Q. I’ve built a large stock position in International Business Machines Corp. over the years. What is the outlook for this company?
F.H., via the Internet
A. Big Blue isn’t blue at all these days. The world’s biggest vendor of computer equipment and provider of information technology services sees signs that corporate spending on tech gear is picking up in the Americas and Asia Pacific.
As a result, it intends to hire 18,800 new employees worldwide this year and end 2004 with 330,000 employees, its biggest workforce since 1991. One-third of the jobs will be in North America, and two-thirds will be in its global business emphasizing growth opportunities such as the Linux operating system.
The firm beat analyst estimates in its third quarter with a profit of $1.80 billion despite a pension settlement charge. That compares with $1.78 billion a year ago. Management has boosted its earnings-per-share expectations by 3 cents for the full year, to $5 a share.
Shares of International Business Machines (IBM) are down 3 percent this year, following last year’s 20 percent increase.
IBM is introducing significant new products, such as its Blue Gene/L supercomputer to be completed in 2005. It is the world’s fastest, thereby taking that distinction away from a Japanese supercomputer.
It released its first eServer BladeCenter platform for the telecom market. There’s also a new version of its database software aimed at users of Linux and Unix operating systems designed to take market share from Oracle Corp.
While IBM boasts a stellar brand name and extensive product offerings, its vast business must deal with currency shifts and other potential problems sometimes difficult to predict. Regarding additional pension lawsuits, it will have to deal with additional costs as the result of either settlements or a federal judicial decision.
The consensus rating on the stock of IBM is currently a “buy,” according to the Boston-based First Call research firm. That consists of four “strong buys,” 11 “buys” and eight “holds.”
Earnings are expected to rise 15 percent this year, versus 14 percent forecast for the computer hardware industry. Next year’s expected increase of 11 percent compares with 17 percent projected for its peers. The firm’s estimated annualized growth rate for the next five years is 10 percent versus 11 percent expected industrywide.
Alliances are a big part of the firm’s strategy. It recently entered into a 10-year partnership with Chicago-based Boeing Co. to develop U.S. Defense Department technology projects. It also forged a $1 billion five-year technology and marketing alliance with PeopleSoft Inc. to do battle with Germany’s SAP AG in corporate financial software.
Q. I own Putnam Fund for Growth & Income in my retirement portfolio. What is your opinion of this fund?
A.H., via the Internet
A. It’s not easy to uncover big future winners when a fund’s portfolio is filled with the largest, most closely watched corporate names in the world.
The fact that small-capitalization stocks have done better then blue chips since 2000 has made matters worse.
The $17.6 billion Putnam Fund for Growth & Income (PGRWX) had a total return of 11 percent over the past 12 months and had a three-year annualized return of 3 percent, according to Morningstar Inc. in Chicago. Both results fall in roughly the lower one-third of large value funds.
“This fund’s performance has been below average compared to other funds holding large-cap stocks, so I’m not very confident about its stock-picking,” said Karen Papalois, an analyst with Morningstar. “While there is no looming danger and I see no reason to sell, it is a mediocre choice compared to better and more proven funds in its category.”
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Its top stock holdings recently were Exxon Mobil, Citigroup, Pfizer, General Electric, Bank of America, American International Group, Fannie Mae, Hewlett-Packard, Altria Group and Tyco International. Twenty-nine percent of assets are in financial services and 20 percent in industrial materials. Other significant groups include health care and consumer goods.
Putnam Fund for Growth & Income does have low portfolio turnover because it buys stocks for two to three years, and its annual expense ratio is a low 0.90 percent. It requires a 5.25 percent “load” (sales charge) and has a minimum initial investment of $500.
Hugh Mullin has led the fund’s experienced management team since 1996, helped by Chris Miller and David King.
After the Putnam fund family was accused in October of fraud by state and federal regulators for permitting some investors and some of its own portfolio managers to quickly trade in and out of its funds, it dismissed Chief Executive Larry Lasser. New CEO Charles Haldeman has improved compliance, reduced fees and fired some employees and is working to improve performance.
Q. How are investments affected by inflation? What’s happening with inflation now and how does it compare to other time periods?
B.D., via the Internet
A. Inflation, the painful circumstance in which you must pay more for goods and services, erodes the value of everything.
I did a TV report in a supermarket in the early 1980s in which I picked up a can of peas to show a half-dozen price stickers on it. The price of that can was increasing even as it sat on the shelf. Inflation had hit 15 percent as measured by the consumer price index.
Today, even with a rise in oil prices, inflation is low by historical standards, at about 3 percent the past year.
“The higher the inflation rate, the less the real return to investors and the lower the value of an asset,” said Mark Zandi, chief economist at Economy.com in West Chester, Pa. “It may cause the Federal Reserve to increase rates, which undermines the value of stocks, housing, consumer purchasing power and corporate profitability.”
It’s difficult to hedge your money against inflation. There are Treasury inflation-protected securities (TIPS), a special type of Treasury note or bond that ties the principal and coupon payments to the consumer price index and increases to compensate for inflation.
Q. What exactly is a hedge fund, and why are hedge funds being looked at more closely?
T.C., via the Internet
A. While mutual funds are regulated and must register with the Securities and Exchange Commission, there are no such requirements for hedge funds.
This lack of regulation and the fact that hedge fund assets now total $870 billion is why the SEC is expected to take steps after the presidential election to initiate registration and other requirements.
A hedge fund is an aggressive fund that includes conservative and speculative investments in order to attain a maximum rate of return. Run by entrepreneurial organizations, the funds make no attempt to conform to market benchmarks. Among the strategies employed are options, short selling and leverage.
Most of these pooled funds are limited to 100 investors willing to pay high fees and assumed to be wealthy and savvy about their money. That is why the industry has maintained that regulation isn’t necessary.
In the first half of this year, the CSFB Tremont hedge fund index that tracks 3,000 hedge funds was up 2.6 percent. A record $43 billion in new funds was pulled in during the second quarter.
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Andrew Leckey is a Tribune Media Services columnist. E-mail him at [email protected].