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sr-120975-11b~ Santa Monica, California, December 1, 1975 ~ t ~~ §~~ ~ j ` ~ $ I TO: Mayor and City Council "~ " ~ ~ ' s -.-; ,ms FROM: City Staff ~nn y (~7~ SUBJECT: Status Report on Santa Monica Perpetual Care ~~it;€:~e~ 7a gg;~, Fund Investment Policy ~;~Y ~~~~~'S ~a~~?~~ fort ~a~aruc~9 Introduction This memorandum transmits the attached report from Mr. Robert Raney of Scudder, Stevens and Clark, Manager of the investment portfolio for the Cemetery Perpetual Care Fund. Background By memorandum. dated July 15, 1975, staff reported to Council that it would monitor , ne Cen~+etery- Perpetual Care F4ind investment policy and perfarmanc'e closely during the next ssx (6) months with the investment counselor to deter- mine whet'ner or not the policy or objectives of the Fund need to be changed in Iight of a changing economic condition. In addition, the staff provided Mr. Raney additional information regarding estimates for future cemetery mainte- nance expense and projected cash flow into the fund from cemetery sales to assist him in refining their recommended investment policy. The investment policy established by Council for the Cemetery Perpetual Care Fund 1Vovember 2, 1971-was as follows: Objective s A. General objective of maximum income consistent with conserva- tion of capital. 1. Strive for ultimate balance of not less than 50°jo bonds or other fixed income securities; and To: Ddayor and Council -2- December 1, 1975 2, The remainder in equities with the objective of capital appreciated consistent with conservation of capital. Staff has discussed the Cemetery Perpetual Care rand investment portfolio with Mr. Raney and he presented a number of portfolio alternatives as set- forth in attachrnent 1. Three economic models were considered. Expected/ restrained recovery; strong cyclical recovery; no recovery/high inflation. Estimated portfolio returns based on several investment mixes are projected. The mix of investments as of October 31, 1975 were:.. Market Value Carrying Value % Stocks $481, 272 $449, 194 39.66 Bonds 643, 189 673, 730 59. 50 Savings and Time Accounts 9, 405 9, 405 . 84 $ 1;134, 186 $1,132, 329 100. 00 Included in the acquisition of the Mausoleum will be an endownment care fund consisting of approximately $131, 000 invested in preferred stocks, Current market value of these stocks is $129, 688.00. In keeping with the invest- meat policy proposed, if it is the pleasure of the Council, staff will direct Scudder, Stevens and Clark to liquidate these stocks and invest the proceeds in short-term securities which presently have a yield of 6 to 7%. Mr_ Raney will review the Perpetual Care Fund performance at the Council meeting December 9, 1975. To: Mayor and Council -3- December 1, 1975 Recommendation 1, It is recommended that the existing investment policy be modified to emphasize investment in short-term high yield. securities, The mix of investments is recommended to be as follows: Liquid investment- 20% Bonds - 40ojo Equities - 40% Prepared by: Dave Dolter Sim Connolly DPD. S EG : c t PCRTrOLIO A_I.TER~'4TIVES EXPECTED _ OTHER CASES Restrained Strong Cyclical r+o Recovery ' Recoverv Recoverv High Inflation ' (Stagflation) Estimated Portfolio Returns Liquid Investments -0- ` Bonds -0- - +16% +29% -21%: Equities 100% Liquid Ir_vestrents 15% Bor_ds 2.0% +14% +21% -12% Equities 65% Liquid Investments 20% Bonds 40X. +12% +15% - 6f, Equities 40% Liquid Zs/est-_z:.ts 33 % Bonds 33% +11% +14% - 4% Equities 33%~ SANTA MONZCA CEMETERY PERPETUAL CARE FUND PRINCIPAL PERFORMANCE Initial Appraised Value, November 5, 1971 Plus, Net Capital Added Adjusted Beginning Value November 28, 1975 Appriased Value Capital Loss INCOME PERFORMANCE Estimated Annual Income, November 5, 1971 Estimated Annual Income, November 28, 1975 Income Increase Yield on Market Value ~~ c~', ,~~, .~~ lv,~' ~~I+~/ w~ ,/ ,,, r.,,, !... . ~ 4 U v J f ~;~ ' t ! _f `, V l d ( I _.~' ~ ,1 T $1,048,767 13b,678 1,185,445 1,142,0.56 _ n~ zQa $ 44,101 74,714 $ 30,613 6.540 SANTA MONICA CEMETERY PERPETUAL CARE F`JND RELATIVE PERFORMANCE (Change in Market Value Only) o Change 11/15/71 - 11/28/75 Santa Monica Cemetery Perpetual Care Fund - 3.7g Market Indices Dow Jones Industrial Average + 2.4 New York Stock Exchange Composite _ ~,5 Standard & Poor's 500 Value Line Industrial Index - 3.4 - 33.9 Salomon Brothers Moderate Discount - 19.3 AA Utility Index SCL(DDER, STEyEi~S B,CLARK 91844 INVES7MENTCIXINSEL SANTA MONICA CEMETERX FUND 11/28/75 SUMMARX OF INVESTMENTS SENIOR SECURITIES .CASH & SHORT TERM BONDS LONG TERM BONDS TOTAL FIXED INCOME SECURITIES EQUITIES STOCK EQUIVALENT CONVERTIBLES COMMON STOCKS TOTAL EQUITIES TOTAL ACCOUNT APPROX VALUE $ 82,496.47 504,955.00 7.2 44.2 587,451.47 51.4 62,200.00 5.5 492,404.88 43.1 554,604.88 48.6 1,142,056.35 100.00 ,~s~~.~1i~f'~1."