Stock markets all over the world are on a dizzying up-and-down roller coaster ride, shedding off hundreds of points one day, and then gaining them back the next.
With such a confused mood in financial markets, what do you do?
Lawyer turned corporate executive turned politician Santiago “Santi” Dumlao Jr. is writing a book, and it is not an ordinary book. From what I heard, he is talking about the stock market foray of the Social Security System, or the SSS, the P300-billion-plus pension fund. And this is quite unexpected.
In 1998, the Harvard MBA graduate became a media darling when he ran for president of the republic, daring to set his political platform on morality. Dumlao campaigned seriously, bringing his moral message across the breadth and length of the land by taking only commercial flights. He was the talk of business town then, considering that he was running against the man named Band … Wrist Band.
You would think that, as he does every now and then in news publication, Dumlao should write a book about politics.
In his book about SSS investments in the stock market, Dumlao must deal with the controversial moves of Carlos “Chuckie” Arellano, the former chair and president of the SSS.
Arellano turned the pension fund from a conservative institution into an aggressive investor in the stock market.
Under Arellano, the SSS became a stock market star. He has been criticized for what media called his “chancy” approach to the SSS fund management.
But then again, Arellano is the only professional fund manager ever to head the SSS, a 54-year-old pension fund. Only one professional fund manager! What are we thinking?
For many years before Arellano went to the SSS in 1998, he headed the trust department of Far East Bank & Trust Co., one of the biggest banks in the country then, which eventually merged with Bank of the Philippine Islands in 2000.
In its heyday, FEBTC always had the biggest trust portfolio among all the local banks.
So in the eyes of Dumlao, as an author, a story about the SSS investments in stocks must be a story about the fund during the time of Arellano.
In pension funds abroad, such as the one in Canada, more than 90 percent of their investments are placed in equities. That is why they employ professional fund managers.
Our SSS has been a timid investor for a long time, going into “safe” ventures like real estate or direct placements in hotels and banks.
The SSS bought a whole office building, for instance, and put money in a commercial bank. The rest of its funds has been parked in government IOUs.
In 1998, the International Monetary Fund has sounded the alarm to our government on the SSS. Actuarial studies showed that the fund had been in a deficit for so long.
Future collections from its members would never cover all its obligations, particularly the retirement pension for its more than 25 million members.
The main reason has been the low contribution rate of SSS members, which has always been less than 10 percent of their pay, one of the lowest, if not the lowest, in the world. In other countries, the norm has been 15 to 30 percent.
Under a professional fund manager like Arellano, the SSS for the first time in its history has become a major investor in the local stock market.
For example, the SSS up to now holds billions of pesos worth of Philex Mining shares.
During the time of Arellano, the SSS bought the shares at only 15 centavos per. With the dividends earned by the shares over the years, the actual cost of the SSS holdings in Philex is now about 10 centavos per share.
As of last Friday, Philex was doing at P28 per share. In a down market!
Philex by the way was the same listed company in that controversial case that the present management of government-owned Development Bank of the Philippines wanted to file against former DBP president Reynaldo David.
The DBP, under David, reportedly sold Philex shares to a group supposedly headed by Roberto Ongpin (man behind other listed companies like Philweb, Petron and others). It so happened that after DBP sold the Philex holdings, the group of Manuel Pangilinan bought the company.
And so the present DBP management claimed there was something fishy in DBP’s unloading of the shares before the deal between MVP and Philex, which pushed up the price of Philex shares to record highs.
DBP in fact made a lot of money out of the Philex transaction. It was just that the present DBP management speculated that the bank could have made more if only it waited for the MVP-Philex deal.
All right, with the benefit of hindsight, even a moron can make such a perfectly timed decision on such a huge stock market transaction. Unfortunately in the stock market, hindsight is never a workable strategy.
Here is my take: What if the MVP takeover of Philex did not push through? We all know that the MVP group has been poised to invest in so many companies (such as the Philippine Star, GMA-7, Harbour Centre and, of all companies, even San Miguel), but the deals fell through after all the hard bargaining.
In this imperfect world, so-called “sure” deals in-the-making can, and do, collapse at the last minute.
Back in 1998, the same MVP group bought a huge block of PLDT shares from the SSS, then under Arellano, when the MVP group took over the telephone company from the group of Antonio “Tonyboy” Cojuangco.
The SSS shares in PLDT were equivalent to one board seat. To the MVP group, it was an important block in their bid to acquire the phone firm. It is said that Arellano sold the block to MVP at a 50-percent premium over the market price at that time.
Eventually, with Arellano set on having the SSS trading in the bourse, it bought back the same volume of PLDT shares in the market. He then sold the block to the MVP group—again. At a huge premium, again.
In his upcoming book, Dumlao thus cannot escape the controversy hounding the SSS and Arellano regarding stock trading. I cannot wait to find out what a learned man like Dumlao has to say about the stock market and pension funds.
Me, I just know that, as a requirement for the SSS position, we must have an experienced fund manager. These are perilous times in financial markets.