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© Copyright 2000 Rogers Media. The following article first appeared in the August 2000 edition of
BENEFITS CANADA magazine.
Retribution for RT Capital
Money managers have manipulated stock prices to boost pension plan performance for years. RT
Capital Management Inc. may discover the market punishes transgressors.
BY DIAN COHEN
Pension plan sponsors and trustees have a fiduciary duty to ensure that their members' money is invested
optimally. This means taking a comfortable risk for an acceptable reward. Part of that fiduciary duty is to
judge the performance of the asset managers hired to do the day-to-day job of investing.
By admitting that it has high closed stocks on occasion, RT Capital Management Inc.--the pension asset
managing arm of the Royal Bank--has positioned itself for some additional scrutiny, from not just the media
but from plan sponsors. Here's a summary of high closing, and the potential fallout from RT Capital's
actions.
Any stock that doesn't trade much can be moved 25¢ or 50¢ by anyone who catches the last few
trades of the day. For example, if a money manager wants their portfolio to look good at the end of a
quarter or year, all they have to do is put in an order late in the day to buy 1,000 shares of, say, Imasco
or Second Cup (both thinly traded) at the offering price.
On thinly traded stock, there's a spread between the bid price--what buyers want to pay--and the offering
price--what sellers want to receive. By specifying the offering price, the stock will be recorded as
closing higher. The portfolio manager, who has, say, 500,000 shares of the stock in their portfolio, has
boosted its value by 50¢ a share, or $250,000 in the portfolio. Voila! Great performance numbers for
that quarter!
The effect lasts just long enough to get the quarterly or annual numbers on paper--the next day the market
judges the fundamentals of the company and prices it accordingly. So in terms of big financial gains, there
is nothing here--no long-term effects, barely even short-term ones. The deed is more stupid than venal, and
the million-dollar question is: Why would anyone do it?
Well, we all know that money managers get salaries, which are not small by any standard, as well as
bonuses. The bonuses (100% of salary is run of the mill) are tied to performance of the portfolio and/or
attracting new assets to manage. If the high closing gamble results in a slightly superior performance,
practitioners would think their modestly sleazy exercise might attract new clients, and put them slightly
ahead of their peers.
So is that all there is to high closing? No. There's actually quite a lot of fallout, most of it long term.
TIME FOR A CRACKDOWN
First, it's important to understand that high closing has been around for years--veteran managers will tell
you that one of the things they did for fun as rookies was watch the markets on the last day of a quarter
to see who could spot the high closers first.
So if high closing has been around forever and there's no long-term effects, why all the press coverage and
regulatory investigations? The simple answer is that it was high time for a crackdown, and the street
gossip is that RT Capital is a known abuser.
Canada already has a tarnished reputation in the international community--what with Bre-X, Confederation
Life, et al--and infractions of fiduciary responsibility, especially in pension funds, are not well
tolerated.
Even if the media attention is excessive compared to the scope of the charges, RT Capital and Royal Bank
will suffer financially from the adverse publicity. At least one outside asset manager has said he won't
place any more business with RT Capital.
Undoubtedly every pension fund sponsor has had to reassure its members about the safety of their money.
More to the point, although no money manager has been fired--at least not at press time--there is a strong
likelihood that this situation may change.
If a pension sponsor has chosen a money manager who is subsequently fired, does the pension sponsor stick
around for a year or two to see how the new hire will perform, or does their board of trustees say, 'Let's
shift our money to another proven manager?'
Right now, the street bet is that RT Capital will see its assets under management shrink. Whether or not
the regulators regulate, the market will inflict quick and ready retribution.
Dian Cohen is an economics consultant with a special interest in pension issues.
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