Introduction
The nature of humans is to labor to make better and safer lives for
themselves and their families. The unfortunate image coming out of today’s school
systems and many of its union-dominated teachers is that manual labor and
skilled labor by employees is to be celebrated only on Labor Day in the US and
similar holidays elsewhere.
I see labor all around. Certainly the homemaker producing meals,
keeping house, and often serving as the household purchasing agent is laboring.
Laboring also are the portfolio managers who are acting, along with others, as
stewards for the retirement funding of employees. Many of these put in more
hours than some that are punching a time clock or equivalent.
On Labor Day 2014, I think we should be thinking about how to make all
that labor a better value. At the first level we should see how to improve
unemployment and under-employment. At the next level we should be paying
attention to retirement funding. Finally, almost all laborers desire to take
care of beneficiaries after they are gone. This post will share some of my own
thoughts on each of these topics.
Mismatched openings and job seekers
As someone who speaks with various employers and particularly
entrepreneurs about their future progress, I often learn about the need to fill
particular positions within their organizations. Often they cannot fill
existing (or more importantly new positions) not because applicants don’t have
the required skills. If the employment decision was left to a computer match
procedure, it is estimated that all or almost all the roughly four million job
openings would be filled very quickly. But that is not the case when are faced
with hiring fellow humans.
I don’t know where so many of these applicants get their work-related
attitudes; whether from their families, friends, or their teachers. The first
hurdle is that the world or others owe them a job. The second is that they have
pre-conceived notions as to the conditions of employment which they think they
should dictate. In many cases they do not grasp how a commercial organization
functions to provide what the clients expect and need. Too often they anticipate
that their co-workers will make room for them and coach them on the first day
as to how the work and social elements really work.
I believe that everyone within an organization is a salesperson meant to
convince every contact that his or her firm is absolutely the best organization to meet
people’s needs. We are all involved with sales and service. People who want to
join a firm need to feel loyalty to the firm, its customers, managers, and
fellow employees. The sad truth is that there is not enough of these people, thus
a number of the openings will not be filled.
The cost of vacant jobs
The economic and financial impacts of not filling the vacancies are
significant. As long as people are unemployed the cost to the society will be
high in terms of taxes paid and more significantly a shortfall in consumer
purchases. There are also, at this time, important investment implications to
the unfilled openings. Organizations will not be operating at optimum
productivity levels. Profit margins will be less than what they could have
been. Today there is concern that profit margins, not profits, have reached
record levels. If these slip, even with higher sales generated profits, the
valuation afforded these stocks will decline, as they will be viewed as more
cyclical and thus could lose their place in some portfolios.
Profit margins are under pressure in numerous employers and particularly
in health and financially oriented concerns today. Due to increases in
compliance and supervisory responsibilities, companies are being forced to hire
good but unproductive people in terms of bringing in more sales. This is
hurting existing margins. When we combine these pressures with much more restrictive
activities mandated for the financial community the results are significant
layoffs at numerous banks and other financial firms. Major clients are already seeing a decline in the levels of service and
supervision. I suspect that this trend will continue unless there are major
changes in regulation.
Retirement funding awareness
One of the potentially major upticks for labor in the US is the
ability to influence its own retirement funding. The switch to Defined
Contribution plans from Defined Benefit plans can produce a retirement account
that more closely represents what the specific employee wants from the
available alternative options rather than being bundled with all other
employees. The various 401(K), 403b and 457 plans leave the responsibility of
choice to the individual. These plans need to be carefully constructed in terms
of levels of contributions, matches, vesting, fees and expenses.
I am pleased that according to BrightScope, the Number One plan based
on these characteristics in 2013 was the Second Career Savings Plan for the
National Football League and the NFL Players Association that I have advised as
to the construction of nine specific fund accounts.
The reason for the nine accounts was to allow the Players to decide
how they wanted their money to be invested, in a collection of mutual funds or
separately managed accounts that generally clone their advisor’s funds. Other
retirement accounts that we manage are customized to the needs of the employee
base. However, all investors including retirement plans are exposed to both
stock and bond markets. With that thought in mind, we all should ask whether
there are parallels between Labor Day 2014 and Labor Day 1929.
As was noted in The Wall Street
Journal, both days had just past the 2000th day of a bull
market. In the case of the earlier market it continued to rise in September and
started its cataclysmic decline in October 1929 to
recover in December but the damage had been done to the confidence in the
market and eventually the economy.
Should employees and other investors totally jump out of the market
with the belief that they will jump back in at materially lower prices?
The great portfolio manager, Peter Lynch, who built such a great
record at Fidelity, is quoted as saying that more has been lost by investors
trying to execute such a maneuver than the size of the losses at the bottom. In
addition, I would be particularly careful investing substantially in high
quality bonds now. Instead of celebrating that the purchasing power of bonds is
now stable to perhaps rising which will help the long punished retirees, the
central banks such as the Federal Reserve, the European Central Bank, the Bank
of England and the Bank of Japan are very much interested in raising the rate
of inflation to spur more risky investment as a way to create jobs. If they are
successful, the purchasing power of bond principal and interest will decline.
Based on their past record they may not be successful.
Helping beneficiaries
All of us who are looking to the future for the benefit of families
and others such as universities, hospitals, and other non-profit groups need to
invest over multiple time spans. In prior posts I have discussed our Lipper Time
Span Fund Portfolios which are designed to meet the different needs of
beneficiaries. With the measurable possibility of a significant market decline
sometime in the next five years we have created a Replenishment Fund Portfolio
concept (REPPORT) to replenish the capital that will be spent over the next two
years to meet operating needs by the Operations Fund (OPPORT).
The Replenishment Portfolio probably has a mixture of equities and
fixed income funds or securities with a maturity of five or fewer years. With
the recognized risk of a significant decline and Peter Lynch’s warning, a
conservative approach is warranted. At this point I would select funds that
invest in companies that have relatively little debt but compared to others
have high returns on assets, equity, and invested capital.
At the other extreme in terms of time spans, the Legacy Fund Portfolio
should be looking into funds that invest in companies that are spending wisely
in research and development plus intelligent brand building. If these companies
do spend wisely they will be creating the kind of unassailable position often
called the protective moat. At that point they should be producing substantial
excess capital, fulfilling Warren Buffett’s favorite structure of a company
that has both a moat and a fortress. On the way their financial ratios are
unlikely to match those found in the Replenishment Portfolio.
Question of the Week:
Where and how are you finding new good people to hire?
__________
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Copyright © 2008 - 2014
A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.
All Rights Reserved.
Contact author for limited redistribution permission.
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