CFA Institute

Leadership Can Make a DifferenceAuthor(s): Marshall D. NelsonSource: Financial Analysts Journal, Vol. 36, No. 1 (Jan. - Feb., 1980), p. 41Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4478308 .

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Complete tables showing all 187 comparisons and t-values, as well as other statistics, are available from the authors upon request. Write to: Mr. Jan Twardowski, % The Vanguard Group, P.O. Box 1100, Valley Forge, PA 19482.

5. The growth stock portfolios are represented by an aver- age of five large growth stock mutual funds: T. Rowe Price Growth Stock Fund, Massachusetts Investors Growth Stock Fund, National Investors, Chemical Fund, General Electric Savings & Security Program. A 0.5 per cent annual adjustment was made for estimated expenses.

6. The 50 stocks are: American Express, American Home Products, American Hospital Supply, AMP, Anheuser- Busch, Atlantic Richfield, Avon Products, Bank- america, Baxter Labs, Black & Decker, Bristol Myers, Burroughs, Chesebrough Ponds, Citicorp, Coca Cola, Colgate Palmolive, Digital Equipment, Eastman Kodak, Emerson Electric, General Electric, General Reinsurance, Halliburton, Hewlett Packard, Interna-

tional Business Machines, International Flavors & Fragrances, Johnson & Johnson, Kerr McGee, K Mart, Eli Lilly, Louisiana Land, McDonalds, Merck, Min- nesota Mining & Mfg., Motorola, J.C. Penney, Pep- sico, Pfizer, Philip Morris, Procter & Gamble, Revlon, Schering Plough, Schlumberger, Sears Roebuck, Squibb, Sterling Drug, Texas Instruments, Upjohn, Warner Lambert, Weyerhaeuser, Xerox. Source: Com- puter Directions Advisors, Spectrum publications.

7. This could be an enticing subject for further study. If the results of such a study were consistent with these pre- liminary indications, the implications for investment management could be profound. Is the preference of pension funds and other institutions for individually managed accounts over commingled funds merely an expensive misconception?

8. Source: Computer Directions Advisors. Investment counselors not yet available. Estimated 0.8 per cent expense ratio adjustment for mutual funds.

LETTERS continued from page 14

Farrell characterized his four groups as "growth stocks," "stable stocks," "cyclical stocks" and "oil stocks." We found five groups-"growth stocks" (45 members), "cyclical stocks" (91 members), "oil and related stocks" (33 members), "stable I" (75 mem- bers, mostly utility, insurance and food-related stocks) and "stable II" (47 members, mostly retailing and railroad stocks). The nine remaining equities had no affinity for any of these groups.

We examined the mobility of stocks between groups by looking at the 81 securities common to Farrell's 1961-69 study and to ours. Our two "stable" groups were treated as a single unit for this purpose. Fifty-eight stocks (72 per cent) occurred in the same group in both studies. The most volatile stocks were growth stocks; 39 per cent of se- curities so classified by Farrell had ma- tured into cyclical and stable stocks, in equal proportions, by the time of our study. Only the "oil and related" group showed complete stability-i.e., no entries and no departures.

To summarize: In spite of differ- ences in methodology and in the con-

stitution and size of the test universes, our study of the period 1975 to 1978 and Farrell's study of the period 1961 to 1969 produced very similar results. Al- though we thus confirm Farrell's con- tention that "the homogeneous groups appear to be stable over time," we have found that their memberships are not stable. Twenty-eight per cent of the stocks common to both studies changed their affiliation between 1969 and 1975.

We are currently investigating the covariance structure of extra-market returns on Canadian equities. Our re- sults thus far suggest that homoge- neous groupings are smaller and more numerous in Canada. One interesting cluster that appeared in late 1976 com- prises securities associated with the Province of Quebec.

-Raymond Goldie Brian Reid

Canavest House Limited, Toronto

Leadership Can Make a Difference Professor Rolf E. Wubbels' article on "The French Economic Miracle" (Fi- nancial Analysts Journal, July/August 1979) is beautiful. If Raymond Barre and Valery Giscard d'Estaing succeed in encouraging free enterprise capital- ism in France, the world will have an innovative example to follow.

Eventually, this world may evolve toward Robert Heinlein's People's Capitalism. Heinlein proposed that every citizen receive at birth shares in public corporations, but receive fed- eral voting rights only after serving his republic in some way (military or pub- lic service). With good leadership, society can become more productive for all. But it takes political courage to follow economic policies that encour- age capital formation and job creation. -Marshall D. Nelson

Senior Analyst, American Airlines Owasso, Oklahoma

Thank You My sincere thanks to John G. Gillis and M.H. Earp for their "Interpreta- tions of Professional Conduct," which appeared in the March/April 1979 issue of Financial Analysts Journal. This presentation provided excellent review material for the Ethics section of the 1979 Chartered Financial Analysts exams, and I was glad to be able to share it with two candidates for the exams who are not subscribers to the Journal.

Keep up the good work. -E.M. Poitier (Mrs.) Consulting Economist

The Bahamas Financial Digest Nassau

FINANCIAL ANALYSTS JOURNAL / JANUARY-FEBRUARY 1980 O 41

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