~ ~..C:~,e~G~~~ 91844 iNVC51MCNiCOUN51l CASH & SHORT TERM BONDS 9,559 SAVINGS ACCOUNT LA ~ 75,000 PAC NOWEST BELL NTS LONG TERM BONDS 9,000 ILL TERM RR 1ST MTGE 50,000 MOBIL OIL CO DEB 50,000 PACIFIC GAS & EL 50,000 MONTANA PWR CO 1ST MTGE 60,000 CHES & POTOMAC TEL 25,000 NEW ENGLAND TEL DEB 100,000 SO CENT BELL TEL 50,000 N Y TEL 100,000 BELL TEL PENN DEB 50,000 SOIJTH CENT BELL DEB SANTA MONxCA CEMETERX RUND page 1 11/28/75 APPROX APPROXIMATE EST ANL PRICE MARKET VALUE INCOME" 5.OOOo 100.00 9,558.97 478 7.000% 02/01/79 97.25 72,937.50 5,250 4.625% 12/01/87 62.00 5,580.00 416 7.3750 10/Ol/O1 86.50 43,250.00 3,688 7.500% 12/01/03 80.13 40,062.50 3,750 8.625% 03/01/04 91,50 45,750.00 4,313 7.000 02/01/09 80,63 48,375.00 4,200 8.625% 09/01/09 93.50 23,375.00 2,156 8.2500 08/01/13 92.50 92,500.00 8,250 9.OOOo 05/01/14 97.86 48,937.50 4,500 9.6250 07/15/14 104.13 104,125.00 9,625 10.000% 09/15/14 106.00 53,000.00 5,000 ~T E'v'El~~ r ~~[ ~~~~ 91844 mwesvic~irccxms~,. SANTA MONICA CEMETERY FUND 11/28/75 page 2 APPROXIMATE EST ANL MARKET VALUE INCOME APPROX PRICE STOCK .EQUIVALENT CONVERTIBLES 30,000 FRED MEYER CV DEBS 4.5000 06/15/97 69.00 15,000 AMER HOSP SUPPLY CV DEB 5.750a 1.2/01/99 124.00 20,000 RALSTON PURINA CV DEB 5.7500 04/01/00. 114.50 CONSUMER & SERVICE 800 DUN & BRADSTREET COMPANIES 29.75 700 .PFIZER INC. 27.75 1,200 TIMES-MIRROR 19.13 900 CAMPBELL SOUP 32.88 1,600 COCA-COLA BOTTLING LOS ANGELES 17.63 500 LIBERTY NATL LIFE INSURANCE 25.38 800 ECKERD JACK CO RP 26.00 800 GENUINE PARTS 36.13 400 SEARS ROEBUCK 71.38 SCIENCE & TECHNOLOGY 125 INTL BUSINESS MACHINES 226.38 20,700.00 1,350 18,600.00 863 22,900.00 1,150 23,800.00 800 19,425.00 567 22.,950.00 600 29,587.50 1,116 28,200.00 1,280 12,687.50 300 20,800.00 288 28,900.00 512 28,550.00 740 28,296.88 875 ~TE~f I~f~l a ~~..,~~,~~~, 91844 IAJV67~41NTCCAINS[L BASIC INDUSTRIES 616 DOW CHEMICAL 500 SHERWIN WILLIAMS 450 ALUMINUM CO OF AMERICA 1,000 ARMCO STEEL 400 GENERAL SIGNAL 425 EXXON CORP 150 ATLANTIC RICHFIELD 600 SANTA FE INDUSTRIES PUBLIC UTILITIES 2,300 SOUTHWESTERN PUBLIC SERVICE 1,000 COLUMBIA GAS SYSTEM SANTA MONICA CEMETERX FUND APPROX PRICE 97..13 36.88 35.50 25.75 37.25 86.00 .91.50 28.63 11.88 23.25 11/2$/75 page 3 APPROXIMATE EST ANL MARKET VALUE INCOME 56,133.00 986 18,437.50 1,100 15,975.00 603 25,750.00 1,600 14,900.00 336 36,550.00 2,253 13,725.00 375 17,175.00 1,080 27,312.50 23,250.00 2,254 2,060 TOTALS 1,142,056.35 74,714 SCUDDER, STEVENS & CLARK fn corporated InYeSfMOrif COlInSOI 333 So. Hope Street, 37th Floor Los Angeles, California 90017 TABLE OF CONTENTS 1) Characteristics of the Santa Monica Cemetery Perpetual Care Fund that are Germane to Formulating a Specific Investment Policy. 2) Objectives and Investment Policy 3) Performance (to be distributed at the December 9th meeting} 4) .November 28, 1975 Appraisal (to be distributed at the December 9th meeting) 5) Investment Outlook & Portfolio Strategy 6) Arguments in favor of maintaining some percentage investment in common stocks 7) Appendix A) Current Market Levels B) Scudder, Stevens & Clark SANTA MONICA CEMETERY PERPETUAL CARE FUND INVESTMENT OUTLOOK AND PORTFOLIO STRATEGY The following chart entitled "Portfolio Returns" summarizes the Restrained Recovery hypothesis that we consider the most probable course for the economy over the next year as well as two others: Strong Cyclical Recovery and No Recovery-- High Inflation. The chart further correlates these three economic hypotheses with expected market levels one year hence for short-term investments, long-term bonds and stocks. The second chart is helpful in trying to determine the mix of assets. It initially shows in percentages the one year returns estimated for liquid investments, bonds and equities under each of the three economic environments. Given these returns, different mixes of assets are assumed, and expected returns for the total portfolio are calculated. It should be emphasized that these figures are at best educated guesses and are subject to constant revision. For the near-term, we recommend that the Cemetery Perpetual Care Fund continue to have an approximate 50/50 split between stocks and long-term bonds. While bonds yield more in terms of current income and are less volatile in price, stocks, in our opinion, do provide more opportunity for growth in principal value as well as growth in current income. PORTNOLIO RETUR1dS ECONOPIIC ASSUMPTIONS Other Cases Expected Strong No Recovery Restrained Cyclical Idigli Inflation Recover Recovery (Stagflation) Real GNP Growth (%) 6 8 0 Inflation Rate (%) 6 8 10 llJZA Earnings/Share ($) 90 100 65 Probability 60 25 15 CURP~ENT MARKET LEVELS October 7, 1975 3 Month U. S. Treasury Bi11s 6.50% 30+ Year Aaa ldew Issue Tel. Subsidiaries 9.25% Dow Jones Ind ustrials Average 806 Dow Jones Yie ld ($38 Dividend) 4.70% ESTIMATED 2.ARKET LEVELS One Year Time fforizon Other Cases Expected Strong No Recovery Restrained Cyclical High Inflation Recovery Recovery Stagflation) 3 l~fonth U. S. Treasury Bills 7.0% 18.0% 7.50% 30+ Year New Issue Tel. Subs. 9.0% 9.6% 10.0% llow Jones Industrial Average 900 1,000 600 ESTIMATED ONE YEAR RETURNS (%) Liquid Investments Bonds Equities ESTIMATEll TOTAL RETURNS (%) For Selected Portfolios Liquid Investments Bonds Equities Liquid Investments Bonds Equities Liquid Investments Bonds Equities Liquid Investments Bonds Equities 0% 0 100 15% 20 65 20% 40 40 33% 33 33 Other Cases Expected Sharp No Recovery Restrained Cyclical Hig1: Inflation Recovery Recovery (Stagflation) 6.7% 7.1% 6.9% 11,0% 6, 0% 3.0% 16.4% 28.8% -20.9% Other Cases Expected Sharp No