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February 23, 2004  1:00 pm Pacific Time   ****  Draft Report for Comment, Updated 2/25/04 ****

SOURCE:  Parish & Company.
@ Copyright and not for publication by media without written approval from Parish & Company.

PORTLAND, Ore., -- Today Parish & Company Breaks A Major Financial Story, with National Implications, Involving Oregon's Public Pension Investments and The Concentration of Foreign Based Investment Managers in Public Pensions in the United States.  Gates foundation liquidating every share of Microsoft stock and impact on Linux development also discussed.

Based upon a national review of public pension systems and their related investment strategies, Parish & Company has identified a remarkable situation.  While a national debate rages over jobs and the appropriateness of outsourcing government contracts to foreign suppliers, no one has noted that many of the biggest contracts of all, public pension asset management, have been aggressively outsourced to foreign based firms.  These include Allianz in Germany, ABN AMRO in the Netherlands, AXA in France and Barclays in the United Kingdom.

Few would question a private firms right to outsource jobs to foreign firms yet outsourcing of public pension assets, whose source is exclusively tax dollars, raises numerous questions. These include the realization that numerous domestic firms can do an equally fine job, especially given the level of index based investment now followed by public pensions.

This is also not to say that public pensions should not make foreign investments, clearly they should.  The issue is why are such investments not being made by investment managers based in the United States?  Such managers could be based in California, Florida or Topeka Kansas.  We are afterall the United States of America and even though state public pension systems are independent, there is significant interaction between overall federal and state budgets and related tax issues.  In addition, large blocks of the public pension portfolios are indexed to key US based stock indexes, for example, the Standard and Poors 500.  Why would such pensions hire foreign based managers when domestic managers are just as competitive on fees?

As one example, consider that in Oregon more than 50 percent of the $37 billion in public pension assets are managed by firms whose parent offices are located outside the United States (see detailed list by manager that follows).  Much of this concentration occurred due to mergers that many public pension managers simply lost track of.  At a minimum, this highlights a lapse in the oversight of such systems.  Oregon's State Treasurer Randall Edwards has been provided this summary for comment.

Also noteworthy is that many of these same firms, including the French conglomerate AXA and Germany's Allianz have had major problems with the Securities and Exchange Commission, resulting in fines due to conflicts of interest.  Many public pension officials have simply not adequately monitored the relationships between firms that underwrite securities and basic investment management.

Mr. Edwards also recently chose Oppenheimer over Vanguard for Oregon's College Savings Plan, after Strong was fired due to its CEO being indicted by the SEC.  Most remarkable about this decision is that Oppenheimer was chosen based upon a lower cost plan when in reality the costs are clearly higher.  Oregon State Treasurer Edwards has since been provided updated data with the hope that he will overrule his staff, based upon its flawed analysis, and reverse the decision.

Parish & Company has communicated the results of this analysis to Oregon's largest newspaper, the Oregonian, in addition to the NY Times given the intensely political nature of these funds.  In addition to leading reporters, Glenn Kramon, editor of the NY Times business section, and Seymour Topping, Columbia University School of Chair of the Pulitzer Prize Commission are also copied.  Public pensions now represent 8 of the 10 largest investment funds in the country.

Parish & Company's analysis of public pension assets included a review of private equity and hedge fund transactions.  One example here in Oregon involves the Texas Pacific Group's offer to purchase bankrupt Enron's largest subsidiary, Portland General Electric, with mostly public pension assets, including $300 million from Oregon, and run it from a Cayman Island based partnership.  More than $1 billion of Oregon's private equity portfolio is now invested with the Texas Pacific Group. The following link details Oregon's private equity portfolio, many investments of which also maintain foreign based parent firms. Summary of Private Equity Investments in Oregon Public Pension System (Note PDF File)

The Texas Pacific Group's purchase of PGE is particularly controversial given that the local figurehead and Chairman of the Board will be Neil Goldschmidt.  Eight days before the Texas Pacific announcement was made the five person Oregon Investment Council that manages Oregon's $40 billion in public pension assets, one of whom is Neil Goldschmidt's wife Diana, allocated an additional $300 million to Texas Pacific.  Neil Goldschmidt was also simultaneously acting as a lobbyist and leading an effort to defeat a public utility ballot measure. Also included in Parish & Company's public pension analysis are specific recommendations made to the Securities and Exchange Commission regarding new disclosure requirements for public pension board members.

It may be perfectly appropriate for public pensions to invest in private equity, if more transparency were available.   The problem is that these firms now completely escape SEC oversight by being based offshore. Conceptually, the public pension system is therefore igniting the removal of a major part of our economy and related free market system, a system predicated upon full disclosure.   Based upon these findings, public pensions will clearly be a major topic of debate in the presidential election.

Also of significant debate should be the activities of other tax-exempt investment pools, in particular trusts and foundations.  A prominent example is the $24 billion Gates foundation and its ability to liquidate every share of Microsoft stock unnoticed.

Microsoft Foundation Liquidates all Shares of Microsoft

Parish & Company provided this story to the NY Times several months ago yet it is yet to be published.  This is of course a story of enormous significance to every one of Microsoft's 70,000 employees.  The obvious question is, why didn't the foundation retain 25 percent in Microsoft, or even 5 percent.  Clearly, employees have been betrayed and left, along with the public pension system, with inflated stock.

