONSE TO RESIGNATION OF PART-TIME EMPLOYEE WAS EXECUTIVE AND NOT APPEALABLE: A part-time bus operator resigned in lieu of his pending dismissal. He spoke to the director, as provided by county rules, and was given notice and opportunity to defend the recommended dismissal at a meeting. The final administrative decision denied the employee a hearing. In a petition seeking certiorari review in the circuit court (appellate division) of the administrative decision to deny him a hearing, the employee alleged that his resignation was coerced and involuntary. As a part-time employee, the former bus operator was not protected by classified service and did not have the right to appeal under the county code. Hence, even if the resignation constitutes administrative action, the action is executive and not reviewable directly or by writ of certiorari. Because circuit courts can only review quasi-judicial actions of administrative agencies, the petition was dismissed. Riley v. Miami-Dade County, 6 Fla. L. Weekly Supp. 757 (Fla. 11th Cir., August 25, 1999).

9. CALCULATE YOUR SOCIAL SECURITY: A new online calculator from National Center for Policy Analysis allows workers to determine their personal stake in Social Security. Log on to and follow the prompts.

10. CALPERS' FORMER INVESTMENT CONTINUES TO LANGUISH: Not that it matters to giant CalPERS any more, but the final chapter in the beleaguered Pompano Square Mall story has yet to be written. CalPERS, which paid almost $60 Million for the property and tried to peddle it for $25 Million in 1996 (see C&C Newsletter for December, 1996, Page 3), finally sold the property in May, 1997 for $21.75 Million. Now, a prominent shopping center developer has dropped its plans to purchase the 30-year old mall at U.S. 1 and Copans Road in Pompano Beach. The bigger they are the harder they fall.

11. RICH OR POOR, IT'S GOOD TO HAVE MONEY: According to a blurb in Money Magazine, the richest 225 people in the world have a net worth equivalent to the annual income of the poorest 2.5 billion people in the world! Obviously much of the world has missed out on the explosive economic growth that roughly doubled the world's output over the past twenty-five years.

"I wish the buck stopped here; I could sure use a few."

12. COULD A CRASH LIKE JAPAN'S HAPPEN HERE?: Money Magazine asked the question of three knowledgeable observers and received the following answers. Steve Leuthold: "The parallels are striking. In Japan, the triggers were a slowing economy and a tightening of the money supply by the central bank. There's a potential for that happening here." Adam Simon Posen: "It could happen, but because our banks are in better shape and our investors are less likely to get scared out of their minds, the repercussions would not be as severe." James Grant: "One quite chilling parallel is the prevalent belief that precedent has nothing to do with investing or business practices any more. It took Japan 10 years to let go of that idea." Dum de dum dum.

13. JAPAN'S NASDAQ: And speaking of Japan, did you know that the Nikkei 225 Index is not its only index? Well, we didn't, at least until we read a piece in Smart Money Magazine. Despite its status as the most-watched Japanese index, the Nikkei is not necessarily the best valuation measure for that market. Just as we have the Dow Jones Industrial Average and the Nasdaq Index, Japan has another benchmark, the Topix. While the Nikkei represents the "old" Japan (manufacturing and cyclical commodities stocks make up 28% and 25%, respectively), the Topix has a 16% weighting in technology and a 14% weighting in telecommunications. And another thing: the Topix is calculated with each stock weighted by market capitalization (like in the U.S.), while the Nikkei uses a simple average of all 225 stock prices -- hard to believe. Incidentally, for 1999 the Nikkei rose about 25% as the Topix racked up a 44% gain.

14. DB VS. DC DEBATE RAGES ON: The National Association of State Retirement Administrators' website has an interesting piece entitled "DB vs. DC-who rules?" Under current topics, NASRA's Will Keating interviewed an actuary who works with public sector clients. The interview is an analysis and comparison of defined benefit and defined contribution retirement programs. Go to to read the whole interview.