Recovery Restrained Cyclical High Inflation Recovery Recovery (Stagflation) 16% 29% -21% 14% 'L1% -12% 12% 15% -6% 11% 14% -4% SCUDDER, STEVENS & CLARK Incorpora fed Investment Counsel 333 So. Hope Street, 37th floor Los Angeles, California 90017 ARGUMENTS IN FAVOR OF MAINTAINING SOME PERCENTAGE INVESTMENT IN COMMON STOCK 1. The long term history of common stock investment has been generally favorable The absolute rate of return has been quite good in many periods (A) The rate of return in stocks has exceeded that in bonds in most periods (B) Recent experience in stocks has no predictive value (C) 2. The current level of common stock prices is at least reasonable in relation to Current earnings (D) Book value (E) 3. Future prospects for a favorable return from common stock investments can be projected from Continued growth in Gross National Product and Corporate Profits (F & G) Growth through earnings on reinvested capital (H) 4. The long standing investment principle of diversification 5. A survey of other trustees (men of prudence) shows a major investment in common stocks is made by every type of fund. (I) ~ ~ ~ ~~ /5~ /0 f 5% O -5% a~ f 943 194 8 19 53 1958 19 b 3 (9~ 1973 1978 C ~~l~~ L FJ .. a ~. _. _ ~/tOC ~___ RISK PREMIUM - (Stock Return minus Bond Return in Percentage) 30 25 20 15 10 5 0 11 54 65 10-YEAR BOLDING PERIODS 1900•- 1974 Source: Frank Russell Co., Inc. 1R1 -.10 -.OS .00 .OS .10 .15 .20 ;~ -- -1- ._ ~ .~ i 05 i ~'O 75 ~I I n~~ ~r~ f~o~~o° 3D ,25 20 /6 /O ~ &~ 25" 20 /5 /o 5 i ~. /920 /925 /930 /F3.3S /9~Q ice'{5 /9~ /nK5 1~F~~ /9/5 /<37C /975 l~~o 20 90 5 4 2 1 3 J ~ ~-- 25 2® 6.3 i F1 a~ r' ~ 0 e, _ , i 0-- 1 9 ~'~~ ~ p e -- ~ " e ,~ N A B _a e~ C~ Obi __ _ ` ~ ~ iQ ~~ ~ g e ,,B ~ ~ 0 O ~1 ~ ° 0 0/ °ei e s ~~ ~ < e ~ 0 I, . ~~ i ~ 9 me ~ _ _ __ __ __ _ _ _ _ 039 W~ X00 900 50 ~0 30 20 10 5 2a 20 15 EO / 5 594E 4950 iJ52 F95.1 1956 195ti "o J:?(3 9~D82 91}f •3 ;SAS 9fl3kE YiD 7la 14372 974 9A71 DOW-,)ONES INDUSTRIAL AVERAGE Annual Price Range and Year-End Book Value 850 800 750 700 650 600 550 500 450 400 350 300 750 200 150 100 50 0 __. 1050 " ' 1000 3 1 95G - 900 - 850 800 I~ 73!'j 750 91-~ 700 i~~ 650 r-~ 600 -s 550 -500 S siL. 2100 laoo t5oo 9200 900 600 30C 24C 18C 15C 12C 9C 6C 1 J 30 ISIO GP®SS NATI®i~AL PP~DUCT iN CURREfVT DOLLARS ACID IN 1958 DOLLARS 4 e m y4 p. .; ~. a ~~ a c'h o o' ,~„ .y m° J dp9 ®~ - a4 _ - ~ GROSS NATIONAL PRODUC ~ - . --- - - IN 1958 DOLLAR °' ao c~' m a m m ~ ~ ~r° --- ---- ®a-----__-_- - :-- ~cs~'°~4 - -_ ~ ~®00 ~S® „GROSS N.4TICNAL P"rcOD os° 4 ~' ,~~ IN CU ®P0 RRENT DOLLARS ~ e ® A cTf9 eti 1920 1930 340 1950 19G0 1970 __ i _.. i S air, 2100 laoo 1500 1200 900 600 300 240 180 150 120 90 60 30 1950 N (R: 6A C7 ~' ~s'•~ ~a f~~6~.LlJ~~~~~ ~ ~ ~~~ 3 ~ ~ C~ ~'.7 r~~~'C.;3 ~6 ~"'~1~;YL ~ ®e.t"~~ 21~LIOP~3 OP DOLe.t~.~?~ ,~ 11% 12~ `0~' 7s 76 a n / ~. 6 ~, ~. -- ~ ^ _ p 75 ~J Q/ 1 IP ^'' 4/ur p os A ` .~M~~~9 ~ O ^, J' ,~ x ;.~ '- ~r~~ - --~ ----- --- - ~V~ ~ ~~ -- --- (~ '"3'Q.'1 ~~Z;~"~~ elJ'e.~'~,,:~ i`.,,; ~'t,.~v eitr'a,„,,.9'~,.~' G^ ~ m~a (rn ... ~ ~..v ~- c,r.~ ~ u ~L~.ui d ~~~~ ~m~~JV~ GROWTH THROUGH REINVESTED EARNINGS RATE OF RETURN ON BOOK VALUE 11.5% RETAINED EARNIIGS RATIO DERIVED GROWTH 55.0% 6.3% YIELD ($37 DIVIDEND ~ DJIA at 850) 4.4% EXPECTED TOTAL RETURN (Growth and Yield) 10.7% COMMITMENT TO EQUITIES Funds iri the A. G. Becl:er Universe as of 1.2/31/74 , First Third Quartile Median Quartile All funds except bank commingled 80% 70% 60 jo Corporate pension & profit-sharing 78 67 56 ="Public retirement 75 53 38 =~~Taft-Hartley funds 87 78 64 =Note: The equity commitments shown for these types of funds is substantially biased toward larger common, stock holdings by the fact that many funds request Becker to measure only the equity portion of the total fund. None- theless, the acceptance of common stock investment as a significant portion of a total fund is high. (Tl m: ~'~,~ ,~ ~ .&f! Telephone '~~ c ~ ,~ ~5ubs;dia~ry~ 80 A . d ~ 70 -~ ray CD 60-~ 50 197® ~- 5.9`7a i w ~ m r ., i° PW O i~ 1971 197 197 197 •1-4.30 +3.3 °Jo _ ~ x.2°70 `~ 11.©°ro naunl~'r ~~'iC~ ! -- . ~ ~ __ 1975 1976 ®~~ e~~~ ~~~~ ~`~ o3°a~e`a° 1+~M 1 w ~, > r ~~~i ~ mma4mme®o~eo ~ e ,, ' ®0 °p~ ~ p ~ °^ ~ ®m~~\ ® ~ ~ B°°1 45 ,Pe~mo~°,~~, ®~ I pA 0 EXPLANATION: This chart, based on interest rates of U. 5, Treasury Bills, Bank for Co-ops, and Certi- ficates of Ceposit, all ~mith 90-day maturities, illus- trates fluctuations in short-tern interest rates during 1973, 197, and 1975. While these rates generally tend to move in unision, fluctuations do present oppor- tunities to improve both relative and absolute rates of return, ~`a'9 ,~d,~®„90-Day Certiricates ~`~°'~+~~ ~:;;~° Of Deposit 4;, ° ,c:ceceeceea 3 mo. Bank for CO-Ops , ~° ~ 3 mo. Treasury Bills .J F M A M J J A S O N D J F M A N J J ,~ ~ rs k a „~ ~ ~,,t ,o, ~ J J A, ~ a~~ ~~1~ l~r~- '~~~ ~~~ o:~ vo -~ ~ / v ~:~ /~ 197 197 ~~ E This chart illustrates graphically on a semi-log scale the disparities among market indices since 1964, particularly the development of the "multi-tier" in the last five years. Weighted Averages: ~r~~t~ ~t~~~~ DJIA and S&P 500 as to capitalization Non-weighted Averages: Growth Stocks - 40 quality issues that have experienced a