At the same time Bill Gates has aggressively used his foundation to invest in defense and media related companies and thereby allow himself to leverage growth of the Windows operating system in new environments by being a major shareholder.  One prominent example is the foundations investment in the Mexican media conglomerate Televisa. Via this investment and subsequent mergers Microsoft now indirectly controls the radio and television broadcasts in Spanish to more than 75 percent of all Latinos in the United States.

If foundations like the Gates foundations receive tax-exempt treatment for security sales, they should be required to be fully disclosed.  Only then will the free market system work.  Linux users in particular should be pressing for such disclosures because only then will the playing field be level.  Thinking that a more superior product will prevail in such an environment is simply naive.

Naturally, many readers will question my source for this disclosure yet the source is most credible, Bill Gates Sr. himself, director of the foundation.  I corresponded with Gates over a several month period in an effort to engage him without success in supporting key corporate governance issues.  Gates specifically noted on more than one occasion, via email, that the foundations now owns no Microsoft stock.

In balancing the ethical issue of publicly discussing a private email with the general public interest I decided to disclose this with the sincere thought that both Microsoft and the foundation will be better off, long term, from such disclosures.  To Gates Sr.'s credit, he was very responsive and thoughtful in his comments throughout our dialogue.


Oregon Public Pension Assets, Excluding $4 billion Private Equity Portfolio

Manager (Jan 31, 2004)         Amount (000's)       Parent Country
ABKB Lasalle Advisors                   403,761                Netherlands
Acadian Asset Management             707,085                United Kingdom - Parent is Old Mutual
Alliance Capital - Fixed                 2,020,641                France - Parent is AXA
Alliance Capital - Lg Growth            751,844                France - Parent is AXA
Arrowstreet Capital                         474,806                United States
Barclays EAFE Index                   1,814,417                United Kingdom
Becker Capital                                343,377                United States
BGI Alpha Tilt                                 982,297                United Kingdom - Parent is Barclays
BGI Growth Index                        3,845,805                United Kingdom
BGI Value Index                           2,984,943                United Kingdom
BGI US Debt Index                         505,436                United Kingdom
BGI World Ex-US Index              1,187,509                United Kingdom
Blackrock - Fixed                        1,988,903                United States
Brandes Investmetn Partners           633,431                 United States
Clarion Partners                              585,209                 Netherlands - Parent is ING
Cliffwood                                         74,701                 United States
Cohen & Steers Capital                  179,148                 United States
Fidelity Investment Mgmt.            2,018,292                 United States
Froley Revy Investment                   550,249                United States - Owned by First Republic Bank
Genesis Asset Managers                  283,716               United States - Owned by Gencap
Goldman Sachs Asset Mgmt            658,206               United States
Grey Star Capital                             145,106               United States
Lazard Freres Asset Mgmt               724,106               United States
Lincoln Property Company               142,984               United States - Based in Texas
Marvin & Palmer Associates             648,412                United States
Mazama Capital Mgmt.                    211,700                United States
MFS Institutional Adv Inc.                499,285               United States
Nicholas Applegate Emerg Growth   111,811               Germany - Parent is Allianz
Nicholas Applegate Minicap             116,718               Germany - Parent is Allianz
Northern Trust                                 739,782               United States
Pacific Investment Mgmt Co.            640,182               Germany - Parent is Allianz
Regency Realty                                167,907               United States - Owned by Capital Corp of West
Rowe, Price-Fleming Intl                  651,233               United States
Sanford Bernstein - Lrg Value          714,420               France - Parent is AXA
Sanord Bernstein - Int. Value            664,099              France
Thompson Rubinstein                        514,792             United States
TT International Investment Mgmt     651,430             United Kingdom
Veredus Asset Mgmt                        163.973             Netherlands - Parent ABN AMRO
Wanger Asset Mgmt                        894,613              United States
Wellington Mgmt - Sm Value            524,751             United States
Wellington Mgmt. - Fixed              2,024,177             United States
Wells Capital                                    185,031             United States  - Parent Wells Fargo
Western Asset - Fixed                   2,030,182             United States - Parent Legg Mason
Winslow Capital Mgmt                     204,477             United States - Based in Minnesota
   Total - Core Investments         37,067,640
   Total - Foreign Based Parent  18,852,588  approximately 51 percent
Note:  this is a very close estimate, within one or two percent, most likely higher than lower.

Bill Parish of Parish & Company is an independent Registered Investment Advisor.  His work has been widely quoted in the Barrons, NY Times, Bloomberg, USA Today and other leading publications.  He has also been featured as the keynote speaker at many leading conferences regarding investment and financial reporting issues.  This includes an April 2002 keynote speech at Kent State in which the other contributors were Bob Herdman, Chief Accountant of the SEC, Bill Ezell, the Chair of the American Institute of Certified Public Accountants and Dennis Bresford, the former head of the Financial Accounting Standards Board or FASB.  You can contact Bill at if you would like to have him speak at your event.

Bill Parish
Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, OR  97223
Tel:  503-643-6999  Fax: 503-221-3161

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