nding corporate America’s investment drought; Capital expenditure relative to sales is at a 22-year low. CEOs must start to put record cash holdings to work

January 23, 2014 6:13 pm

Ending corporate America’s investment drought

CEOs must start to put record cash holdings to work

If 2014 is the year the US economy finally picks up speed, it ought to be the moment companies start investing. US non-financial companies are sitting on record levels of cash – almost $1.5tn. Alas, there is scant sign that chief executives are preparing to put their balance sheets to better use. The latest survey of non-financial companies in the S&P 500 index shows they are expected to boost capital expenditure by just 1.3 per cent for the year ending in June, according to Factset, a data company. This hardly looks like a vote of confidence in the US recovery. Unless companies show signs of stepping up their investments, there will be a question mark over its sustainability.

One piece of good news is that investors are increasingly demanding that chief executives put their cash to work. Until recently the pressure went the other way. Investors demanded share buybacks and companies complied. But the continued rise in US equity prices has made buybacks increasingly expensive. And investors, at least, appear to be regaining their animal spirits. In a Bank of America Merrill Lynch survey published on Tuesday, 58 per cent said they wanted companies to prioritise capital expenditure over other uses of cash flow, the highest number since the survey began in 2001. Their next step should be to punish risk-averse bosses by shifting money to more ambitious companies.

Washington should also do its part by showing it is serious about cleaning up the US corporate tax system. A large share of the non-financial cash mountain is held offshore by just five US tech companies – Cisco, Apple, Google, Oracle and Qualcomm. At $150bn, Apple’s cash reserves alone account for a 10th of the total. And a large share of the cash that chief executives have been returning to shareholders has been raised through the proceeds of debt in the domestic markets. This is tax arbitrage at its worst. US repatriated earnings are taxed at 35 per cent – the difference between what they pay abroad and at home, which is close to the highest headline rate in the world. That needs to change. Washington also needs to get rid of its generous tax subsidies on debt interest.

Third, US companies may be held back by fear of a continuing lack of demand in the economy. There is precious little they can do about this on their own. Paying employees more would help. So too would a rise in the federal minimum wage, which is near historic lows in real terms. But these will only assist at the margins. A better fiscal stance from Washington that took advantage of low borrowing costs to upgrade US infrastructure would also help. Politics makes that unlikely. A more plausible solution comes from John Delaney, a centrist Democrat from Maryland, who has submitted a bill that would give companies a partial tax holiday on any repatriated earnings they put into infrastructure bonds. Such imagination is in short supply in Washington. It should be rewarded.

Ultimately, there is no single fix for what has become a prolonged corporate investment strike. The remedies are manifold. But investors could do more to alter the misaligned incentives facing bosses. Remuneration based on stock price performance rewards chief executives who squeeze their companies for short-term returns. These must be rejigged. And bosses themselves must show more leadership. The problem is not unique to the US. Companies around the world held almost $7tn of cash and equivalents at the end of 2013 – more than twice the level of 10 years ago – according to Thomson Reuters. Capital expenditure relative to sales is at a 22-year low. The moment is long past due to ask why. Everyone, including investors and governments, will need to pitch in to reverse this trend.

Google Pushes Back Against Data Localization

JANUARY 24, 2014, 6:28 PM  2 Comments

Google Pushes Back Against Data Localization

By CLAIRE CAIN MILLER

The big tech companies have put forth a united front when it comes to pushing back against the government after revelations of mass surveillance. But their cooperation goes only so far.

Microsoft this week suggested that it would deepen its existing efforts to allow customers to store their data near them and outside the United States. Google, for its part, has been fighting this notion of so-called data localization.

“If data localization and other efforts are successful, then what we will face is the effective Balkanization of the Internet and the creation of a ‘splinternet’ broken up into smaller national and regional pieces, with barriers around each of the splintered Internets to replace the global Internet we know today,” Richard Salgado, Google’s director of law enforcement and information security, told a congressional panel in November.

Data crisscrosses the globe among data centers, and companies often store redundant copies of data in different places in case of natural disaster or technical failure. In most cases, companies cannot even pinpoint precisely where certain data is located.

At the same time, the United States government is tapping the fiber-optic network that connects data centers worldwide, according to leaked documents. So even if data is stored outside the United States, it could be intercepted during its travels.

Still, Microsoft and other tech companies are trying to prevent foreign customers from switching to services outside the United States. In the next three years, the cloud computing industry could lose $180 billion, 25 percent of its revenue, because of such defections, according to Forrester, a  research company.

Yet even though Google faces these same risks and requests from foreign customers, its policy position is for surveillance reform instead of data localization, according to a person briefed on Google’s policy who would speak only anonymously.

Though Google at one time tried to offer customers the ability to store their data in one location in response to requests, it does not offer that feature now because it determined it was illogical, the person said. Google decided data is more secure if it is stored in multiple locations and that storing it in one location slows Google services and makes accessing the data less convenient for customers, the person said.

Mr. Salgado said a proposed law in Brazil that would require all data of Brazilian citizens and companies to be stored in the country would be so difficult to comply with that Google “could be barred from doing business in one of the world’s most significant markets.”

Bank-Run Fears Continue; HSBC Restricts Large Cash Withdrawals

Bank-Run Fears Continue; HSBC Restricts Large Cash Withdrawals

Tyler Durden on 01/24/2014 21:31 -0500

Following research last week suggesting that HSBC has a major capital shortfall, the fact that several farmer’s co-ops were unable to pay back depositors in China, and, of course, the liquidity crisis in China itself, news from The BBC that HSBC is imposing restrictions on large cash withdrawals raising a number of red flags. The BBC reports that some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it. HSBC admitted it has not informed customers of the change in policy, which was implemented in November for their own good: “We ask our customers about the purpose of large cash withdrawals when they are unusual… the reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime.” As one customer responded: “you shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”

Via The BBC,

Some HSBC customers have been prevented from withdrawing large amounts of cash because they could not provide evidence of why they wanted it, the BBC has learnt.

Listeners have told Radio 4’s Money Box they were stopped from withdrawing amounts ranging from £5,000 to £10,000.

HSBC admitted it has not informed customers of the change in policy, which was implemented in November.

The bank says it has now changed its guidance to staff.

“When we presented them with the withdrawal slip, they declined to give us the money because we could not provide them with a satisfactory explanation for what the money was for. They wanted a letter from the person involved.”

Mr Cotton says the staff refused to tell him how much he could have: “So I wrote out a few slips. I said, ‘Can I have £5,000?’ They said no. I said, ‘Can I have £4,000?’ They said no. And then I wrote one out for £3,000 and they said, ‘OK, we’ll give you that.’ “

He asked if he could return later that day to withdraw another £3,000, but he was told he could not do the same thing twice in one day.

Mr Cotton cannot understand HSBC’s attitude: “I’ve been banking in that bank for 28 years. They all know me in there. You shouldn’t have to explain to your bank why you want that money. It’s not theirs, it’s yours.”

HSBC has said that following customer feedback, it was changing its policy: “We ask our customers about the purpose of large cash withdrawals when they are unusual and out of keeping with the normal running of their account. Since last November, in some instances we may have also asked these customers to show us evidence of what the cash is required for.”

“The reason being we have an obligation to protect our customers, and to minimise the opportunity for financial crime.However, following feedback, we are immediately updating guidance to our customer facing staff to reiterate that it is not mandatory for customers to provide documentary evidence for large cash withdrawals, and on its own, failure to show evidence is not a reason to refuse a withdrawal. We are writing to apologise to any customer who has been given incorrect information and inconvenienced.”

But Eric Leenders, head of retail at the British Bankers Association, said banks were sensible to ask questions of their customers: “I can understand it’s frustrating for customers. But if you are making the occasional large cash withdrawal, the bank wants to make sure it’s the right way to make the payment.”

Why Crash Tests Have Auto Makers Looking to 2017 Unless the Obama auto-mileage rules are rolled back, all cars will be small cars

Why Crash Tests Have Auto Makers Looking to 2017

Unless the Obama auto-mileage rules are rolled back, all cars will be small cars.

HOLMAN W. JENKINS, JR.

Jan. 24, 2014 6:50 p.m. ET

In the strange world created by the government’s highly irrational policies toward the auto industry, car makers got some good news-bad news this week. Their new minicars were found to be sadly lagging on safety by an independent testing lab.

Among the teensy euro-style cars flying off the assembly lines, only the Chevy Spark rated “acceptable” by the vaunted Insurance Institute for Highway Safety in a common type “front overlap” crash at 40 miles an hour. Ten others, including the Fiat F.MI -3.41% 500 and theToyota 7203.TO -1.37% Prius C, were rated “poor” or “marginal.”

This bad news, which has been all over TV the past few days, is good news for an industry gearing up for the lobbying fight of its life—the 2017 “mid-term review” of President Obama’s strict new fuel-economy rules. The review was the key concession ceded to auto makers when the White House had the industry by the throat in 2009.

Economists puzzle over the matter in a world of yo-yoing gas prices and advancing technology, but let’s just say a back-of-the-envelope estimate is that the 40-year-old fuel-economy regime known as CAFE, or corporate average fuel economy, has never secured any real benefit for the United States. Consider: The mileage targets went unchanged from 1990 to 2009 and yet the U.S. light-vehicle contribution to global greenhouse emissions fell from a negligible 3.3% to an even more negligible 2.6% for reasons beyond Washington’s control.