strong 15~ growth in earnings trend since 1500 1960 Value Line Industrials - 1,400 stocks, broad list majority listed on New York Stock Exchange ~,~ A ~ ~ 5®® DJIA Vralu~ Lln~ Ir~daa~trl~l~ ~~~ 5~ ~C~ 0 70 ORGANIZATION AND FACILITIES OF SCUDDER, STEVENS & CLARK We are an independent investment counsel firm and have no connection with a broker,. insurance company or bank. Organized in 1919 for the purpose of providing unbiased and professionally informed investment advice on a con- tinuing basis to individual and institutional clients,. we have grown through the years to one of the largest such firms in terms of assets managed and personnel. Fees for investment management are our only source of income, and every effort is directed solely toward pro- viding our clients with the close personal investment supervision and service they expect from us. Our ob- jective has always been to pursue an identity of interest with our clients. The total employees of the firm number about 600, and our of- fices are located in 13 cities. We believe that our staff is unusually well-balanced in abilities, experience, aqe and professional and academic qualification; the edu- cational background of the staff includes the following degrees: 2 Ph.D., 102 MBA, 16 MA/MS, and 15 LLB/JD. Fifty-three members. of our firm hold the professional designation Chartered Financial Analyst, more than any other advisory firm, bank, insurance company, or other organization that we know of. Our services and competence embrace expertise in various specialized areas such as taxation, Government regulation of the securities industry, financial planning, and retirement fund operation and structure. Scudder, Stevens & Clark has supervised portfolios with a wide .range of investment objectives in contrast to many firms which concentrate their efforts toward a specific investment objective to the exclusion of others. V7e have thus accumulated skills and experience in managing institutional portfolios whose characteristics require the assumption of varying degrees of risk and long-term goals. Unlike many others in the investment field, we have long fol- lowed the policy of avoiding close identification with other businesses, such as serving on boards of publicly owned companies or having outside directors of our firm, with the objective oL- assuring as much freedom of choice as possible in our role as advisor. The firm has grown steadily and on a well-fouhded basis over the years. This has meant that we have been able to pursue a policy of employing promising young men and women, and of training them in the firm to the point where they meet all the requirements for assuming senior investment responsibility. As noted above, our dedication to professional competence and quality of personnel is indicated by the number of advanced degrees held by members of our organization, and by the members of our staff who hold the Chartered Financial Analyst designa- tion. Our steady growth and ability to attract truly competent people has meant that we have not had to reach outside the organization for top management or research talent, nor have we had to merge or sell the firm to acquire ad- ditional strength. As an example of the continuity of our organization, the Chief Executive Officer, Director of Research, and Director of Consulting (all national responsibilities) have been with Scudder 24 years, 21 years, and 22 years, respectively. From time to time, of course, certain individuals caith particular skills have been brought into the firm from other organizations; but as noted above, this has not reflected a lack of completely qualified people within Scudder to exercise senior responsibility for the direction of research and of the firm's overall business. OFFICES SCUDDER, STEVENS & CLARK NATIONAL ORGANIZATION CHART RESEARCH Scudder, Stevens & Clark has two functional divisions: Research and Consulting. Our Research includes our General Econ- omics Department, Equities, Senior Securities and Real Estate. Research is the heart of our firm; the Department is staffed with 102 people, of whom 65 are professionals, the balance being clerical and statistical. General Economics Department Our General Economics Department contributes to the investment decision process by providing a continuous flow of infor- mation and analysis on the domestic and foreign business environment. The Department, with considerable interaction with bond and equity research, prepares a set of assumptions for discussion at the Policy Committee level. Once the Policy Committee .approves the basic assumptions, the Department prepares a forecast of the major economic aggregates. The forecast is used throughout the organization thusly: by the Policy Committee for background, by P.esearch for analytical purposes and by Consulting for descriptive purposes in dealing with clients. Through its weekly Economic Commentary the Department keeps the organization up to date on current developments and notes any changes which might impinge on the economic outlook. The Department undertakes special studies on a wide range of topics. An attempt is made to highlight areas of chang- ing developments and to give background on topics of current