Departments: Money
Looking for Profits? You Could Go to the Track

Q: Lately, I’ve been hearing about “tracking’’ stocks. What exactly are they?

A: A tracking stock is a separate class of shares issued by a parent company that “tracks” the performance of one of its business divisions.

Tracking stocks have been around for 15 years. But there’s been a great deal of renewed interest in them because many companies are using these stocks to track their fast-growing technology businesses.

In December, for example, AT&T announced plans to create a tracking stock for its cellular business.

A company that issues a tracking stock must provide a separately audited business statement for that division and allocate income and expenses to it.

So a tracking stock is, in effect, like a spinoff that is not spun off.

Among the tracking stocks issued so far this year: AT&T’s Liberty Media; Donaldson, Lufkin, Jenrette’s DLJ Direct; and Ziff Davis’s ZD NetWeb. On deck are DuPont’s life sciences unit and Disney’s Go.com, its online content provider.

A company that issues a tracking stock is hoping to get credit for a high-growth division within the company without selling that division off. In other words, the company wants to see its stock market price reflect its high-growth business efforts.

An accelerating stock price can mean a great deal to a company. A higher price helps a company recruit and retain management and also makes it easier for a company to acquire other companies.

But Wall Street typically discounts growth within conglomerates. That’s partly because each Wall Street analyst follows a particular industry. A company that’s in just one business is easier to analyze.

So issuing a tracking stock can help. Sprint is followed by 28 industry analysts. But Sprint PCS, its tracking stock issued in November 1998, has 32 analysts—and is up fivefold in a year.

Tracking stocks are issued in one of two ways. The first is by issuing them as a dividend to current shareholders. In other words, shareholders might receive one share of the tracker for every 10 shares they own in the parent.

The second method, which is growing more common, is for the parent to issue the tracking stock as an initial public offering, a more attractive option for the company because it raises money.

All this “tracking” may be good for a company, but not so good for shareholders. There’s an inherent conflict of interest in having one corporate board that’s responsible for two separate divisions, with their own stocks.

The shareholders of that new stock do not have voting rights. The corporate board is responsible for making decisions that are best for all shareholders of the parent company.

But what happens when the interests of the parent are at odds with the interests of the subsidiary?

How are company resources allocated in that case? How are expenses allocated? How can investors who have a stake in the tracking stock make certain they are getting a fair shake?

Despite the spectacular performance of a few trackers, overall performance is ho-hum.

The average overall return on tracking stocks, since each began trading, is 30 percent. This return is roughly one-third of the return you would have if you’d invested in the Standard & Poor’s 500 index when each stock was introduced, according to the business press.

So before you rush into tracking stocks, to get a pure play on a dot.com or telecommunications company, think about the parent company that comes along with it—and what that parent is trying to get from you as an investor.

Q: I’m worried about having too much technology in my mutual fund portfolio. How can I find out how much I have?

A: Two Web sites should be helpful. First is www.morningstar.com.

This site, sponsored by Morningstar, the well-known mutual fund publishing company, provides an X-ray feature that helps you look inside your portfolio and see what industry sectors make up your mutual fund.

Similarly, www.moneycentral.com, a site where I publish a weekly column, provides a Fund Finder that helps you see, under “portfolio composition,” what’s in your portfolio. Under “top holdings,” you can see the 10 companies that account for the biggest share of your portfolio.

Technology has been the engine of growth in the stock market over the past year.

All investors should have some technology in their portfolio, but investors also should, as you point out, be careful that an investment in technology doesn’t make up the entire portfolio.

—Mary Rowland

Mary Rowland is a regular contributor to several major financial planning magazines.

Thrifty Educator

Each month, NEA Today prints money-saving tips from NEA members. This month’s tips come from Coleen Collete, a fourth grade teacher at Memorial Elementary School in Hopedale, Massachusetts, and Paula Thompson, a retired special education teacher from Mobile, Alabama.

Coleen Collete: “I ask my local card shop for leftover envelopes that aren’t used because the cards that go with the envelopes weren’t sold. Normally, the card shop’s procedure is to throw these envelopes out. I take the most brightly colored ones and use them to send home notes to parents. The color makes the envelope stand out among the school papers and gives my note a better chance of being delivered.”

Paula Thompson: “Bulletin board paper is not easy to measure and put up, so I use gift wrap instead. After stapling it to the center of my board, I add a pre-cut corrugated, colorful border. Gift wrap does the trick for holiday themes, and it also can be used for backgrounds of subject features such as dinosaurs, jungles, and space themes. Let your imagination flow at your local gift wrap department.”

If you have a money-saving tip from your workplace, send it along to neatoday@nea.org. We’ll print the best of the bunch in a future issue.

Heads Up from NEA Member Benefits

We all have different insurance needs at different times in our lives.

One plan that can adjust to your needs is the NEA Level Premium Term Life Insurance Plan. Provided by the NEA Members Insurance Trust® and underwritten by Prudential, the Level Premium Plan allows you to lock in the same affordable rate from the time you initiate coverage until you reach age 70.

Up to $250,000 is available for NEA members up to age 49, when you’re likely to need the most coverage. Up to $100,000 is available for members between ages 50 and 69, when your coverage needs tend to decrease.

And up to $10,000 is available for members over age 70.

As an added benefit, the Plan will waive your premium if you’re under age 60 and become totally disabled for six months or more.

Call NEA Member Benefits at 1/800-637-4636 today to find out more. Or check www.neamb.com.

Good news for NEA Credit Card holders! NEA Member Benefits and MBNA America now offer Net Access, a service that lets you check your NEA Credit Card account online, any time.

You can pay your bill, check your balance, or register multiple accounts right from your personal computer. And don’t worry—all transactions are secure.

To use this new service, you must first enroll by providing information to verify your identity and cardholder status.

Then you can create your Net Access profile, with your own unique user name and password. You can log on to Net Access through the Web at www.neamb.com.