Wall Street West—Stock Problems Don’t Scare County’s Retirement Chief

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A lesson driven home again in recent seasons, although perhaps never with such a swift vengeance, is that a good investor has a diversified portfolio. With the Nasdaq down more than 60 percent, and the broader indices deep in bear territory, today many wish they had invested more in stodgy bonds, or REITs, or even off Wall Street.

Not so for Ken Shaffer, chief investment officer for the Pasadena-based Los Angeles County Employee Retirement Association (LACERA), the retirement pot for the county’s workers.

In the last year, the value of LACERA’s portfolio has diminished but little, retreating from a peak of $31.5 billion to $29.0 billion at the end of February, less than a 5 percent haircut.

“We are only about one-third in domestic equities,” said Shaffer last week. “That doesn’t mean we haven’t gone down; we have. But nowhere near what the indices have done.” A look at LACERA’s portfolio explains why. About 11 percent is invested in real estate, and another 25 percent in fixed-income investments (usually bonds). Another quarter of the pool is in international equities, and there is even a small chunk about 5 percent in private equity. Interestingly, Shaffer does advise investors to diversify, but does not warn them away from an equity-heavy portfolio, if they are long-term investors (though some investments should still be off Wall Street, such as a house).

“I truly believe stocks will outperform bonds over the long run. If you are middle-aged or younger, saving for retirement, you might want to be in stocks only.” Of course, that prompts the question: LACERA is virtually a permanent investor. If stocks outperform bonds, why not jettison bonds in favor of more equities?

Shaffer hems and haws a bit when answering such a question, but explains that LACERA does have a board of trustees, and that the fund is still run by and serves people, not market theoreticians.

“All of us are human beings, especially our trustees. You would have to be able to face the downturns,” said Shaffer.

In other words, the recent 5 percent haircut, or about $1.5 billion, would be magnified in an equity-centric portfolio. Watching several billion dollars evaporate in a single winter is not what any trustee wants to happen on his or her watch. Additionally, if LACERA were more heavily in stocks, county government contributions to the pension fund might have to be boosted in bear market years, said Shaffer. The county supervisors are loath to face that possibility, said Shaffer, preferring more stability to potentially higher returns.


Tech No Wreck

There are a couple things investors ought to know, says Michael Pachter, head of research for downtown Los Angeles-based Wedbush Morgan Securities. First, not everything tech was bashed in the past 18 months. For example, video games have a great future, and many video software makers are doing well on Wall Street, including Calabasas-based THQ Inc. and Santa Monica-based Activision Inc. THQ hit a low of $7.62 last June, but was trading last week in the $37-a-share range, an all-time high. Same for Activision, which hit a low of $5.37 last June, but was trading last week in the $24-a-share range, also an all-time high.

And secondly, video game sales last year exceeded movie box office, for the first time.

“Yeah, you can look at Julia Roberts at the Academy Awards, but you make more money selling video games,” said Pachter.

Industry statistics show that game sales were $8.1 billion last year, vs. $7.5 billion for movie tickets.

Driving video software sales are widening consumer acceptance, and new hardware platforms, such as the much sought-after Sony PlayStation 2, said Miguel Iribarren, Wedbush’s interactive entertainment analyst.

“Sales in this industry follow their own cycles,” said Iribarren. “They tend to rise after new platforms are introduced, which allow for better and more sophisticated games.”

As the games improve, demand surges. Coming up are two more new hardware platforms, one by Microsoft, and one by Nintendo. Sony, Microsoft and Nintendo have slated $2 billion to finance ad campaigns for the new machines, said Iribarren.

That being the case, video game software sales should grow by more than 20 percent a year for the next three years, said Iribarren. In addition to kids, more young adults are playing the video games, said Iribarren. As the quality of the games improves, and as teenagers turn into 20-somethings, they continue to play on the video consoles.

“We are seeing widening demographics for video games,” said Iribarren. “This is an industry of improving hardware, software and widening age groups.”


Riding the Downturn

The old joke about corporate finance lawyers is that they bill a lot of hours in good times by putting deals together, and then they punch the clock on “workouts” and restructurings when those deals fall apart. Jim Zukin, nameplate partner and co-founder at Century City-based finance house Houlihan Lokey Howard & Zukin, is doing lawyers one better. HLHZ long ago established itself as a major player in middle-market ($50 million to $1 billion) corporate valuation work, and demand for that service surged in the recent good times as M & A; deals skyrocketed. Now, in tough times, demand for the service is also surging, as creditors and dealsters need fresh ink on what a business is worth.

“Our business (revenue-wise) was up 50 percent last year. This year is not as strong, but we are still growing,” said Zukin. That’s even more impressive when one considers that most of Wall Street is retrenching. HLHZ has more than 500 employees, and is still hiring.

Zukin said a new corporate alliance division of HLHZ, headed up by Peter Pekar, is bringing in business.

“We find people are trying to increase business even in a downturn, and what better way than a corporate alliance,” said Zukin.

Not everything is restructuring or distressed-mergers work, said Zukin. HLHZ has a merchant banking arm and is active in the biotech sector. It tries to zero in on biotech ideas that have commercial potential, said Zukin, employing lawyers and scientists in the process.

Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].

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