interest. The Department has begun work relating the macro-economic fore- cast to trends in specific industries. This is a develop- ing area and one which will be increasingly important. The Department produces a flow of funds analysis as the finan- cial counterpart to the Economic Forecast, and provides current comments on monetary and financial developments, interest rates and credit conditions. The Department prepares memoranda on broad international develop- ments as they affect the United States business climate. It also keeps up to date on developments in specific countries and areas of investment significance. In support of portfolio reviews with clients, representatives of the Department often present the economic background material. The Department serves as a consultant. to other departments on a variety of questions dealing with mathematical problems, portfolio selection and analysis, model build- - ing, cost analysis, etc. Historical and current volumes on economic subjects, as well as a large collection of economic journals and govern- ment publications, available in our library, give ready access to primary source material. In addition, the Department relies heavily on computer-stored statistical information. Computation facilities include use of Data Resources, Ines timesharing system and Scudder Reliance, an in-house batch process computer. The firm supports both the Wharton Econometric Forecasting Association and the Uni- versity of Maryland Interindustry Forecasting Project. Members of the Department regularly attend meetings of these groups and use their models and data banks. as part of the input in the forecasting process. In addition to these formal relationships, members cf the Department have established informal contacts with a wide variety of business, financial and academic econo- mists. Luncheons are hosted periodically by the Depart- ment at which both outside guests and members of the firm exchange views. Within the Department is a charting section. Broad use is made of charts, slides and other visual aids, both in written and oral presentations. The Department has four professional economists who .have had a wide variety of experiences, both within the firm and in prior employment in industry, banking, teaching and government. Their professional associations are extensive; their publications and accomplishments are well recognized. The Department also includes a supporting staff of sta- tistical, clerical and secretarial personnel. Industry Research We have devoted many years and considerable funds to the cre- ation of our industry research effort, which today ranks among the best in the investment field, not only in terms of quality of work, but in size. Our present industry research staff includes 25 senior analysts. To be sure, size itself is not necessarily desirable nor does it ensure superior results. However, we have found that expanding facilities have allowed us to investigate in detail numer- ous new areas and to offer to our clients a continually growing range of investment alternatives. Further, we are always seeking new ways to improve or add to our research product, as exemplified by the utilization of our own IBM 370 computer in New York. This greatly accelerates the flow of material, both research and otherwise, and it frees our analysts to work on special projects which might be of investment significance to our clients. As a matter of interest, our research effort receives consider- able support from the advisory fees received from the various Scudder mutual funds, allowing us to retain our entire research effort for the benefit of clients. In contrast, other investment advisory firms sell the results of their research to other financial institutions. We believe that the public distribution of research work must of necessity detract from its effectiveness, and we have consistently refrained from this practice. Senior Securities The analysis and management of senior securities is both de- manding and highly technical. The alternatives are count- less, and special skills and attention .are required for each different type of issue. Relationships are constantly shifting among securities of dif- ferent maturity ranges and betcaeen issues that outwardly appear similar, as well as among the various categories of senior securities. Consequently, there are frequent opportunities for investment action. But to identify these opportunities requires sizable and experienced staff, first to stay abreast of the changing relationships and then, more importantly, through the analysis, .challenge and intepretation of historical record s, to anticipate correctly subsequent changes therein. We established a separate senior securities department to fol- low these markets over 40 years ago. Today our senior securities staff is one of the largest in our profession, and we believe that few firms, if any, can match the depth of staff and continuity of personnel which we offer for the management of bond portfolios, no matter how complex. In addition to secretarial and clerical personnel, nine people are concerned with bond research, while five others devote their full attention to the execution of senior securities investment