15. DB PLANS' UNEXPECTED RESILIENCY COULD AID RECRUITING: And while we are on the subject, Employee Benefit News has an interesting article on its website. The author believes that the rumors of the demise of defined benefit plans have been greatly exaggerated. Pensions were part of the once-sacred contract between management and labor. In time they became known, appropriately, as defined benefit plans -- benefits clearly defined based on years of service and salary. However, in the late 1970s these plans were upstaged by sleek new defined contribution plans. They appeared cheaper to administer, empowered workers to manage their own nesteggs, were portable and allowed employees to take full advantage of the bull market. They were the future and DB plans seemed destined to fade into financial history. But a funny thing happened on the way to the dump: DB plans did not go away; in fact they are growing in assets and participants. The resiliency of DB plans underscores their often-overlooked advantages over the competition. Furthermore, if the stock market experiences a prolonged downturn most people will wish their savings were in a stodgy old pension plan where the employer bears responsibility for contribution shortfalls. DB plans continue to grow: 42 Million U.S. workers and retirees currently have access to a DB plan, up from 38 Million in 1985. Between 1995 and 1998, assets in DB plans rose 39%, to $5.2 Trillion. And although the actual number of plans has fallen slightly (from 125,000 to 112,000), the decrease was mainly due to mergers. Despite the popularity of DC plans among workers, many employers have retained their DB plans because they are safer retirement vehicles -- particularly those employers that recognize strong fiduciary or paternalistic responsibilities toward their employees. DB plans have also retained their popularity because employers have learned to run them more efficiently. For example, one of the most costly aspects of administering a DB plan is selecting and monitoring money managers. This cost has been minimized, however, by shifting assets into index portfolios. While index funds have generally outperformed actively managed funds in recent years, indexing also reduces the monitoring, and ultimately the costs of running, a DB plan. And as we have previously reported (see C&C Newsletter for January, 2000, Item 6), the expense of DB plans has fallen as the stock market continues to flourish. Instead of having to make large contributions to their pension plans each year, employers are allowing market appreciation alone to fund fully or even overfund their plans. DB plans have survived because many employers believe they make good business sense. Although DC plans allow employees to begin accumulating savings quickly, traditional plans create an incentive for workers to remain on the job because retirement payments are backloaded, benefitting higher-paid, higher-seniority workers. This structure can be a potent tool for employers seeking to limit turnover and retain experienced workers in a tight labor market. Read the entire piece at,cfm?id=88.

"I pretend to work. They pretend to pay me."

16. STANDARD BUSINESS MILEAGE RATE GOES UP: Internal Revenue Service has increased the optional standard mileage rate for business use of an automobile for 2000. Last year the rate was reduced to 31 cents per mile, but for this year the rate has been increased to 32.5 cents. The rate for charitable use of an automobile remains at 14 cents per mile. And the rate for automobiles used for medical purposes or moving also is unchanged at 10 cents per mile. Finally, for purposes of using the fixed and variable rate method to compute deductible expenses for a leased vehicle, the standard automobile cost may not exceed $27,300.00 in 2000.

17. LAWYERS CAN NO LONGER "PAY TO PLAY": Spurred by Securities and Exchange Commission Chairman Arthur Levitt, the American Bar Association has adopted an Ethics Rule forbidding lawyers from making political contributions as a way to get government work. "By voting to end pay to play, America's lawyers demonstrate a bold and inspired leadership on a pressing ethical issue," Levitt said after the ABA's policy-making House of Delegates voted 266-157 to adopt the model rule. In the past, Levitt has warned against letting money managers make campaign donations to state and local officials, who oversee public employee pension funds that hold more than $2 Trillion in assets nationwide. He was successful in having the SEC last year propose a rule prohibiting certain of the practices (see C&C Newsletter for October, 1999, Item 5). The new ABA rule, which state regulators will be asked to adopt, does not prohibit all political contributions by lawyers. It provides that "a lawyer or law firm shall not accept a government legal engagement or an appointment by a judge if the lawyer or law firm makes a political contribution or solicits political contributions for the purpose of obtaining or being considered for that type of legal engagement or appointment."

18. HIGH-TECH COMPANY SWITCHES TO NASDAQ FROM NYSE: Aeroflex, a small high-technology company, will become the first publicly-traded company to move its listing from the New York Stock Exchange to the Nasdaq Stock Market. As companies grow in size and market value, they often move from the Nasdaq to the NYSE --for example, Qwest Communications International. But until now, no company has ever left the Big Board for the Nasdaq. The move may reflect the shifting attitude of U.S. investors, who have become increasingly infatuated with the growth potential of small technology sector companies, many of which are listed on the Nasdaq. Last year saw demand for those stocks fuel an unprecedented 86% rise in the Nasdaq composite index.

