Can Too Many Options Slow Down a Company?
INVESTING DIARY -- December 27, 1998
When it comes to employee stock options, it seems,
there can be too much of a good thing. A new study
by Watson Wyatt Worldwide, a management consulting firm
in Bethesda, Md., found that those companies that grant
the largest number of stock options substantially
underperformed their stingier peers.
The study tracked the 1997 performance of 940 companies
in various industries. Watson Wyatt divided the
companies into three groups, based on potential
dilution to their shares if the options already
granted, as well as those available for future grants,
were exercised.
That dilution, expressed as a percentage of shares
outstanding and commonly referred to as "overhang," was
a hefty 18.7 percent for the top third of the companies
surveyed. This group returned a median of just 13.5
percent to shareholders in 1997.
By contrast, the middle third of the companies
surveyed, whose shares would be diluted by just 10.6
percent if all the options were exercised, returned a
median of 16.9 percent.
And, it seems, the chief financial officer can be too
parsimonious with options as well. The bottom third of
companies surveyed, with potential share dilution of
just 5.7 percent, returned 16.2 percent, more than the
spendthrifts, to be sure, but still less than the
middle group.
"Very high overhang lowers returns; very low overhang
hurts returns," said Ira T. Kay, global practice
director of executive compensation consulting at Watson
Wyatt.
The options glut has raised the hackles of
institutional investors, especially those with holdings
in the high-technology industry, which tends to grant
relatively more options to employees.
-- Richard Teitelbaum
Slower Days for Value Stocks
If it seems as if your value stocks are spinning their
wheels, it probably isn't a reflection of your
stock-picking prowess. Last month, the difference in
12-month performance between the S&P/Barra Value and
S&P/Barra Growth indexes was the largest in 11 years.
The growth index was up 33.74 percent in the 12 months
through Nov. 30, while the value index was up just
13.25 percent, according to Putnam Investments. (The
Standard & Poor's 500-stock index returned 23.66
percent.)
"I think it has to do with economic sensitivity in a
slowing economy," said Thomas V. Reilly, chief
investment officer for global value at Putnam, who
cited lowered inventories that have affected the
energy, chemical and paper industries. "These are
traditional value areas."
-- Richard Teitelbaum
FUNDS WATCH
A New Kind of Sector Fund
Investors seeking exposure to a particular industry now
have a new vehicle on which to place their bets. Last
Tuesday, the American Stock Exchange started nine
Select Sector SPDR funds, open-end index mutual funds
created by dividing the S&P 500-stock index into its
component industries.
The funds are a spinoff of the Amex's popular Spiders,
Standard & Poor's depository receipts, trusts started
in 1993 that let investors track the S&P 500.
Like Spiders, the Sector SPDR fund shares trade on the
Amex and have low annual fees, just 0.65 percent.
Because they are traded like ordinary shares of stock,
however, investors must pay commissions to buy and sell
them, which they can do throughout the trading day.
By contrast, the 39 sector funds of Fidelity
Investments levy annual fees ranging from 1.05 percent
to 2.5 percent. Investors pay a 3 percent front-end
sales load. If they sell shares held fewer than 30
days, they pay an extra 0.75 percent fee. Otherwise,
they pay a flat fee of $7.50. The Fidelity funds are
priced hourly.
The Select Sector SPDR funds cover industries from
consumer services to technology.
Which is the better deal? That depends, said Russel J.
Kinnel, head of equity funds research at Morningstar
Inc. "The advantage of SPDR's is that you can trade
them more frequently, they hold almost no cash and they
are more precise than actively managed funds, which all
define their sectors differently," he said. But, he
added, long-term investors may benefit from active
management.
-- Carole Gould
Copyright 1998 The New York Times Company
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