But one thing is certain: However much government agencies keep insisting lighter cars don’t have to be smaller and more dangerous cars, vehicles would get a lot smaller under the Obama out-year targets. In 2013, the average vehicle tipped the scales at 4,041 lbs. By 2025, the average vehicle would hardly be heftier than today’s 2,500-pound minicars—about 2,976 lbs., according to an MIT study.

Voters may not care about auto-industry profits, but they do care about safety and comfort. Auto makers make a near-riskless bet that Washington will rein in the rules before they really bite. In the 1990s and 2000s, pols carved out the SUV loophole to keep auto makers and car buyers happy. Only one big question lingers, on which millions in lobbying fees will be spent, and that’s the exact form Washington’s climb-down will take.

Indeed, CAFE shows how terrible government policy, like ladies of the night and oversize oil paintings, can become respectable with age. The Bush White House once routinely criticized the rules in its annual economic report. When President Bush got in trouble in Iraq, he seized on higher mileage targets as a kind of recognizable currency to show that his only approach to a messy Mideast wasn’t to send in the troops.

President Obama, for his part, routinely blames Detroit’s focus on selling big cars for its financial meltdown. This is complete nonsense, of course. Big cars earn all of Detroit’s profits. But Mr. Obama is borrowing the logic of cognitive linguist George Lakoff, who teaches Democrats to say what voters want to hear. And liberals and environmentalists want to hear that Detroit’s bankruptcy was punishment for SUVs.

As a House GOP investigation would later find, the current target of 54.5 miles-per-gallon target in 2025 was picked by Team Obama because it made an impressive-sounding “headline number.” Decimals apparently indicate seriousness. In reality, the rules are full of fudge factor to favor the electric cars Mr. Obama likes to talk about and Detroit’s pickup truck business. A more realistic claim would be about 47 mpg in 2025, though that’s still far more fuel economy than car buyers would likely find worth paying for at any gas price below $7.

Which brings us to the small cars that fared so badly in the front overlap tests, including the 2014 Ford Fiesta.

Ford was louder than most in predicting that Americans would become more like Europeans, willing to hand over top dollar for teensy cars with luxurious touches. But Europeans pay $9 and $10 for gas. Plus, even as they get fatter and older like Americans, Europeans spend fewer hours behind the wheel, which makes a lack of full-size comfort easier to accept.

In the U.S., gasoline is about $3.28. At this week’s Detroit auto show, Ford was talking up not its minicars but its full-size pickup and a forthcoming 155-mph Mustang.

But then fraudulence in all things is not the worst practical slogan for anybody practicing politics. We don’t exaggerate when saying all auto makers are focused on 2017. Hard to find is an executive who believes the rules will survive as written. Get ready for one of the great regulatory scrums. Not only will car makers send lobbyist hordes to shape the successor rules to their own advantage, but to the disadvantage of their rivals.

The Bernanke Tide What the Fed gives to emerging markets it also takes away

The Bernanke Tide

What the Fed gives to emerging markets it also takes away.

Jan. 24, 2014 6:41 p.m. ET

In Warren Buffett‘s famous formulation, only when the tide rolls out do you see who’s been swimming naked. So it goes in emerging markets with the skinny dippers being exposed as the Federal Reserve tapers its unprecedented bond-buying.

That’s the story of the week in global financial markets, as it becomes clear that some of the swimmers need a better workout regimen. The last few years have been good for countries such as Brazil, Turkey and Indonesia as the Fed’s low-interest-rate policies have had investors hunting for yield around the world. Any semi-respectable country without Hugo Chávez or Ayatollah Khamenei in charge could attract foreign capital. Not all of that money went to productive use. And now that the Fed seems set on drawing down the QE era, investors are hedging their bets and returning to dollar and euro assets.

The hardest hit are the countries with policies least able to stand without the Fed prop. That includes Argentina, which the Kirchner clique has run like Venezuela without the populist charm. Turkey’s lira has taken a bath amid the political showdown over corruption, a large current-account deficit, and monetary policy that has been too easy for too long. Russia’s ruble is also hitting new lows against the euro, as its economy increasingly looks like a one-act play (oil).

China is a special case because its growth jitters have more to do with the withdrawal of its own domestic financial stimulus. But China’s hints of slowdown, and the probability of a big bill for cleaning up bad debts, have spooked investors elsewhere worried that global growth may slow.

One lesson is that countries are going to have to improve their policies to attract capital. South Korea is in better shape than most in part because it has struck free-trade agreements that have made it more globally competitive. Mexico’s energy and other reforms have investors optimistic about its growth prospects and burgeoning middle class. The end of Ben Bernanke’s Fed tide will have its uses if it spurs the kind of tax, trade and investment reforms that have been put off in too many places.

The question is how much damage will be done as this global adjustment takes place. One of the conceits of the Bernanke era has been that U.S. monetary policy need only be concerned with America’s domestic economy. The rest of the world would take care of itself. This was always an illusion.

A country that runs the world’s reserve currency is also the world’s central banker, as the rude shifts in capital flows have shown. The last week’s exchange-rate gyrations are a repeat of what happened last summer when Mr. Bernanke made clear he wanted to begin tapering the Fed’s bond-buying. A few bad weeks in global markets at the time caused the Fed chief to blink in September and put off the start of tapering until December. Now the Fed is leaking that it will keep tapering at its meeting next week, probably by another $10 billion, and markets are moving again.

Will the Fed blink again? This will be Mr. Bernanke’s final meeting as chairman and it’s unlikely that the Open Market Committee will pull a surprise after the recent leaks. Mr. Bernanke will go out having set the Fed on a tapering course. But continued market ructions will put the pressure on new chairman Janet Yellen, especially if they spill into U.S. stocks and affect U.S. business and consumer confidence.

Yet sooner or later the world will have to adjust to a normal monetary policy. QE and near-zero interest rates can’t last forever without running risks of even more misallocated capital and market distortions. The end of the Bernanke tide was always going to leave somebody naked, and the sooner they get dressed the better.

Cory Booker: Building on the Success of the War on Poverty; The government’s half-century of effort has slashed poverty rates. It’s time to strengthen and scale up what works

Cory Booker: Building on the Success of the War on Poverty

The government’s half-century of effort has slashed poverty rates. It’s time to strengthen and scale up what works.

CORY BOOKER

Jan. 24, 2014 7:01 p.m. ET

In my three months as a senator, I have already seen firsthand that partisan debates in Washington can distract us from uniting around common-sense actions to address our most urgent needs. I always try to remember the old African saying: “When there is a snake in the hut, there is no need to debate its color.”

Two of the interrelated dangers we face today include an underperforming economy and, in everything from health care to criminal justice, the continuing problem of spending too much money and not getting the results we want in return.

Our national investment strategy is hardly a strategy at all. We are failing to invest in areas that not only produce great social returns but also reduce federal spending in the long run. Most glaring of all, we’ve got our priorities wrong: We are failing to maximize the productivity of our greatest natural resource—our people.

Opposing Argument

In America, tragically, social mobility is flat or, by some measures, actually declining: If you are born poor, you are likely to stay poor. This fact contradicts the very concept of America, deprives us of the genius of our people, damages our economy and threatens our way of life.

Against this backdrop, we are now having a debate over the War on Poverty, marking the 50th anniversary of President Lyndon B. Johnson’s 1964 speech. Listening to pundits and politicians over the past month, I’ve felt that too much of the discussion has been fueled by our partisan divide and has failed to unite us around actually addressing the pressing crisis of poverty.

Don’t get me wrong: I’m happy to hear more people talking about poverty. But we can’t fall prey to the debilitating simplicities of our seemingly binary political world.

Data, not stultifying political or ideological rhetoric, must drive our agenda. So let’s be clear on the facts. The federal government’s half-century of effort has slashed poverty among seniors from 35% in 1960 to 9% in 2011; it has brought so-called “deep poverty” (those living 50% below the poverty line) down to 5.3%; and it has cut overall poverty by a third, when you factor in tax credits and other payments, according to a recent report by the Council of Economic Advisers.

Continuing our fight against poverty—an endeavor that President Johnson rightly warned would be long and difficult—is fiscally responsible. If we are going to have a real conversation about it, we must abandon the rigid ideological view that, simply by virtue of being a government initiative, the Great Society was a failure.

We must dispense with the false choice between pursuing fiscal responsibility and funding programs to help the poor. Instead, we should be focused on outcomes and substantive cost-benefit analyses. So how do we best leverage societal investment for maximum return?

As mayor of Newark, it always frustrated me to see constant assaults on initiatives—from food stamps to Medicaid expansion—that keep so many New Jersey families out of the quicksand of poverty and make financial sense.

Take food stamps—formally known as the Supplemental Nutrition Assistance Program. A 2010 National Academy of Sciences study found that it lifted four million people out of poverty. But those dollars also “ripple throughout the economies of the community, state and nation,” according to the U.S. Department of Agriculture, which also found that “every $5 in new SNAP benefits generates a total of $9 in community spending.”

I’m sure many Americans share my frustration and worry about whether their federal government feels a sense of urgency on poverty. The failure to extend unemployment insurance is the current case in point.