19. IRS UPDATES "SAFE HARBOR EXPLANATION" FOR DIRECT ROLLOVER DISTRIBUTIONS: The Internal Revenue Service has issued an updated model explanation to be given to recipients of eligible rollover distributions from qualified pension plans within a reasonable time before the distribution is made -- generally no less than thirty days and no more than ninety days. IRS Notice 2000-11, IRB 2000-6 (February 7, 2000). The Unemployment Compensation Amendments of 1992 directed the Secretary of the Treasury to develop a model explanation to satisfy the amendment requiring a plan administrator to provide a written explanation to any recipient of a payment that could be "rolled over." The model explanation was originally published as Notice 92-48, which we provided to our clients at the time. The notice has been revised to reflect recent changes in the law relating to commencement of minimum required distributions, elimination of 5-year averaging tax option for lump-sum distributions, an exception to the early withdrawal tax for tax levies on qualified plans and a restriction on certain hardship distributions that are not eligible for rollover treatment. The notice renders IRS Notice 92-48 obsolete. Incidentally, a plan administrator may "customize" the Safe Harbor Explanation by omitting any portion that could not apply to the plan. We have already provided our public pension clients with a customized Safe Harbor Explanation and will be pleased to make a copy available to any reader upon request.

"A fine is a tax for doing wrong. A tax is a fine for doing well."

20. TWO BANKRUPTCY COURTS SAY MANDATORY CONTRIBUTIONS ARE NOT PART OF "DISPOSABLE INCOME": Following up his recent article questioning the soundness of two bankruptcy decisions from New York holding that mandatory contributions to a public sector defined benefit plan constitute "disposable income" in bankruptcy Chapter 13 (see C&C Newsletter for November, 1999, Item 19), general counsel for the New York State Teacher's Retirement System reports on two bankruptcy court decisions to the contrary. Appearing in the February 2000 NAPPA Report, the article cites decisions from U.S. Bankruptcy Courts in Montana and the Northern District of Alabama. However, the author expresses concern that these courts did not directly take issue with the reasoning from the New York decisions that contributions can only be considered mandatory where the debtor will be fired if he or she fails to make them. Although the author concludes that the more recent decisions go the right way, because their reasoning is not altogether satisfying, he suggests it may be a while before the issue is finally put to rest.

21. SMITH BARNEY PLAYS HARDBALL: In a classic example of putting one's money where one's mouth is (or, more accurately, taking it away), Smith Barney has withdrawn its accounts from a money manager who employed a portfolio manager falsely claiming he had a college degree. Smith Barney's compliance department discovered the situation during a routine due diligence check last summer. Apparently, broker-dealers placing money with managers have a rating system, and because Smith Barney's compliance officer chose to treat the misrepresentation as a material event, the firm had to withdraw its accounts -- even though the money manager summarily dismissed the offending employee. Ironically, Smith Barney brokers "loved" the money manager's performance, but were overruled by the compliance department, according to an article in Plan Sponsor.

22. NASRA URGES CODE OF ETHICS: The National Association of State Retirement Administrators recently adopted a resolution urging all public fund fiduciaries to adopt a Code of Ethics that would govern their decision-making, personal conduct and relationships with others. The resolution contains two standards. The first addresses exclusive loyalty, which states that public fund fiduciaries should abide by the highest ethical standards, making all decisions in the best interests of system participants and placing participants' interests above all other interests. The second standard deals with decision-making, suggesting that all public fund fiduciaries should make decisions in a fair, honest and open manner, sharing information with fellow fiduciaries and system participants, and placing the participants' interests above all other interests. In an opinion piece in Plan Sponsor, former counsel to CalPERS reviews the proposed Code of Ethics and suggests the following "Ethics Action Quick Test." If you are confronted with an ethical situation that you are not sure how to handle, judge your response against the following simple guidelines: Is the action legal? Does it comply with our values? If you do it, will you feel uncomfortable? How will it play in the press? If you know it is wrong, don't do it. If you're not sure, ask and keep asking until you get an answer.

"Everybody lies, but it doesn't matter since nobody listens."

23. DC PLANS HAVE GREATER EQUITY EXPOSURE THAN DB PLANS: A survey by the Committee on the Investment of Employee Benefit Assets reported in Pensions & Investments shows that at year-end 1998 69% of defined contribution plan assets were invested in equities compared to 62% for defined benefit plan assets. Both were up from 1994, when 57% of DB assets and 51% of DC assets were allocated to equities. The numbers may be somewhat misleading, in that 38% of DC assets were in company stock (up from 35% in 1994). Another interesting point: fixed-income allocations in DB plans dropped less than 1%, to 28%, in 1998; fixed-income allocations in DC plans fell 16 percentage points, to 22% in 1998. In other words, while allocation to company stock remained relatively constant in DC plans, domestic equities replaced stable value/GICs for second place. In the 128 companies surveyed, DB plans had about 55% more assets, covered close to 90% more people and paid out about 30% more in benefits than DC plans in 1998.

