The Best Ways to Profit From the Growing Pension Fund Crisis
Jul 16th, 2008 | By Martin Hutchinson | Category: Stock Market InvestingAvoid the very well established companies with heavy defined-benefit pension obligations. Listen General Motors, I’m a faithful Buick driver. And I’ll probably buy another Buick next time around (or maybe a Caddy if I’m feeling rich), and I’m rooting for you to succeed – even though most analysts feel that Toyota and others have you licked. And while I’ll remain loyal to your products, that loyalty doesn’t include investing my hard-earned savings in you. [For a related story on General Motors’ latest woes, check out this report in today’s issue of Money Morning.]
GE is one company whose stock I truly hate: In my opinion, General Electric should never have “diversified” away from dependable “drop-it-on-your-foot” electrical equipment and home appliances to fly-by-night finance - and I think GE stockholders have a rude awakening coming, part of which will come from the mess of their defined-benefit pension scheme.
Deere & Co. (DE) is a great company, in exactly the right business to make money right now, but you have to be aware that there’s a defined benefit pension problem there, too, although only a medium-sized one.
On the other hand, I knew there had to be an advantage in investing in high-flying tech companies, and now I’ve finally found one. Most of them were founded after 1980 (even Microsoft Corp. (MSFT) was tiny before then), meaning that they don’t have this pension problem – they rewarded their employees with stock options and kept pensions down to a skimpy 401(K) plan. Check the footnotes in the annual report to be sure, but I would think you’re pretty safe in this sector, or in any company founded after about 1985.
International Business Machines Corp. (IBM), Xerox Corp. (XRX) and the telephone companies would be obvious exceptions, given that pensions may be a problem with these companies.
Finally, you can always invest abroad, where the problem generally takes an entirely different shape, since the demographic and economic patterns are so different. If you want an auto company, what about India’s Tata Motors (ADR: TTM), which is expanding fast and certainly has no great legacy pension problems. (It’s worth noting that there are investor concerns that Tata won’t have the capital to finance the expansion. But the market has discounted this at current prices, and the company has the giant Tata Group behind it).
If you want a bank, try Korea’s Kookmin Bank (ADR: KB), which has avoided both U.S. pension problems and the U.S. housing crisis.
In Brazil, the work force is young and most pension plans (the few that there are) are mostly of the defined-contribution variety, so consider a look at mining giant Vale (ADR: RIO).
Source: The Best Ways to Profit From the Growing Pension Fund Crisis
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Martin O. Hutchinson is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets.
Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.