programs. Strategy is developed by the analytical group, but areas of specialization are divided among the several analysts, who work closely with our five in-house economics and approximately forty equity analysts. Thus, our senior securities research staff can devote full time to the analysis of investment opportunities, with the necessary extensive supporting material on the gen- eral economy, specific industries, and individual com- parries supplied by other members of our Research Depart- ment, as well as outside research sources. This in-depth coverage, together with our trading capabilities and specialists in the supervision of bond accounts, allows us to offer complete bond portfolio management to indi- vidual and institutional investors, with varying require- ments as to income and capital performance. Real Estate One of the relatively new services we have made available to our clients is a real estate and mortgage investment department. This is headquartered in our Los Angeles office, but coordinates its activities with our other offices. We have long believed that there is a great need for unbiased, professional advice in the real estate and mortgage areas. However, it has been our experience that the only effective way to obtain prime mortgages with acceptable terms and interest rates is to compete with the large lenders on a daily basis. Otherwise, we have found that all that is usually left is a second or third refusal of loans that have already been rejected by the other large lenders. This is especially true in situations where the potential lender is located at some distance from the proposed project and has had to rely on local brokers for assis- tance. Therefore, we have developed what we consider to be a truly unique package which not only guarantees to our clients first refusal of prime loans, but also eliminates the necessity £or them to become involved in any of the negotiations. Scudder, Stevens b Clark Research Department Director of Research Associate Director of Research 6 Assistant Director of Research - Administration 1 Inves [ment Research Committee 1 Consumer Raw Ma nufacturin Regulated Foreign General Interest Rates General and Materials and and Research Economics and Research Service and Cyclica is Miscellaneou Senior Studies Intermediate Industries Securities Broadcasting Business. Services Cosmetics & Toiletries Drugs Food 6 Beverage Household Products Merchandising Soaps Tobacco Hawaii Chemicals Construction Containers Metals Paper Petroleum & Energy Petroleum Service Photography Aerospace Automobile Electrical Equipment Electronics Hotels Industrial Equipment Machinery b Truck Mobile Homes Folluti on Printing b Publishing Railroad Equipment Recreation b Leisure Restaurant & Franchise Textile & Apparel Tire & Rubber Air Australia Tra nsportati0n Canada Banks Europe Business Japan Equipment Credit 8 Finance Insurance Public Ilti 1 hies Railroads Real Estate Trucking Domestic Foreign Credit Special Studies Demography Tax Bond & Equity Risk Municipals Corporates Treasury Preferreds Convertibles Private Placements Quantitative Financial Theory Industry Models Statistical Research Support Research Evaluation Systems Capital Management Theory Technical Work Data Banks LOS ANGELES OFFICE Organization The Los Angeles office of Scudder, Stevens & Clark was founded in 1931 to serve clients in an area which includes the southern half of the states of California and Nevada, as well as the states of Arizona and New Mexico. This office, the largest of the firm outside'of New York, is virtually a self-sufficient investment counseling opera- tion. All types of investors are served: individuals, trusts, charitable endowment trusts, pension and profit- sharing funds, corporation endowments, public -retirement funds, personal holding companies, union and labor joint management funds, a-nd others. The portfolio management group in the Los Angeles office num- bers 22, of which 14 are senior portfolio managers. We have attached a personnel list describing briefly back- ground data on each of .these individuals. Each of these portfolio managers has readily available to him all of the facilities located not only in Los Angeles but in our other offices. On the chart depicting the "Decision Making Process", you will note that the portfolio manager has the input from three important sources: the Economic Department, the Strategy Committee and the Research Depart- ment. Some of these facilities are located in Los Angeles. For example, the Los Angeles division of the Research Depart- ment is responsible for a number of industry groups,. including banks, food merchandising, speciality merchan- dising and recreation and leisure time. The Real Estate and Mortgage Investment Department is head- quartered in the Los Angeles office. This department maintains full facilities to acquire and supervise real estate investments. The policy and interpretation committee includes members of the Los Angeles portfolio management group. It is this com- mittee that assists the individual portfolio manager in determining the risk-reward ratio in various types of investments and what an appropriate mix of such invest- ment media would be at any given