24. MUTUAL FUNDS FLOURISH: Mutual funds have become so commonplace that they are finally on a par with bank savings accounts as America's favorite way to save and invest. According to data from fund consultant Financial Research Corp., reported by Pensions & Investments, mutual fund assets equaled bank deposits by the end of third quarter 1999, compared to a 1:4 ratio at the end of 1989. During the decade, long-term mutual fund assets exploded to around $4 Trillion, up from about $500 Billion. Data show that nearly half of American households are invested in mutual funds. And retirement plan assets invested in mutual funds also skyrocketed to about $1 Trillion, meaning that they make up almost 20% of all mutual fund assets. Logically, the number of firms offering mutual funds rose (to 625 from 275 in 1989), as did the number of mutual fund portfolios (to 5,800 from 2,100). Fidelity Investments retained its position as largest mutual fund company with assets over $500 Billion -- ten times larger than its assets in 1989!

"I started out with nothing and still have most of it."

25. BUCK ISSUES SURVEY ON DB ECONOMIC ASSUMPTIONS: Buck Consultants, Inc. has issued its most recent survey on actuarial assumptions for defined benefit plans, examining funding interest rates, salary increase rates, actuarial cost methods and full funding limitations for the 1998 plan year. The survey covers a cross section of employers, many of which are Fortune 1000 companies. The average funding interest rate for plans surveyed was 8.16% compared to 8.20% for 1997. The largest concentration of plan sponsors (32%) used a funding interest rate of 8.50% for 1998. The average equivalent salary increase rate from age 25 to normal retirement age was 5.20% compared to 5.30% for 1997. The average current liability interest rate was 7.06% compared to 7.21% for 1997. The majority of plans sponsors (77%) used a current liability interest rate of 7.17%, the highest rate within the allowable corridor. Finally, the accrued benefit (unit credit) actuarial cost method for determining contributions was the most commonly used method (70%).

26. PUBLIC RECORDS CUSTODIAN MAY COLLECT SPECIAL SERVICE CHARGE FOR INSPECTION: Under Chapter 119, Florida Statutes, the Public Records Law, all public records are open for public inspection and copying, unless the Legislature has exempted them from disclosure or they have been made confidential by law. While the statute authorizes the custodian of public records to charge a fee for furnishing copies of records based on the actual cost of duplication, there is no statute that generally authorizes imposition of a fee for the mere inspection of public records. The Florida Attorney General recently concluded that a public records custodian may adopt a policy to impose a reasonable special service charge based on the actual cost incurred in instances where the nature or volume of public records requested to be inspected or examined is such to require extensive clerical or supervisory assistance. Here, the requested records contained original documents that had no recorded or maintained counterparts and, by their nature, would need a heightened degree of protection from alteration or destruction. Hence, extensive clerical or supervisory assistance was required, and compensation therefor could be collected based on the average labor cost of personnel providing assistance. Broward County asked for the Attorney General Opinion after it sought to impose a $7.50 clerical charge attributable to a clerk's overseeing a one hour inspection, and being unable to perform regular duties. AGO 2000-11 (February 21, 2000).

27. "PUBLIC SAFETY OFFICERS" MUST BE CERTIFIED AS FIREFIGHTERS: In a recent opinion, the Florida Attorney General concluded: (1) "Public Safety Officers" who perform the duties and functions of professional firefighters must be qualified and certified as professional firefighters under Chapter 633, Florida Statutes and (2) volunteer firefighters who are paid for performing the functions of professional firefighters, would be employees who must be qualified and certified pursuant to Chapter 633, Florida Statutes. The Attorney General did recognize Section 175.032(8)(b), Florida Statutes, providing that "compensation for services rendered by a volunteer firefighter shall not disqualify him or her as a volunteer." AGO 2000-12 (February 22, 2000).

28. MARKET-NEUTRAL MONEY MANAGERS POUNDED: Because of the unprecedented split between value and growth stocks, most market-neutral money managers were stung last year. The median market-neutral return in the Russell Universe was -5.81%. While the spread between large-cap value and growth stock returns as measured by the S&P/BARRA style indices was 16 percentage points, it was a staggering 54 percentage points for the difference between the Russell 2500 Value and Growth Stocks. In fact, growth stocks outperformed value stocks by 125 percentage points during the past eighteen months, representing a 6.8 standard deviation. According to a front page article in Pensions & Investments, this event should occur only once every 285 billion years!

"The eternal mystery of the world is its comprehensibility."