But I believe we have a profound opportunity: Fifty years after the War on Poverty began, we can greatly advance our common cause if we recommit to policies that have been successful and update our approach, based on the evidence of what works and what doesn’t. There are many sound ideas, ranging from addressing the educational needs of our children to stimulating more investment and entrepreneurship in pockets of urban poverty. Here are just a few.

In a global, knowledge-based economy, the genius of our children is our nation’s greatest asset. Universal pre-K is a must: Based just on cost-benefit analysis, the evidence is overwhelming. We know that every dollar spent on high-quality early education returns roughly $7—through reduced spending on social services, as well as higher earning and productivity for participants as adults.

In focusing on kids, we must be willing to confront some uncomfortable truths. Whether a child grows up in a two-parent home is one of the top predictors of social mobility. This doesn’t mean that we demean single-parent households. But we should focus on proven strategies that empower couples to stay together (like eliminating the marriage penalty in the Earned Income Tax Credit) and better support single parents (like raising the federal minimum wage).

As mayor, I saw countless families broken apart and economically hobbled when one parent went to jail for a nonviolent drug offense. We can save taxpayer money and keep families together by reforming our ineffective criminal-justice system. For instance, re-entry programs that help former prisoners move quickly toward training and work have been shown to produce profound benefits, with significant reductions in recidivism and future taxpayer expenditures.

In terms of anti-poverty impact and return on investment, few programs surpass at-home nursing initiatives designed to serve low-income, first-time mothers. A study funded by the Pew Center estimated that the returns of such programs exceed $73,000 over the life of a child. Other studies have shown marked reductions in crime, child abuse and other problems, including infant death rates.

For young people entering the workforce, apprenticeships are a great way to close the skills gap and to increase lifetime earnings—by up to $300,000. But the U.S. had just 358,000 active, registered apprenticeships in 2012—a tiny fraction compared with other industrialized countries. We should expand private-sector-led apprenticeship strategies similar to those in South Carolina, which saw a 580% increase in apprenticeships in recent years.

The above examples give me hope that we can cut through the old false debates. We’ve proved, through strategic investments, that we can tackle poverty by empowering people to succeed—and save taxpayer dollars in the long run.

What excites me about being a senator is the opportunity to strengthen and scale up these common-sense programs through federal investments, public-private partnerships and incentives. Significantly reducing poverty isn’t a question of whether we can—it is a question of whether we have the collective will.

I welcome a broad conversation about poverty and social mobility, but the balance sheet is indisputable after a half-century of the War on Poverty. We need to do more, not less.

But doing more doesn’t mean wasteful and indiscriminate spending. Doing more means making smart investments in proven programs and innovating around promising new strategies.

We have a historic opportunity today to lift millions out of poverty, to limit government spending in the long term and to create middle-class jobs. Doing so isn’t just a moral imperative; it will also profoundly improve our global competitiveness and the economic security of American families. As that African saying goes, the snake is in the hut; it is now time for us to act on the urgent challenges before us.

The 13-F Spotlight: Revealing And Concealing Hedge Fund Trades

The 13-F Spotlight: Revealing And Concealing Hedge Fund Trades

Jan 22 2014 | 8:28am ET

By Ronan Cosgrave
Director and Sector Specialist
for Convertible Bond Hedging, PAAMCO

One of the more interesting snapshots of the investing universe is captured by the 13-F filings with the U.S. Securities and Exchange Commission (SEC), which come out 45 days after the end of each quarter. Institutional investors, including hedge funds with more than $100 million in assets, are obliged to file their long U.S. equity positions, other securities such as select options, and some convertible bonds with the SEC at the end of each quarter. The SEC then publishes them for the world to see 45 days later. The $100 million asset threshold captures hedge funds above a moderate size that are investing in U.S. equities whether they are U.S. based or not.

Plenty of people find it very interesting and useful to see where the largest and most successful hedge funds are investing. In fact, there is now an index that tracks the best-regarded managers’ largest 30 investments as well as an upcoming ETF of the same theme. For example, if one just invested in the top 10 holdings of the hedge fund universe identified in the 13-F filings released on July 15, 2013 and sold them when the next holdings release occurred on November 15, the portfolio would have had a total return of 17.3% (11.6% when you exclude Icahn Enterprises which is in the top ten purely due to Carl Icahn’s own holding of his eponymous holding company). The S&P 500’s return for the same time period was 7.65%.

13-F: A Game of Cat and Mouse

The 13-F filings of hedge funds have spurred an ongoing game of cat and mouse. Everybody with a high profile knows that their 13-F filings are going to be dissected. These investors hardly have a problem with the world piling into their trades behind them, and sometimes they even take advantage of these trades by subsequently lightening up on their holdings. To further add to the confusion, some of these long positions may be hedges to short exposures, such as put options, where the fund may actually have a negative bias on the individual company. It is for this reason that inferences should not be drawn from the holdings of firms like Susquehanna Investment Group, and other options traders and market makers, which regularly feature in the 13-F data. Regardless of these firms’ opinions on any given company, they are, in general, simply hedging an exposure derived from their dealings in the options and other related markets.

While large funds file considerably more data privately with the SEC, other government agencies in the U.S., and in other jurisdictions, the 13-F filing offers a rare chance for comparative analysis of the equity positions of the hedge fund world in general. At PAAMCO, we have transparency into our own fund investments, and we furthermore have a reasonable idea of what is going on in the broader hedge fund universe. Having an actual external comparison, however, is a very useful tool.

September Filing

The data from the filing on September 30 covers $1.48 trillion worth of U.S. equity holdings spread across 860 filing hedge fund managers. This very non-trivial number represents an average holding of $1.72 billion of long U.S. equities for each reporting hedge fund. While this may seem rather high, it is fair to say an element of distortion is introduced by the quantitative market neutral funds that may be levered multiple times as they can have thousands of names with tiny weights in their portfolios. To put the $1.48 trillion number in perspective, the total market cap of the S&P 500 is nearly $16 trillion (as of November 29) while the total full market capitalization of all listed U.S. stocks is (as measured by the Wilshire 5000) $22 trillion (as of November 29). For further comparison, the most recent Hedge Fund Intelligence biannual Global Review estimates that hedge funds around the world manage $2.6 trillion, $1.8 trillion of which is managed out of the U.S.

13-F filings will only show approximately half of the hedge fund books as the 13-F filers are not obliged to show short positions. Also, the number of managers holding many positions is artificially increased by the aforementioned market neutral funds. However, the sum of the dollars invested in each name is a good indication of where hedge fund assets are flowing.

The Numbers

Taking the S&P 500 as a guide, out of aggregate 13-F filings, 46% of the dollars represented are invested in S&P 500 companies. The S&P 500 is approximately 75% of total U.S. market capitalization, so one might infer there is a relative bias away from the large/mega cap companies. However, within the S&P 500 it is relatively unevenly distributed ranging from very popular (e.g., Dollar General: held by 97 funds with ownership of 30% of the shares outstanding) to ignored (e.g., Windstream: held by 20 funds with ownership of 0.57% of the company; though Windstream is certainly not ignored on the short side with a 13.9% short interest as of October 31). The average market cap of the top ten holdings is $159 billion. While on average just over 19% of reporting managers hold each of the top ten holdings, it is hard to draw many conclusions from that. Notably, there is a very distinct technology and financial sector bias within the top ten.

As noted before, Icahn Enterprises is a holding company for activist investor Carl Icahn and while it would seem like a very direct example of investors piggybacking on another investor’s ideas, in fact it is Carl Icahn’s own hedge fund which holds just over 88% of this company.

It is interesting for us to compare our PAAMCO portfolio to the 13-F filings; only 10% of PAAMCO’s U.S. equity investments are in S&P 500 companies and the average market cap of the top 10 U.S. equity names in the PAAMCO book is $8.5 billion as of September 30, 2013. The PAAMCO top 10 holdings add up to 15.3% of our long equity portfolio and are held on average by two managers out of a possible 41 13-F eligible managers (4.9%). Based on this data, it is apparent that PAAMCO’s managers are more concentrated in top names and that these names are smaller than what the overall hedge fund universe focuses on.

Conclusion

Good trade ideas are limited in number and hard to come by. When a lot of smart people are given more or less the same objective (make money!), the same information (Reg FD!) and the same tools (the market!) they can at times look very similar. However, investors should be careful to make sure that passive hedge fund herd-following is not masquerading (and charging) as active investing. Having a fund with a consistent overlap with the most popular names or with the portfolio of various famous investors’ positions is not value-adding active management.

In general, hedge fund assets are concentrated in the larger cap names, though to be fair, less so than the actual market. However a large weight in mega-cap names is an inevitable result of the sheer size of some of the funds in the hedge fund industry. Don’t forget that the average size of long portfolio in this sample is close to $2 billion. This inhibits the amount of impact smaller market cap investments could possibly have on a portfolio, while also magnifying liquidity issues. Another take-away is that hedge funds seem to like ‘growthier’ names. For example, more staid large-cap investments such as Exxon Mobil or J&J are comparatively ignored in favor of names such as Apple, Facebook or Qualcomm. Finally, it is important to know what is in underlying portfolios and to use that information in a cohesive manner recognizing that there are many different angles one must examine to truly understand risk exposures.

