Vice Presidential Portfolio Makeover: Dick Cheney

Nov. 3, 2000 -- Americans (those who vote, in any event) will soon head to the polls to choose a new president. The major candidates and their running mates are pledging to steer the nation through continued prosperity. To determine which candidate is best suited to run the nation’s fiscal engine, we examined how the candidates handle their own finances, and then huddled with professional financial planners to hear their thoughts. The planners had some advice for the candidates on how to improve their portfolios. And if it doesn’t help you decide who you’re voting for, it may help you with your investments.

In terms of his personal finances, Dick Cheneyconfronts two problems. The first is strictly oneof image: American voters like their rich publicofficials (and would-be officials) to appeargenerous, and Cheney’s record doesn’t quitemeet those expectations. (For that matter,neither did Vice President Al Gore’s back in 1997,when he also came under fire for paltrycharitable contributions.) Cheney, who mademore than $4 million last year, caught flak when itwas revealed that his direct charitablecontributions over the past decade amounted toless than 1 percent of his ’99 income.

The situation is complicated by the fact thatGeorge “Rally the Armies of Compassion”Bush has said he wants charities to get moreinvolved in providing social services. Based onCheney’s history, you don’t exactly picture himsnatching up his Santa hat and racing off toclang a bell for the wee ones. That’s problemone.

Classic Investing Mistake

Problem No. 2 — the more interesting one, for our purposes — relates to thatclassic investing mistake: failing to diversify.

Not surprisingly, the former CEO of Halliburton isloaded up with company stock. Michael Zabalaoui, a certified financial plannerand CPA at Resource Management in Metairie, La., says Halliburton aloneaccounts for more than a third of Cheney’s equity investments. Throw inanother holding, Anadarko Petroleum, and Cheneyhas 42 percent of equity investments concentrated in just two companies and onesector.

And boys, the chickens have come home to roost because, despite thisyear’s steep rise in oil prices, Halliburton’s looking pretty uninspiring. AsZabalaoui points out, the stock has a lofty price-to-earnings ratio of 55,although its share price still hasn’t surpassed its high from 1997. For most ofthat year the stock was trading in the mid-$50s. Now it’s in the $30s andrecently veered uncomfortably close to its 52-week low. “Over the last coupleof years, Halliburton has been a losing proposition even as the overall markethas gone up,” says Zabalaoui. “He would have been much better off havinginvested in the S&P.”

In September, Cheney caught lots of flak for hemming and hawing about whatto do with a Halliburton options package then valued at $3.6 million. Thoughhe said he’d forgo the options, that debate is starting to look academic, sincethe bulk of the options have recently been underwater. On Cheney’sdeparture, Halliburton reportedly also gave the CEO a retirement package ofstock and stock options worth $13.6 million, though the value of the packagewould have diminished with the stock’s decline.

The Lucrative IPO Route

Besides oil stocks, Cheney has a large position in Morgan Stanley DeanWitter. While it’s unclear when he bought the stock, it’sbeen an excellent performer, rising in the past three years from asplit-adjusted price of $20 per share to $80 today. Other, smaller holdings aremostly Old Economy blue-chips, like Procter & Gamble,Union Pacific, Reader’s Digest and Lockheed Martin. More tech-oriented holdingsinclude Motorola and EDS.

Cheney also apparently got in on some lucrative IPOs in 1999. According to arecent New York Times report, he quickly resold stocks that had skyrocketedfrom their offering price, racking up an 80 percent return valued at close to $46,000.

Equities make up 61 percent of Cheney’s portfolio, with the balance in cash.

Zabalaoui suggests Cheney boost his equities allocation another 10 percent, whileredirecting some of the cash into municipal bonds. He recommends an overallweighting of 70 percent equities, 20 percent muni bonds and 10 percent cash, although he saysthe exact proportions would depend somewhat on Cheney’s cash needs.

He’d also like to see Cheney sell some oil holdings and funnel the money intodiversified no-load mutual funds. On Zabalaoui’s shortlist of fund buys: anS&P 500 index fund, Rydex OTC, Strong Growth, TIP Turner MidcapGrowth, Strong Growth 20, Fidelity Growth and Janus.

Setting aside the problem of overconcentration, Zabalaoui says, Cheney’sportfolio is basically “in line with a wealthier retiree who’s not in a position toneed to take a lot of risk.” That’s a relevant concern, he adds, particularly inlight of recent market volatility: “When you have $12 million, how much riskdo you need to take?”