29. "GROWTH" OR "ANTI-VALUE"?: The same issue of Pensions & Investments contains a short article about a portfolio manager who believes it's not value versus growth, but value versus anti-value. An anti-value stock is one with prospects of earnings losses. Investors who simply bought companies with expected losses had a winning strategy in 1999. In the Russell 2000 Index, anti-value stocks returned 154% compared with 21.2% for the Index. The Russell 2000 Growth Index returned 43% and the Russell 2000 Value Index returned -2%. In the Russell Mid Cap Index, anti-value stocks returned 63% compared with 18.2% for the Index. The Russell Mid Cap Growth Index returned 51% and the Russell Mid Cap Value Index was flat. In the Russell 1000 Index, anti-value returned 65%, compared with 20.9% for the Index. Bizarre.

30. BROKERS ADD VALUE ON NASDAQ TRADES, BUT NOT ON BIG BOARD: Statistics from 85 investment managers reported in Pensions & Investments indicate that in the third quarter of last year brokers added a median value of six basis points on Nasdaq trades and zero basis points on New York Stock Exchange trades. Commissions per share averaged 4.7 cents, with calculations made using a dollar-weighted average -- that is, the sum of all commissions paid, divided by the traded value, divided by the number of shares. The data were gathered by Plexus Broker Universe, which released figures to the public for the first time.

31. P&I SAYS WORLDWIDE INDEX ASSETS GROW: Worldwide index assets managed by the leading index fund managers reached $2.2 Trillion by the end of the year, nearly 70% of which ($1.5 Trillion) were U.S. institutional tax-exempt. Almost two-thirds of that amount -- $1.1 Trillion -- was in domestic equities, an adjusted drop of 2.4%. The S&P 500 is the benchmark for 58% of the domestic equity index assets reported. Domestic index bonds, the only category to gain assets over market growth for the period, grew 4.6%.

32. TAKE THE MONEY AND RUN?: The nation is celebrating its longest economic expansion ever. The government is running a record budget surplus. Inflation might be quelled. And the Nasdaq Stock Exchange, home of technology stocks, is trading at stratospheric levels. So what's the problem? Pensions & Investments reports that some pension consultants, investment advisers and economists are recommending that pension funds walk away from the table with their earnings by loading up on long-term, long-duration bonds such as 30-year Treasury zero-coupon bonds and the benchmark 30-year Treasury bonds. Our readers know that the longer a bond's duration -- a measure of bond price volatility -- the more sensitive it is to changes in interest rates (see C&C Newsletter for December, 1999, Item 12). Long-duration bonds allow pension funds to eliminate interest rate risk because their prices move in the same direction as pension liabilities and the opposite direction of interest rates. These experts suggest that changes in the economic environment warrant pension plans' re-examining their long-term asset allocations. Ironically, the recommendation comes as the government scales back on issuing new 30-year Treasury bonds and embarks on a plan to buy back outstanding bonds this year (see C&C Newsletter for November, 1999, Item 18). The specter of a shortage has pushed up the prices of long-term bonds and caused their yields to drop, as institutional investors have rushed to stockpile them. This idea of asset reallocation is not all that unique (see C&C Newsletter for January, 2000, Item 3 and C&C Newsletter for February, 2000, Item 5).

"Indecision is the key to flexibility."


Growth style Employed by investment managers who invest in companies that have superior growth prospects. Generally, these companies have higher price-to-earnings and price-to-book ratios and lower dividend yields.

Growth-at-a-reasonable-price style (GARP) Employed by investment managers who invest in companies that have superior growth prospects. However, security selection techniques are used to identify those companies that are underpriced relative to other companies in the same industry or sector.

Health Services A sector classification that includes securities of firms providing health-related services or products.

Hedging A strategy used to offset investment risk.

High Yield A bond rated BB or lower by Standard & Poor's Corporation or Ba by Moody's Investor Service. A High Yield bond is lower in quality than an investment grade bond and has greater credit risk.

Historical Beta The measure of a stock's (or portfolio's) return volatility relative to the market (benchmark index). A beta of 1.00 means a stock has exhibited the same volatility as the market over the period measured. A beta of .85 means, in general, a stock is less volatile than the market (that is, moves 0.85% for each 1.00% move in the market) whereas a beta of 1.15 means a stock is more volatile than the market (that is, moves 1.15% for each 1.00% move in the market). An estimate of the historical beta of a portfolio is based on a simple linear regression of the portfolio returns.


In Item 1 of our February Newsletter, concerning the City of Miami Beach pension case, we said 1998 when we meant to say 1988. Although the date is not particularly significant to the holding, we want to be as accurate as possible.

In Item 10 of the same newsletter, when we talked about smoothing investment results, we said "actual" when we "actually" meant "actuarial."

And besides, we haven't made a mistake - - at least to our knowledge - - since last September!

Copyright, 1996-2004, all rights reserved.

Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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