13-F filings throw into relief the use of portfolio transparency; a large part of the hedge fund universe already offers this transparency to larger clients. However for those that don’t, the SEC has done their clients a favor and given them a tool to monitor their hedge fund investments and assess them relative to other hedge funds: 13F filings can be used to monitor crowdedness of individual positions in hedge fund portfolios and risk-manage exposures in times of hedge fund de-leveraging; they can be used to measure overlap between managers in the same portfolio or to independently assess sector weightings independent of different sector categorizations by underlying managers. It is up to investors to make use of this data as an evaluation tool and judge accordingly.

Ronan Cosgrave, CFA, CQF is a Partner and Sector Specialist for the Convertible Bond Hedging strategy at PAAMCO. He also serves as the Portfolio Manager and main point of contact for certain institutional investor relationships. He is responsible for global manager research and portfolio construction within this sector. Ronan is a member of PAAMCO’s Investment Oversight and Risk Management Committees. Prior to joining PAAMCO, Ronan worked as a Process Engineer at IBM’s Storage Technology Division sites in Silicon Valley, Germany and Ireland. He also did chemical engineering design and commissioning for ProsCon, an Irish engineering and process control consultancy. Ronan received his MBA in Finance and Economics from Columbia Business School, and B. Eng. in Chemical and Process Engineering (Honors) from Cork Institute of Technology.

Immigration debate mars Norway’s liberal reputation

Immigration debate mars Norway’s liberal reputation

MORTENSRUD (NORWAY) — Ms Lise Ulvestrand and her husband went to the southern Oslo town of Mortensrud in 2005 for the space, the forest and the cheaper rents. A former development worker in Latin America and a social worker who worked with Norway’s immigrants, she says she is comfortable around foreigners and different cultures.

6 HOURS 28 MIN AGO

MORTENSRUD (NORWAY) — Ms Lise Ulvestrand and her husband went to the southern Oslo town of Mortensrud in 2005 for the space, the forest and the cheaper rents. A former development worker in Latin America and a social worker who worked with Norway’s immigrants, she says she is comfortable around foreigners and different cultures.

However, as the number of immigrants, including Muslims, gradually increased in Mortensrud, she began to worry about her children and their education. So, the Ulvestrands decided last summer to move back to comfortable western Oslo, where she grew up. The family wanted a stable environment and had some questions about the social challenges at the children’s school, where the non-ethnic Norwegian majority was growing rapidly.

Their concerns about immigration and perceptions that Islam is challenging prevailing national values are widely shared, both among some Norwegians, like the Ulvestrands who are on the left of the political spectrum, and among many on the right, who in September put the Conservative Party into office after eight years of Labour Party-led leftist coalitions.

The intensifying debate about immigration has focused on the anti-immigration Progress Party, which is part of the new Conservative-led government. It came under intense scrutiny in 2011, when a former member, Anders Behring Breivik, bombed government buildings in Oslo, killing eight people, before going on to kill 69 others at a Labour Party summer camp on the island of Utoya. Breivik quit the party in 2006 because he felt it was not sufficiently radical.

Mr Ketil Solvik-Olsen, Minister of Transport and Communications and a deputy leader of the party, scoffed at the notion that the party had anything to do with Breivik’s ideas. “We are strict on immigration, but this is not a war on cultures. Our idea is to protect our welfare system,” he said.

Instead, he spoke about the kind of discomfort that the Ulvestrands felt. “Some people feel they wake up one morning and their old neighbourhood is gone,” he said. “Strangers move in and people don’t even understand what they’re saying; we have a generous welfare system and you feel like a stranger in your own neighbourhood.”

After the killings and a disastrous showing in local elections in 2011, the populist party began tamping down more extreme voices. In September, the party won 16.3 per cent of the vote, down from the 22.9 per cent it won in 2009, but enough to form a coalition with the Conservative Party led by Prime Minister Erna Solberg.

The Progress Party is now considered mainstream and its level of support has required “more moderate rhetoric” than that from smaller, more extreme parties such as the Swedish Democrats, said Mr Thomas Hylland Eriksen, a social anthropologist at the University of Oslo.

“Yet they firmly belong with other parties … that see immigrants, and in particular Muslims, as a threat to the integrity of society,” he said.

The party, however, is facing criticism by older, more ideological members and beginning to lose support in opinion polls. Mr Anders Romarheim, a fellow at the Norwegian Institute for Defense Studies said the new acceptability of the party may have encouraged the fierce anti-Islam opinion that remains prevalent on Norwegian social media.

However, there is also a new reticence about public rhetoric, the Prime Minister said in an interview. Public discussion of Islam is less about their beliefs or their colour and more about lack of education and need for training, Ms Solberg said.

Mr Hylland Eriksen said Breivik’s massacre had regrettably little lasting impact on Norway’s politics. “Some of us were hoping that it would serve as a loud and clear reminder of the need to accept that we live in a culturally diverse society,” he said. “Instead, the political dimensions of the attack have been consistently dodged.” The New York Times

McDonald’s CEO Don Thompson said that the fast-food chain has lost relevance with some customers and needs to improve its menu offerings and provide better value

McDonald’s Says Its Restaurants Got Too Complicated

Tepid Quarterly Results Prompt Promises of Menu Changes, Better Execution

JULIE JARGON

Updated Jan. 23, 2014 3:42 p.m. ET

McDonald’s Corp. MCD -0.64% Chief Executive Don Thompson said that the fast-food chain has lost relevance with some customers and needs to improve its menu offerings and provide better value.

On Thursday, McDonald’s reported flat sales and earnings for the fourth quarter. Same-store sales slipped 0.1%—marking a second quarterly decline in 2013—weighed down in part by a steeper-than-expected 3.8% drop during December in the U.S., McDonald’s biggest market.

After nearly a decade of outperforming other restaurant companies, McDonald’s has struggled lately. Franchisees and executives have said the company’s more complicated menu—after years of adding items to suit broader tastes—has slowed service and turned off customers, while failing to attract lots of new business.

Mr. Thompson said 2013 was a challenging year and that while he expects improvement in 2014, January is shaping up as another sluggish month, with same-store sales likely to be flat.

“The key is going to really be to re-establish the trust of customers,” Mr. Thompson told investors on a conference call. “That means basic execution at a restaurant level, marketing engagement at a much stronger level and also to make sure that our menu is relevant.”

Mr. Thompson became CEO in July 2012, succeeding Jim Skinner, who had overseen eight years of strong sales growth and a roughly 188% run up in the McDonald’s stock that transcended the global economic downturn. Since then, however, sales have been soft: Same-store sales last year edged up just 0.2%, the slowest annual gain since 2002, when global same-store sales fell 2.1%. And the share price rose only 10% in 2013, compared with 25% for the Dow Jones Industrial Average.

McDonald’s executives say they have learned from their mistakes of the past year and are moving to correct them. The company rolled out numerous menu items in quick succession, creating a bottleneck in the kitchens. They also rolled out products that were too expensive for many consumers, including chicken wings that were priced far above competitors’ offerings, leaving the chain with approximately 10 million pounds of unsold wings, according to a person familiar with the matter.

“We overcomplicated the restaurants and didn’t give restaurants an opportunity to breathe,” Tim Fenton, McDonald’s chief operating officer, said during Thursday’s call. “We need to do fewer products with better execution.”

The chain is revamping its kitchens to include expanded prep tables to give employees more space to assemble food. It also plans to add more employees at peak hours and during weekends.

Mr. Thompson said the marketing needs to reflect efforts to improve its menu. McDonald’s on Wednesday announced the appointment of Deborah Wahl, formerly chief marketing officer of home builder PulteGroup Inc., to be its new chief marketing officer for McDonald’s USA.

“We’ve got to make sure that the food is relevant and that the awareness around McDonald’s as a restaurant that prepares fresh, high quality food is strong and pronounced in our marketing and our messaging,” Mr. Thompson said.

In the latest quarter, same-store sales in the U.S. fell 1.4%, while in Europe they grew 1%, as strong performance in the U.K., Russia and France was partially offset by Germany. The Asia/Pacific, Middle East and Africa region’s same-store sales fell 2.4%, reflecting weakness in Japan and relatively flat performance in China and Australia.

For 2014, McDonald’s is budgeting $3 billion in capital expenditures, which will cover up to 1,600 new restaurant openings and the refurbishing of more than 1,000 existing locations. The company also expects to return about $5 billion to shareholders through dividends and share repurchases.

Investors Shun Currency Benchmark Amid Forex Probe Volumes on London Benchmark Are ‘Dropping Like a Stone’

Investors Shun Currency Benchmark Amid Forex Probe

Volumes on London Benchmark Are ‘Dropping Like a Stone’

CHIARA ALBANESE

Updated Jan. 23, 2014 3:47 p.m. ET

Investors are shunning the main benchmark for global currencies amid a widespread probe into possible manipulation of foreign-exchange markets, according to several people who attended a high-level committee of currency-market participants that met in London this week.

Trading volumes at the 4 p.m. WM/Reuters fix “are dropping like a stone,” said one participant at the foreign-exchange committee of financial-markets association ACI on Wednesday.

The WM/Reuters fix is calculated daily by a unit of State Street Corp. from trades executed either side of 4 p.m. London time. The fix provides a snapshot of currency rates and is used by companies and major institutional investors as a reference point for valuing foreign-currency-denominated assets and liabilities.