point and time. In Los Angeles we have an order department with four pro- fessional securities traders. This department operates under Scudder Fund Distributors--a member of the Na- tional Association of Securities Dealers. It is merely a corporate entity to assist us in placing our clients'. orders most advantageously. The firm does not benefit in any way from Scudder Fund Distributors other than to serve clients more efficiently. Operating Procedure Each of our portfolio managers has access to these various facilities. Accordingly, we are in a position to estab- lish a flexible relationship with our clients, to suit individual requirements. If desired, we can and would prefer to assume the role of in- vestment coordinator to ensure that the program is carried through to completion. We recommend that our clients concern themselves primarily with broad policy decisions rather than the numerous investment details which can be carried out by our firm without additional fee. Our ex- perience indicates that such an arrangement usually leads to more satisfactory investment results. We meet with our clients periodically to discuss the business and invest- ment environment and to .recommend basic investment policy. Within the framework of the ob;ectives and policy agreed upon, Scudder, Stevens & Clark would: 1 2 3 Select appropriate bonds and stocks for investments and for replacement of less attractive issues, Place orders with the most suitable bro- kers and dealers, Prepare all necessary letters of directions to a bank selected to hold custody of the assets. We also provide quarterly reports and evaluations, including a summary of the investment position by various categories so that a complete picture of the assets of the fund would be presented. These reports would be discussed with. you at regular meetings which normally work out most satis- factorily on a quarterly basis. Between meetings, we are available for conference in per- son and by telephone. We believe it is important to establish a close relationship with clients so that we will always be aware of investment and other requirements. We believe it is also important that our clients are kept aware of the investment climate and learn the extent to which our organization can be utilized to their benefit. President, SCUDDER, STEVENS b CIARK Incorporated Los Angeles Lnvestment Review Committee Mortgage ) I Research ~ ~ I Order and Department. Department Real Estate CONSULTANTS CLIENTS SCUDDER, STEVENS & CLARK, INCORPORATED LOS ANGELES -"`~ Budget Staff sistance Personnel Office Procedures Financial I ! Mutual I I New Planning ! I Funds Business Investment Policy G Strategy Committee Common Bonds General Stocks and Economics Interest Rates General Research Studies ~ PARTNERSHIP ~ LOS ANGELES OFFICERS AND ASSOCIATES STEVEN ARONOFF, C.F.A. - Graduated from the University of Calif- ornia at Berkeley in 1966 and received his M.B.A. from the University of Southern California in 1968. He joined the Research Department in 1969 after two years as a security analyst for a major national insurance organization. OLIN BARRETT, C.F.A. - A Vice President - Investments, he received his A.B. degree from Stanford University in 1959 and his M.B.A. from the Harvard Graduate School of Business Admin- istration in 1961. He joined the consulting staff in 1962. CHARLES B. BOOTHE - A general partner of Scudder, Stevens & Clark, he also serves as Chairman of the Board and Chief Executive Officer of Scudder, Stevens & Clark Incorporated. He entered the investment banking business in 1935 after gradu- ating from Stanford University and, following four years of service with the U. S. Navy, returned to the investment counsel profession. DAVID R. BRYANT - Received his A.B. degree, with high honors, from Princeton University in 1964 and his M.B.A. from the Stanford Graduate School of Business in 1966. He attended the Uni- versity of Michigan Law School. He joined the Real Estate and Mortgage Investment Department in 1972, having previously been associated with the firm's Cincinnati office. BARBARA COWDEROY - Attended Kingston University in England. After six years with an international banking organization in London and a West Coast brokerage firm, she joined Scudder, Stevens & Clark in 1962. DONALD F. CRUMRINE - Graduated from the University of Southern California with a B.S. degree in 1969 and received his I4.B.A., with distinction, from the Wharton School of Finance. He joined the consulting staff in 1972. NORMAN E. DECKER - A Vice President and Secretary, he received his B.S. in 1952 and his L.L.B. in 1956, both from the University of Wisconsin. He served in Korea and Japan with the Army Judge Advocate. In 1963 he joined the firm to head the Financial Studies Department after seven years as a trust officer with a leading Los Angeles bank. NOEL F. DeDORA - Graduated from the University of California at Berkeley with a B.A. degree in 1963. Following four years of service with the U. S. Navy, he was employed as a Registered Representative with a West Coast brokerage firm, and then had five years' experience with a major West Coast bank as a senior portfolio manager. He joined Scudder, Stevens & Clark in 1974. JOSEPH