Canadian feature in New York Times regards the Nortel disaster<<<Putting Canadians' Nest Eggs in a Nortel Basket
By BERNARD SIMON
TORONTO, July 25 — The plunge in the telecommunications industry is sending a shock through many Canadians' retirement plans.
Tom Ahrens pinned his hope for a comfortable retirement in large part on Nortel Networks (news/quote), which makes telecommunications equipment. A 52-year-old soybean and cattle farmer from Peterborough, Ontario, Mr. Ahrens invested approximately $210,000 in Nortel's stock about six months ago. His shares are now worth about $45,000, and he owes about $30,000 to his broker because he bought some of the stock with money he borrowed on margin.
The dwindling Nortel investment, an acquaintance's recommendation, was supposed to make up two-thirds of his retirement fund. "I really don't feel too good about that," Mr. Ahrens said. "We milked cows for over 10 years, and farming itself is not so profitable anymore.
"I should have stayed with my conservative buying methods and stayed with John Deere," he added, referring to his previous devotion to Deere & Company (news/quote), the farm machinery maker, whose stock has fallen just 12 percent this year, compared with Nortel's 77 percent decline.
Although Nortel's plunge has been matched by that of many other North American communications and technology companies — including Lucent Technologies (news/quote) in the United States — the stock has an unusually large place in Canadian portfolios.
Long considered the bluest of Canada's blue chips, Nortel was a darling of the telecommunications boom. Individuals flocked to the home-grown company with the global success whose equipment carries 75 percent of the Internet traffic in North America.
Taras Kovaliv for The New York Times
Tom Ahrens, a farmer in Ontario, invested more than $200,000 in Nortel's stock; it's now worth about $45,000.
Nortel grew to an outsized portion of the Toronto stock market as well, leading many individuals to overweight the stock, even when they thought they were diversifying by buying mutual funds. And rules that limit how much in retirement plans can be invested abroad encouraged an overweighting in Canada and Nortel as well.
Though hard to quantify, "the damage wrought by Nortel on Canadians' retirement savings has been significant," says Gerry Rocchi, president of Barclays Global Investors Canada in Toronto.
Investors' faith in Nortel stems in part from its storied past. The company, once known as Northern Telecom, has its roots in the Bell Telephone Company of Canada. With the stock on the skids earlier this year, Jean Chrétien, Canada's prime minister, assured Canadians that "Nortel is a very good company, a very sound company."
But the stock has fallen from a peak of $89 a year ago to $7.68 today in New York. The company recently stunned the financial world by posting a second-quarter loss of $19.4 billion, one of the biggest ever. Its chief executive, John Roth, who was named newsmaker of the year in the Canadian edition of Time magazine in January, warned that business was unlikely to improve before the second half of next year. A search is under way to replace Mr. Roth, who is to retire next year.
Nortel shares trade on the New York Stock Exchange and on the Toronto Stock Exchange. At its peak last year, Nortel represented more than 36 percent of the Toronto TSE 300 index. Even at its shrunken price today, Nortel represents more than 5 percent of the index.
By comparison, the biggest stake in the Standard & Poor's 500-stock index in the United States is now General Electric (news/quote), at just over 4 percent. And Nortel accounts for just 0.23 percent of the S.& P. 500.
Using a mutual fund to get a basket of stocks is generally considered a low-cost way for an individual to minimize the risk that one stock's fall will hammer a portfolio. But a general stock fund that mimicked the Canadian market would have left an investor with a big exposure to Nortel. "A lot of people thought that when they were buying index funds they were diversifying," said Irwin Michael, portfolio manager at ABC Funds, a Toronto mutual fund firm. "They were not."
Canadians' exposure to Nortel is mostly through group pension plans and tax-sheltered registered retirement savings plans. The Association of Canadian Pension Management estimates that group pension plans had total assets of 650 billion Canadian dollars ($422.25 billion) at the end of last year, with about 300 billion Canadian dollars ($195.32 billion) more in individual plans.
Canada has a taxpayer-financed pension plan for retirees that is similar to the Social Security program in the United States, and Canadian companies provide various types of pension plans. But Canadians are saving more for retirement as well.
A Gallup survey commissioned by the Investors Group (news/quote) of Winnipeg, one of the country's biggest mutual fund distributors, found that 58 percent of Canadians had savings in individual registered retirement savings plans last year. Contributions are deducted from income, and contributors invariably receive a sizable tax refund. Additional gains are also sheltered from taxes until withdrawal.
These individual plans and corporate pension plans are allowed to invest no more than 30 percent in foreign securities in return for their tax breaks. The limit was raised to 30 percent from 20 percent two years ago.
Pension funds "had more in Nortel than they would have had in an ideal situation," says Robert Betram, executive vice president for investments at the Ontario Teachers Pension Plan.
And pension plans were more likely to follow an indexing strategy than individuals were. Mr. Rocchi of Barclays estimates that index funds make up as much as 20 percent of Canadian institutions' investments. "Having a lot of Nortel in the Canadian index hurt," he said, "but that was compounded by the fact that many institutions hold 40 percent of their assets in Canadian equities." (Bonds and other types of assets bring their total Canadian holdings up to 70 percent of their portfolios.) Canada represents only 2 percent of the international capital market, and if the pension funds weighted their portfolios worldwide, "Nortel would be a minor footnote," he said.
Some pension plans have reduced their exposure to conventional index funds or switched to customized funds specifically to reduce their Nortel exposure, according to Stephen Bigsby, executive director of the association of Canadian pension managers.
Many investors, meanwhile, wound up with more Nortel stock in May 2000 when BCE Inc. (news/quote) of Montreal, the parent of Bell Canada (news/quote), distributed most of its Nortel position to its shareholders. Its Nortel holding dropped from 36 percent to 2 percent.
Even after Nortel's precipitous decline and the cancellation of its dividend, many individual investors have not given up on the company.
"Nortel was huge in Canada," says Alan Zuck, a Toronto secondary-school teacher, who is sitting on several hundred shares bought in March 2000 at about $40 apiece. "It was a home-bred success story.
"We're so dominated by our neighbors to the south that when you have a Canadian success story, you want to support it," he added. So Mr. Zuck bought several hundred more shares on Feb. 15, just hours before the company shocked the financial markets with a warning that its business was deteriorating. Mr. Zuck sold those shares the next morning for a loss of $5,000, more than he takes home in a month.
Mr. Zuck and Mr. Ahrens have joined one of several lawsuits brought against Nortel in the United States and Canada, accusing management of having known or of having should have known of its deteriorating financial condition well before the Feb. 15 profit warning. Nortel has said that the lawsuits are without merit and that it intends to defend itself vigorously.
Like Mr. Zuck and Mr. Ahrens, many retired people are still holding on to their Nortel stock, says John Tabet, a vice president at Retirement Counsel of Canada Wealth Management. They "are waiting for the market to return to its previous highs."
He added, "They are reluctant sellers in Nortel because of their faith in John Roth and company.">> endquote |