“The WM/Reuters benchmark service is committed to reliability and robust operational standards,” a State Street spokeswoman said. “WM continually reviews recommended methodology and policies to ensure that industry best practices are considered.”

Recently, the fix has also become a key focus of authorities looking into potential manipulation of global currency markets, according to people familiar with the investigations.

The U.K.’s Financial Conduct Authority kick-started the global probe into possible currency-market manipulation last April. Since then, regulators in Europe, Asia and the U.S. have also launched investigations, and several major currency-dealing banks have suspended traders in connection with the probe.

As The Wall Street Journal reported in December, transcripts of electronic communications between traders at different banks appear to show efforts at collusion to try to maximize profits and minimize losses in trading around fix points.

Before the global currency-market investigation, around 1% to 2% of the $2 trillion-a-day global “spot” currencies flows were executed at the London fix, according to market participants. These trades, while a relatively small slice of the overall currency market, have an outsize impact, given they are completed over a relatively short window.

The ACI’s foreign-exchange committee meets several times a year and membership consists of major investors and currency-dealing banks. One person who attended this week’s meeting said banks that trade at the fix for their clients are seeing less of that kind of business. “It’s a realization that attempting to put through at a given moment in time a very substantial order is not necessarily the most efficient way of doing it. If you had to buy $100 million worth of Korean equities, you would not do it at a split second. So why do it in foreign exchange?” this person said.

The ACI discussion comes after bankers at various high-level industry forums have considered the impact of the currency-market investigation on the way foreign-exchange trades are executed. Representatives of several large global banks said at a meeting in November of the Foreign Exchange Committee of the Federal Reserve Bank of New York that industry best practices would be altered as a result of the probe, according to minutes of the meeting.

In October, bankers and policy makers at a meeting of the European Central Bank considered changing the way foreign-exchange benchmarks are calculated, or pushing clients to ditch benchmark-based trades altogether, according to a person who attended the meeting.

Some fund managers are also expressing concerns about trading at the fix.

“Asset managers have got to do what they have to do, and they can either use the fix or avoid it. Studies have shown that there is more liquidity around the fix, but volatility also tends to be higher,” said Eric Busay, portfolio manager at California Public Employees’ Retirement System, which has about $283.8 billion of assets. “We have always been concerned about anomalous moves in the price around the fix, and we’ve always been very cautious in the use we make.”

Robert Savage, a hedge-fund manager who plans to launch currency fund CCtrack Solutions in coming weeks, said “publicity over the fix has made managers realize that their obligation for best execution isn’t solved by getting a public price at a particular time.” His new fund won’t be using the WM/Reuters fix, Mr. Savage said.

Female CEOs Missing in IPO Boom Just 3% of Firms Going Public Had Female CEOs; Care.com’s Marcelo Joins Club

Female CEOs Missing in IPO Boom

Just 3% of Firms Going Public Had Female CEOs; Care.com‘s Marcelo Joins Club

TELIS DEMOS And DOUGLAS MACMILLAN

Jan. 24, 2014 1:03 p.m. ET

As a female, Filipino-American entrepreneur and CEO, Sheila Lirio Marcelo doesn’t fit most corner-office stereotypes.

When her company, Care.com Inc., began trading Friday following its initial public offering, Ms. Marcelo joined another small club: Just 3% of companies that went public in the U.S. between 1996 and 2013 had women CEOs, according to sociologist Martin Kenney and economist Donald Patton at the University of California, Davis.

The figures haven’t changed much recently. Last year, 82 “emerging-growth” companies went public, the most since 2007. But only two— Marrone Bio Innovations Inc.MBII -1.07% and Veracyte Inc. VCYT -3.03% —had women CEOs, according to Messrs. Kenney and Patton, who updated their study for The Wall Street Journal.

Mr. Kenney suggests the dearth of women-led IPOs could reflect the underrepresentation of women among venture capitalists and as founders of venture-backed companies. In a 2011 census by the National Venture Capital Association and Dow Jones VentureSource, 11% of venture-capital investors were women.

“It’s not necessarily that there’s some sort of discrimination, but rather structural factors,” said Mr. Kenney, a professor of community and regional development. The study excludes blank-check shell companies, real-estate investment trusts, companies founded more than 30 years ago, and spinoffs of larger companies.

Shares of Care.com were up 31% midday Friday, from the IPO price of $17. The offering priced above its initially proposed range of $14 to $16 a share, raising $91 million for the company.

Women are scarce in U.S. corporate executive suites, and even scarcer at technology companies, the source of many IPOs. Law firm Fenwick & West recently found that 11.5% of top executives in top publicly traded Silicon Valley firms are women, compared with 14.7% at companies in the S&P 100.

Women are underrepresented in the board room of many IPOs as well. Neither FacebookInc., FB -2.90% the biggest IPO of 2012, nor Twitter Inc., TWTR -0.91% the biggest technology IPO of 2013, had a woman on its board at the time of the IPO. Facebook has since added two women to its board, Twitter one.

“The deck is rigged against [women] at all levels,” said Vivek Wadhwa, fellow at the Stanford University Rock Center for Corporate Governance. “Women don’t get to hob nob with the board members. So the trust never builds,” he said.

Curiously, women CEOs are more prevalent before and after an IPO than around the time of an initial offering. A study by Dow Jones VentureSource last year found women CEOs at 6.5% of privately owned, venture-capital-backed companies—the pool from which most IPOs emerge. Among companies in the S&P 500 index, 24, or almost 5%, are led by women, according to S&P Capital IQ.

Selina Lo, CEO of networking-equipment maker Ruckus Wireless Inc. RKUS -5.06%before, during and after its 2012 IPO, says that there are few women present in the IPO process.

“In my segment, it is extremely male dominated. You really don’t find that many female executives, and primarily it starts with the venture community being predominantly male,” said Ms. Lo, who was also a senior executive at Alteon SYNI 0.00% WebSystems Inc. during its 1999 IPO. Alteon was acquired the following year by Nortel Networks Corp. for more than $7 billion.

A forthcoming research paper suggests investor bias may be a factor. Researchers at the University of Utah’s David Eccles School of Business presented M.B.A. students with public-offering prospectuses of the same company, but changed the gender of the CEO.

The students were four times as likely to recommend an investment in a company with a male CEO. The paper is to be published in a coming issue of the Journal of Management.

During the long road to an IPO, “a series of unconscious biases kills it for some women,” says Lyda Bigelow, lead author of the study.

At Care.com, an online marketplace for nannies and other at-home caregivers, Ms. Marcelo is a public face for the company and an advocate for women in business. She left her role as entrepreneur-in-residence at Matrix Partners in 2006 to start the company. She has expanded the service to 9.7 million members, many of whom pay a monthly, quarterly or annual subscription to find and solicit care givers. Care.com doesn’t disclose how many customers pay for the service.

Ms. Marcelo in an interview Friday said, “All along the line there are certainly challenges for women.” She added: “A lot of people face different types of challenges, whether it’s color or age, and it’s about mustering that extra strength to have that conviction and passion to do what you love.”

The Benefits of Default The Possible Default of a Trust Product in China Should Be a Wake-Up Call for Investors

The Benefits of Default

The Possible Default of a Trust Product in China Should Be a Wake-Up Call for Investors

WEI GU

Jan. 23, 2014 11:49 a.m. ET

Wealth management is booming in China, but some of the products being sold can be risky. Soul Htite, the CEO of Sino Lending, tells WSJs Wei Gu what investors need to be aware of when buying investment products.

The possible default of a trust product in China should be a wake-up call for investors, many of whom believe the government will stand behind anything they buy from banks.

High-yielding investment products have exploded in popularity in the past few years as investors flee low-return bank deposits. And while there will likely be more trouble with such products, they can be good for savers if people invest with care.

So far, Chinese investors who bought fixed-income wealth-management products have enjoyed higher returns than bank deposits offer, without suffering any losses. But that looks to be changing now, as a slowing economy starts to expose the weakness in the system, and the Chinese government may not want to absorb all the losses.

Investors need to adjust by not treating trust products as all the same, instead focusing on finding well-run offerings that fit their risk appetite and investment goals and that diversify their portfolios.

For now, the focus is on a three billion yuan ($500 million) fixed-income wealth-management product sold by the Industrial & Commercial Bank of China,601398.SH 0.00% issued by China Credit Trust and backed by loans to a struggling coal miner, Zhenfu Energy Group. As the maturity date of Jan. 31 nears, worries that the company can’t pay back the loans are growing—and investors are calling on ICBC to cover their losses.

The money at risk is a drop in the bucket for China’s trust industry, whose total assets at the end of the third quarter exceeded 10 trillion yuan ($1.67 trillion)—up 60% from a year earlier— largely because there is lots of cash chasing too few good opportunities. Chinese investors don’t trust the stock market. Bank deposit rates, kept artificially low, generally lag behind inflation. The government has made it harder and more expensive to buy real estate.

The first lesson investors should take from the potential default is that earning a low return is better than losing money. Laura Zhang, a Shanghai housewife, invested two million yuan in an investment product from New York-listed Noah Holdings Ltd., managed by Guangfa Securities, in 2011.