F. FALCON, C.F.Q. - Received a B.S. degree, with high honors, from the United States Coast Guard Academy and an M.B.A. from the Harvard Graduate School of Business Administration in 1961. His background before joining our consulting staff in 1973, included experience in both security analysis and portfolio management with two well-known firms in New York. ROBERT T. FLAHERTY, C.F.A. - A general partner of Scudder, Stevens. & Clark and a Vice President and Treasurer of Scudder, Stevens & Clark Incorporated, he joined the firm in 1960 after receiv- ing his M.B.A. from the Stanford Graduate School of Business. He previously graduated, with great distinction, from Stanford University where he was elected to Phi Beta Kappa. DANFORD E. HAND, C.F.A. - Received an A.B. from Stanford University in 1958 and an M.B.A. from the University of California at Berkeley in 1960. Prior to joining the firm's Research Department in 1971, he served as a portfolio manager and security analyst at a leading San Francisco bank and 'later headed the Research Department of a West Coast stock broker- age firm. ROBERT B. HARDAWAY, JR., C.F.A. - Graduated from the University of Virginia in 1949. Before joining the consulting staff, he was a Vice President and Trust Investment Officer of a large West Coast trust company and, prior to that, was as- sociated with a major bank in Virginia. WALTER E. LA[dRENCE - A Vice President of the firm, he attended 'the University of California at Berkeley and entered the invest- ment banking business in 1929. Prior to joining the firm, he was the senior partner in Southern California for a New York Stock Exchange firm. RUSSELL K. MEACHAM - Received his B.S. in 1956 and his M.B.A. in 1961, both from the University of Southern California. After service in the Air Force, he held positions as a stock broker and security analyst. He joined the firm in 1962. W. DAVID NIEBUHR - Received his B.A. degree with highest distinction from the University of Kansas in 1964; and M.B.A. from Stanford in 1966, and an M.S. (Statistics) from Stanford in 1969. He also attended Rice University and the University of Santa Clara Law School. Prior to joining the firm in 1973, he was associated with one of the Big Eight accounting firms and had ' also served as controller of a small biochemical research firm. JOAN A. PAYDEN, C.F.A. - A general partner of Scudder, Stevens & Clark and a Vice President and Director of Portfolio Manage- ment of Scudder, Stevens & Clark Incorporated, she received her B.S. from Trinity College in 1955 and attended Columbia University. Prior to joining the firm in 1960, she was associ- ated with a major New York Stock Exchange firm in New York as a portfolio analyst, senior portfolio manager and research analyst. MILDRED A. PRESNELL - ~ Vice President of the firm, she received her B.A. degree from Occidental College in 1931. She has been affiliated with Scudder, Stevens & Clark Incorporated and its predecessor firm, Willis & Christy, since 1935. ROBERT M. RANEY, C.F.A. - A Vice President - Investments, he received his A.B. from Stanford University in 1961 and his M.B.A. from the University of California at Los Angeles in 1963. He joined the consulting staff in 1963. CAROL REIGOTTIE - Joined the firm in 1966 after having been associ- ated with a major Los Angeles brokerage firm in the capacity of assistant to the research director. SANDRA J. RYGEL - Graduated, cum laude, from the University of California at Los Angeles in 1969 and joined the firm in 1970. L. SHERMAN TELLEEN, C.F.A. - A general partner of Scudder, Stevens & Clark and a Vice President and Director of the Los Angeles firm, he received his A.B., cum laude, from Stanford Univer- sity in 1952 and his M.B.A., with honors, in 1956 from Stan- ford Graduate School of Business. He has been with the firm since 1956. ROBERT W. TEMPLETON, C.F.A. - Graduated, cum laude, from Carleton College where he was elected to Phi Beta Kappa. He was as- sociated with a major mid-western bank and joined the firm after receiving his M.B.A. from the Stanford Graduate School of Business in 1967. STEPHEN TITUS, C.F.A. - A Vice President and Director of Bond Management for the firm, he graduated from Pomona College and received his M.B.A. from Stanford Graduate School of Business in 1950. He thereafter joined a Los Angeles invest- ment counseling firm and was its President from 1962 to 1968 when it merged with Scudder, Stevens & Clark Incorporated. FRANKLIN E. ULF - A Vice President - Investments, he received his B.A. from Pomona College in 1953 and his M.B.A. from the University of Southern California in 1960. He joined the firm in 1973 after having served since 1960 and President and Chief Executive Officer of a Los Angeles-based invest- ment counsel firm of which he was also a co-founder. He previously served as a financial analyst for a large oil company based in Los Angeles. JACK T. WELLS - Graduated Magna Cum Laude, Phi Beta Kappa from the University of Washington and has been involved in mortgage banking since 1954. He has extensive experience in real estate loan and equity underwriting and appraisal. Mr. Wells was formerly a Senior Vice President of one of the nation's largest mortgage banking firms.