She was told the money would be used to buy large blocks of shares on the stock market that would then be sold to small investors at a profit. But the fund changed strategy after a few months, shifting from block trades to private placements—allowed under the contract, though they weren’t supposed to be the focus. Instead of delivering an annualized return of 60% as originally projected, it lost 12%.

Noah said it doesn’t guarantee the principal of investment products like the one bought by Ms. Zhang, and adds that its fixed-income products have never lost money.

Ms. Zhang, who is married to a lawyer, regrets not carefully reading the fine print of the documents she signed. “All those big institutional names associated with the product made it look quite safe, but when it failed to deliver, no one is assuming any responsibility,” she said. Now, she mostly invests in start-ups and private-equity firms run by people she trusts and has known for more than five years.

“The moment you think that you can just be lazy and outsource the decision to someone else, there will be a problem,” said Ms. Zhang. “It is your money after all, and you have to take full responsibility.”

Ms. Zhang invests funds she’ll need in the short term in conservative reverse-repurchase agreements issued by the People’s Bank of China, which currently yield about 6%. (The good news for investors from China’s continuing cash crunch is that low-risk money-market investments are offering quite healthy yields, providing a reasonable place to park money they know they will need in the next few years—say, to pay for college.)

Investors looking to beat the yield offered by bank deposits should make sure they understand what happens if an investment goes bad. The potential of a big loss should be balanced by enough of a potential return to justify the risk.

They should also consider whether the investment diversifies their holdings, a classic way to reduce risk. People who already own multiple apartments, for example, might do best by avoiding funds that invest in real estate.

Finally, they should look at how the fund is run. Some banks charge commissions as high as 4%. Some products are vague about investment strategy and leave themselves a lot of freedom to change it.

It is no surprise that Alibaba Group’s Yuebao fund has become China’s biggest mutual fund in just six months. By leveraging their gigantic customer bases and taking advantage of low-cost Internet infrastructure, new entrants such as Alibaba and Tencent HoldingsTCEHY -5.11% are able to charge lower fees. And they offer better disclosure than many of their competitors.

China “hard landing” stokes fear at Davos

China “hard landing” stokes fear at Davos

POSTED: 24 Jan 2014 20:38
The risk of a hard landing for the economy in China as well as the threat of military conflict with Japan stoked fears at the World Economic Forum in Davos on Friday.

DAVOS, Switzerland: The risk of a hard landing for the economy in China as well as the threat of military conflict with Japan stoked fears at the World Economic Forum in Davos on Friday.

Days after the world’s second-largest economy registered its worst rate of growth for more than a decade, top politicians and economists at the annual gathering of the global elite said the near-term outlook was bleak.

Li Daokui, a leading Chinese economist and former central bank official, said: “This year and next year, there will be a struggle, a struggle to maintain a growth rate of 7-7.5 per cent, which is the minimum to create the 7.5 million jobs every year China needs.”

On January 20, Beijing announced that its economy had grown at 7.7 per cent in 2013, the worst rate since 1999.

“The risk of a hard landing in China has not been dispelled yet,” added Nouriel Roubini, the economist who earned the nickname “Dr Doom” for predicting the collapse of the US housing market and global recession in 2008.

He cited concerns over rising inequalities in China and the “vast challenge” facing authorities in Beijing as they bid to push through deep-seated economic reform.

President Xi Jinping has committed to transforming China’s growth model to one where consumers and other private actors play the leading role, rather than huge and often wasteful state investment.

But several delegates voiced concern that the reforms were not being carried out quickly enough.

British Finance Minister George Osborne said: “In China, I think the challenge there is that there’s a lot of good talk about economic reform … we all now just want to see that delivered by the Chinese government.”

Roubini was characteristically more direct.

“Talk is cheap … we have to see action and so far we have not seen a lot of action,” he stressed.

“I worry that it’s going to be a gradual process and it may not go fast enough,” added the economist, saying that many of the reforms also did not go far enough.

A potentially explosive diplomatic spat between Japan and China over islands in the East China Sea, which has been a major topic in Davos this year after a keynote speech by Japanese Prime Minister Shinzo Abe, also raised fears for the economic outlook.

Victor Chu, a Hong-Kong-based venture capitalist, said: “If there were an accident in the territorial situation, if there were accidents before politics and diplomacy can return things to the status quo … that could be serious” for the economy.

Everything rests on the success and pace of reform, several analysts said, with many predicting that Chinese growth could pick up after a relatively sluggish couple of years.

“It’s not easy, it’s a long and winding road but if you look at the long-term outlook, it has to be positive,” said Chu.

Speaking on the sidelines of the meeting here, the Managing Director of the International Monetary Fund, Christine Lagarde, said that a slowdown in China would have an impact on the global economy but played down the likely extent of the deceleration.

“We don’t see a massive slowdown, we see a slightly reduced growth rate,” she said.

Big Four firms, China in talks over corporate audit impasse: KPMG

Big Four firms, China in talks over corporate audit impasse: KPMG

12:18pm EST

By Amanda Cooper

DAVOS, Switzerland (Reuters) – In the midst of a U.S.-China quarrel over corporate auditing, the global chairman of audit giant KPMG said on Friday that a “constructive dialogue” was under way to defuse the dispute, which led days ago to U.S. sanctions against the Chinese arms of the world’s largest accounting firms.

“We are in dialogue with the Ministry of Finance in China on the matter,” KPMG KPMG.UL Chairman Michael Andrew told the Reuters Global Markets Forum, an online community, in Davos, Switzerland, during the World Economic Forum meetings.

Months of tension over U.S. regulators’ attempts to examine audits in China of U.S.-listed Chinese companies boiled over on Wednesday when a U.S. administrative law judge sanctioned the Chinese units of the so-called Big Four.

The Chinese arms of the Big Four – KPMG, Ernst & Young ERNY.UL, Deloitte & Touche DLTE.UL and PricewaterhouseCoopers PWC.UL – have refused to hand over to U.S. officials the records of audit work done by the Chinese units for U.S.-listed Chinese companies.

Fearing that complying with Washington’s demands would violate Chinese secrecy laws and incur Beijing’s wrath, the firms are in the middle of an international standoff that could escalate and damage U.S.-China economic relations.

The sanctions, imposed by U.S. Securities and Exchange Commission Administrative Law Judge Cameron Elliot, were expected and underscored “the need for both governments to resolve the impasse,” Andrew said.

“The four accounting firms are caught in an unenviable position that if we hand our work papers over, we breach Chinese law and risk jail terms,” Andrew said. “If we don’t hand our papers over we get sanctioned by the U.S. government.”

Judge Elliot declared that the Chinese arms of Deloitte & Touche, PricewaterhouseCoopers, KPMG and Ernst & Young should be suspended from auditing U.S.-listed companies for six months.

The firms “willfully” refused to turn over audit documents from China requested by the SEC and deserve little sympathy, Elliot said.

The SEC for years has been trying to get documents from the firms to investigate a rash of accounting scandals at Chinese companies whose stocks are listed in the United States.

KPMG’s Andrew said the judge’s ruling will be appealed by the firms. The matter could play out for months, or even years, as it goes before the five-member SEC and moves into the courts.

China’s securities regulator said on Friday it deeply regretted Elliot’s ruling. At a regular news briefing, ministry spokesman Deng Ge said China hoped the SEC “would make the correct decision” on the case, adding that “the SEC would bear all the responsibility for consequences of its action.”

Rate support for leveraged buyouts fades; Money markets sound alarm for ECB; Rapid withdrawal of liquidity has pushed up overnight lending rate; Regulators warn on non-traded Reits

January 24, 2014 8:32 am

Rate support for leveraged buyouts fades

By Henny Sender

The profits of the Hilton buyout and IPO won’t be repeated soon

When Hilton went public at the end of last year, its listing was great news for its owners at Blackstone. It was also good news for the Federal Reserve, which acquired more than $4bn in Hilton debt that had been on the Bear Stearns balance sheet as part of JPMorgan’s purchase of the troubled security firm in 2008.

In addition, Hilton’s recovery was spectacularly lucrative for the hedge funds that invested in Hilton debt. And there was a lot of debt since Blackstone put in less than 20 per cent equity, paying for its $27bn purchase with more than 80 cents on the dollar in debt, or well over $20bn in total.

Some of the smartest debt investors in the world traded the debt, including Centerbridge Partners, Oaktree Capital Management and Greg Lippman, the former Deutsche Bank mortgage credit trader, who is now the chief investment officer of hedge fund MaxLibre.

Both Centerbridge and Oaktree began buying the debt at its nadir below 50 cents on the dollar and rode it all the way up to the high 90s. Meanwhile, Mr Lippman came so late to the trade in late 2012 that in some cases he paid above par for the debt and still made a decent return on his investment. These investors were attracted to the trade since hotels are among the most cyclical and volatile ways to bet on a real estate recovery driven by easy money. And, the most junior debt offered the greatest potential upside as a way to play Hilton.

Hilton was one of the most levered of all the leveraged buyouts of the peak years. Nevertheless, the hedge funds that piggybacked on Blackstone also made a lot of money primarily because of the Fed’s easy money policies that brought interest rates way down, in turn making it easier for Blackstone to pay down Hilton’s debt load.

Today, there is widespread optimism on Wall Street about prospects for this year. But the single most important factor in the best trades of the last few years – such as the Hilton trade – was declining rates, and that trend is coming to an end, suggesting that the general optimism is overdone.

Although the Fed has made it clear that it plans to keep rates lower for longer than was the case a few months ago, the central bank may not be as effective on keeping rates where it wants them to go. Moreover, even if rates rise on the expectation of stronger economic growth, that growth probably will not be strong enough to offset the negative of rising rates, a big bearish factor for both the credit market and the stock market.

Moreover, the Hilton story, among other things, is a reminder that the main beneficiaries of the Fed’s easy money policies are levered investors, and the real results of quantitative easing are reflected more in rising asset prices than in the real economy.

The Hilton story had a happy ending for all investors who had faith that it would eventually work out, though that outcome was not always obvious. When Blackstone restructured the debt in 2010, the firm put in equity and paid off some of the junior debt at 45 cents on the dollar. Holders who took part in the Blackstone orchestrated debt restructuring in 2010 (some of whom paid less than 50 cents on the dollar in the secondary market) ended up with $1.16, pocketing accrued interest and a percentage of the profits on the deal, alongside Blackstone.

There are factors beyond the Fed that contributed to the success of the Hilton trade. Blackstone had always made it clear that it had ambitious plans to grow Hilton and that determination to transform the formerly sleepy business helped both the story and confidence. Moreover, Blackstone was visibly behind Hilton, both putting more money in at the depth and making a market in the debt so holders knew they could get a bid if they wanted to sell.

It was clear that Blackstone would not walk away, as other private equity firms abandoned overleveraged buyouts. In addition, the banks were more co-operative than they may have otherwise been, mindful of the fees that Blackstone doles out to them. They agreed to sell their junior debt to Blackstone for that low 45 cents on the dollar at a time when it was clear that the worst was behind both the credit markets and Hilton itself.

But sadly for investors today, all this is history now. The saga of Hilton is not likely to be repeated any time soon.

January 23, 2014 6:45 am

Money markets sound alarm for ECB

By Ralph Atkins in London

Rapid withdrawal of liquidity has pushed up overnight lending rate

Sudden rises in very short-term market interest rates – the cost of borrowing overnight, for instance – usually spell trouble. Soaring Chinese interbank borrowing costs at the end of last year highlighted the central bank’s difficulties in curbing the most egregious financing practices of the country’s banks.

Less noticed beyond a few specialist circles, the European Central Bank has this year also seen market interest rates rising – not as acutely as in China, but possibly sufficiently to force a change in strategy.

As in China the rises reflect shifts in the banking landscape – something the ECB is keen to encourage. But the risk is of rising market rates feeding through into higher borrowing costs for businesses and consumers when economic growth remains weak. An unwanted, premature monetary policy tightening – via higher market interest rates – could tip the eurozone into a dangerous deflationary slump.

Sweeteners

The ECB’s problem is largely self-inflicted. When the eurozone debt crisis was at its most intense in late 2011, Mario Draghi, the new ECB president, decided to flood banks with a “wall of money”.

Eurozone banks were urged to take advantage of cheap three-year ECB loans, or “longer-term refinancing operations”, but to ensure sufficient take-up the ECB sweetened its offer with an early repayment clause. Rather than being locked into holding ECB funds on their books for the full three years, banks could repay after a year.

The sweetener helped ensure the LTROs were successful in averting disaster: banks borrowed more than €1tn and the eurozone crisis eased, at least temporarily.

By the time the early repayment clause could be exercised in January 2013, the situation had changed. With the eurozone clearly on the mend and financial tensions eased, repayments quickly flowed.

At the end of last week €450bn had been repaid. And the ECB’s balance sheet has shrunk significantly: relative to gross domestic product, it will soon be smaller than the US Federal Reserve’s.

Withdrawing all that liquidity has pushed up market interest rates. As a result of cuts in official ECB interest rates, the euro overnight index average (Eonia) – an interest rate benchmark – had crashed almost to zero (excluding spikes caused by technical factors). This week it was back above 35 basis points.

You can argue that LTRO repayments are good news. Banks are repaying ECB money because their finances are healthier and they can borrow again in markets.

Strikingly, a quarter of LTRO repayments have been by banks in Spain, on the eurozone’s crisis hit “periphery”, according to Barclays. “A higher Eonia is a small price to pay for a return of investors to the periphery,” says Laurent Fransolet, the bank’s head of fixed income research.

The rises so far in Eonia are also modest compared with the peaks seen during the crisis years. What is more, repayment of the LTROs – which were the eurozone’s answer to “quantitative easing” – are making easier an eventual exit from the ECB’s exceptionally loose monetary policies.

While the Fed has struggled to calibrate manually the tapering, or scaling back, of its asset purchase programme without creating turmoil in global financial markets, the pace of the ECB’s exit is driven by the market; banks repay ECB funds as their finances improve.

Wrong kind of exit

In the long run that might arguably produce better economic outcomes. The snag is that this seems precisely the wrong time for an ECB exit.

While the LTROs were designed to avert a looming bank crisis, the ECB’s task in coming months is to prevent sharp falls in eurozone inflation from turning into a deflationary shock. The slow pace at which the Fed is unwinding its crisis policies has kept the euro high against the dollar, adding to downward pressure on eurozone prices.

Mr Draghi could try to override the automatic tightening effects of LTRO payments, but that may not be easy. Given that banks are repaying LTROs, take-up of any fresh offers of long-term ECB loans might be embarrassingly weak.

The ECB could cut its main policy rate again – already at just 0.25 per cent. Beyond that, the only alternative may be full-blown US-style quantitative easing, an option it has resisted so far.

We are not at that point yet. Mr Draghi points out rightly that there is no clear relationship between measures of “excess liquidity” and Eonia – LTRO repayments are only part of the story. But the ECB is braced for an acceleration in repayments. From this month the maturity of outstanding loans has fallen below a year, making them less useful to banks needing to impress regulators.

The warning lights are flashing in money markets.

January 24, 2014 8:57 am

Regulators warn on non-traded Reits

By Anjli Raval in New York

Investors are betting heavily on a shadowy type of US property investment even as regulatory scrutiny of the sector intensifies.

Like their publicly listed counterparts, so-called non-traded real estate investment trusts (Reits) own income-generating property portfolios. But these unlisted Reits, which raise funds through share sales by broker-dealer networks, tend to target mom and pop investors and have come under fire in recent years.

They lack transparency, have high management fees and broker commissions, and are illiquid assets that do not have mark-to-market pricing – an accounting practice that allows investors to assess the fair value of a company’s assets.

Even as criticism about the sector’s opacity by the Financial Industry Regulatory Authority has mounted, non-traded Reits raised a record $19.6bn in 2013, up from $10.4bn in 2012, according to data by Robert A Stanger & Co, an investment bank that tracks the industry. This year they are expected to hit the $20bn mark.

The securities industry’s self-funded regulator is expected to file industry guidelines with the Securities and Exchange Commission as early as next month. Non-traded Reits will be required to provide better information on fee structures and report changes in the value of underlying properties more swiftly.

Income-oriented investors have been drawn to Reits, which distribute at least 90 per cent of their taxable income to shareholders annually in the form of dividends. But as anxiety surrounding rising interest rates battered public Reit stocks last year, their private counterparts only grew in popularity.

“While some of these non-traded Reits have performed well, other companies have been very bad investments,” said Ben Strubel, president of Strubel Investment Management. “A lot of unsophisticated investors don’t know what they’re getting into and are at risk.”

Fees and commissions can rise to 12 per cent of the original investment and investors are often locked in for seven to 10 years.

Finra has warned investors that their returns, upon liquidation, may be less than the original investment. It has also flagged the dubious marketing tactics of some brokers and expressed concern about companies using leverage to pay out distributions that exceed operating cash flow.

Market participants say the influx of cash may spur non-traded Reits to make riskier property purchases, which could eventually come back to burn investors in the real estate vehicles.

This is still a relatively new industry which is moving towards lower fee structures and more frequent valuation guidelines. The demand is there for these assets

– Keith Allaire, Robert A Stanger & Co

Although a portion of outstanding shares may be redeemable annually, non-traded Reits usually return money to shareholders only through “liquidity events” such as the sale of real estate, a takeover or a stock exchange listing.

American Realty Capital Healthcare Trust, which has assets valued at $1.7bn and is headed by Reit mogul Nicholas Schorsch, is set to list its common stock in what analysts expect to be up to $20bn of liquidity events of non-traded Reits during the next two years, up from about $17bn in 2013.

“Illiquidity is not necessarily a deficiency,” said Keith Allaire, managing director at Robert A Stanger & Co. “This is still a relatively new industry which is moving towards lower fee structures and more frequent valuation guidelines. The demand is there for these assets.”

EM tumble carries echoes of 1990s crisis

January 24, 2014 5:22 pm

EM tumble carries echoes of 1990s crisis

By John Authers

Fed, China and now Argentina send investors scurrying for cover

When the money keeps rolling out you don’t keep books,
You can tell you’ve done well by the happy grateful looks.

Evita, lyrics by Tim Rice

Argentina has been here before. So have many other emerging markets. For the second time in six months, money is rolling out. Emerging currencies are under acute pressure, as are bonds and equities.

But the important point about crises in emerging markets is that they do not start there. Instead, they are almost invariably triggered by the actions of investors or central banks in the developed world.

Emerging markets have made strides during the past two decades. With a few exceptions, they have let their exchange rates float, built the institutions needed for free-market capitalism, and developed local debt markets to cut reliance on foreign funds.

But certain truths remain. Flows of foreign capital still dwarf local money. While that money keeps rolling in, the temptation is to behave like a latter-day Eva Peron; and when that money rolls out, there can be problems.

Look at a historical precursor: the wave of emerging markets crises in the late 1990s that started with Mexico’s “tequila crisis”. It started in 1994 when the government gave up defending its peso at an overvalued level.

Mexico had been spending beyond its means. But the trigger for crisis came from the US, where the Federal Reserve that year raised rates sharply to head off inflation. That brought money home and revealed Mexican problems.

This week’s events fit the 1990s template, only now China has emerged as the world’s second economic superpower. Events there, as well as in the US, can send money scurrying for cover.

Argentina is a special case. Its debt was downgraded late last year, to reflect concern at the new economic team of the president, Cristina Fernández, so many institutions are barred from investing in it. It is no longer even considered an “emerging” market by MSCI, the guardians of the term for equity markets, so many equity investors cannot buy Argentina.

There is little reason why Argentina should affect others, beyond its neighbours.

Rather, the exit from emerging markets has been driven by renewed concern about the Fed. Talk that it would taper off its bond purchases, which kept US rates low and encouraged money to go overseas, last summer led to a sell-off in emerging markets.

When the Fed finally tapered, in December, it muted the effects with forward guidance that in effect promised that rates could not start to rise until 2015 at the very earliest. This week’s sell-off of emerging currencies came as traders worried that such “forward guidance” could not be trusted.

The fate of the forward guidance offered in August last year by Mark Carney, governor of the Bank of England, demonstrates the problem. He promised not to raise rates at least until unemployment dropped to 7 per cent; it has since fallen faster than expected, to 7.1 per cent; and so Mr Carney this week downplayed the importance of his guidance.

The message for traders: central banks can always retreat from guidance if they have to.

Then there is China. HSBC’s flash estimate of the ISM supply managers’ index this week suggested the economy was shrinking. Further, money market rates in China are spiking upwards, in a crude attempt by the authorities to bring credit under some control. And China faces a test case over whether it will allow defaults by trust loans, a form of shadow banking.

Faced with such concerns, US and western money headed home and into treasury bonds, which are now yielding almost exactly what they were when the Fed announced its taper in December.

Sentiment towards emerging markets tends to move in long waves. As the chart shows, developed markets have beaten emerging markets during the past 20 years, a period that starts on the eve of the tequila crisis – even though emerging markets have grown far faster.

Such waves of sentiment are hard to stop. This one could easily last longer.

Emerging markets funds have suffered persistent outflows for more than three months, according to EPFR data, without what BofA Merrill Lynch calls true “capitulation”. That would mean outflows of more than $20bn per week; the latest week saw an outflow of $2.4bn.

As for currencies, fair value measures kept by Deutsche Bank’s Alan Ruskin suggest that none has yet overshot, and that Brazil’s real is close to its 10-year average, after accounting for inflation.

In the long run, the well-rehearsed arguments for emerging markets remain good. They are likely to grow faster than the west, and do not look expensive. Those with a long-term horizon might well start dribbling money into emerging markets.

But the risks remain high that emerging markets assets will soon be cheaper still. That will depend largely on the Fed, and on China.

Last updated: January 24, 2014 2:29 pm

Emerging markets sell-off spreads

By Ron Derby and Robin Wigglesworth in London and Gillian Tett in Davos

Emerging market stocks have fallen sharply, tumbling to their lowest since July 2013 as investors took fright at a plunge in Argentina’s peso and wider volatility sweeping through financial markets amid concerns over Chinese growth.

The FTSE Emerging Markets index fell 1.2 per cent on Friday, extending this year’s slump to more than 4.7 per cent.

Fears over emerging markets have heightened since theUS Federal Reserve announced plans to scale back and eventually end quantitative easing this year. But those concerns have been compounded by worries over Chinese economic growth – a big driver for the developing world as a whole.

The movements in emerging markets have been “spectacular” this week, said Jane Foley, senior currency strategist at Rabobank. “Domestic fundamentals have come home to roost.”

As emerging market currencies took another dive, investors poured money into US Treasuries, the yield on 10-year US government debt falling to 2.73 per cent.

Turkey’s lira fell 1.6 per cent on Friday followingThursday’s heavy losses, with Russia’s rouble falling to its lowest level in almost five years against the US dollar.

South Africa’s rand slid to its weakest level since October 2008. Even Mexico’s peso, one of the stronger currencies in the developing world, declined for a fourth straight day to its weakest level against the US dollar since June last year.

Despite concerns over tapering and its impact on the developing world, Alexandre Tombini, the central bank governor of Brazil, insisted that his country had plenty of “buffers” to deal with any market turbulence.

“Tapering is a net positive for a country like Brazil,” he said, arguing there was no reason to fear that a shift in US monetary policy would hurt Brazil in any serious way. “This change of relative prices since (taper talk) started is part of the process [of normalisation].”

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The market volatility was triggered by a survey released on Thursday that indicated Chinese manufacturing unexpectedly contracted in January. That was followed by a nose-dive in the value of Turkey’s and Argentina’s currencies. The Argentina Peso had its biggest one day drop, down 14 per cent, on Thursday and continued its drop against the US dollar on Friday, weakening a further 1.7 per cent.

Of the 24 emerging market currencies tracked against the US dollar by Bloomberg data, only three, the Chinese renminbi, the Thai baht and Taiwanese dollar, were in positive territory.

Pimco’s Gross problem: who can succeed the ‘Bond King’?

Pimco’s Gross problem: who can succeed the ‘Bond King’?

Thu, Jan 23 2014

By Svea Herbst-Bayliss

BOSTON (Reuters) – When Pimco co-founder Bill Gross’ heir apparent abruptly stepped down this week, the news illustrated just how reliant the company is on its star manager, an uncomfortable fact for investors who worry the 69-year-old has not done enough to find a replacement.

With Mohamed El-Erian, 55, resigning his position as chief executive and co-chief investment officer at the $2 trillion asset manager, all power now appears to be flowing back to Gross, who co-founded Pimco in 1971 and runs the $237 billion Total Return Fund, a mainstay in many retirement portfolios.

Gross, a yoga enthusiast who shaved his mustache a few years ago to look younger, greeted the departure by dividing up El-Erian’s roles among a few more men, and by saying he is not yet planning for life after investing in bonds.

“Pimco’s fully engaged. Batteries 110 percent charged,” Gross said in a Twitter post from the firm’s official “@PIMCO” account that still features a photo of Gross and El-Erian side by side.

“I’m ready to go for another 40 years!” his tweet continued, a nod to the rigorous work ethic demanded by Gross, known among rivals and investors as the “Bond King.” Portfolio managers at Pimco start their days at 4 a.m. and rarely speak on the firm’s Newport Beach, California, trading floor, communicating instead by email to keep the noise down.

El-Erian, a trained economist and one-time senior International Monetary Fund official known for his near daily appearances on cable television and wide-ranging market calls, landed back at Pimco seven years ago after leaving the bond house for a two-year stint as head of Harvard University’s endowment. He first joined Pimco in 1999.

Pimco parent Allianz (ALVG.DE: Quote, Profile, Research, Stock Buzz) brought him back in part to “reduce the Bill Gross risk,” said one investor who asked not to be named for fear of angering Gross.

Even though Allianz quickly appointed Douglas Hodge as chief executive officer plus Andrew Balls and Daniel Ivascyn as deputy co-chief investment officers to replace El-Erian, analysts and investors agree that none are real contenders for Gross’ job right now.

“The problem is it takes a number of years to groom somebody like Mohamed,” said Sean Egan, president of Egan-Jones Ratings Co. “It’s difficult and Bill Gross is not getting any younger. From a public perception standpoint, the next couple years are going to be difficult.”

Pimco declined repeated requests to interview Gross, El-Erian or his newest lieutenants.

The two deputy co-chief investment officers have managed billions of dollars, but nothing that compares to the Total Return fund. Ivascyn’s $30 billion fund at Pimco, for example, amounts to less than 13 percent of Gross’ main portfolio.

“Heir apparent is not their label now,” said Morningstar senior research analyst Eric Jacobson.

Indeed Gross has said in media interviews following El-Erian’s resignation that more deputies would be named in coming weeks, a sign his pool of potential successors is growing, not narrowing. Morningstar analysts said the list of new appointees could include portfolio managers and directors such as Curtis Mewbourne, Christian Stracke, Scott Mather and Tony Crescenzi, each a long-time bond market hand of one stripe or another.

The group, Jacobson said, tends to skew relatively young and is somewhat split among those with strong backgrounds in economics, and those with more hands-on experience running portfolios. There appear to be few generalists who have the mix of skills one would expect to find in an heir to Gross, he said. “I can’t think of any single person who would seem to be an obvious and ready candidate.”

For investors – especially the big name institutions – a clear succession plan has always been important, prompting even other iconic investors such as Warren Buffett, 83, to groom Todd Combs and Ted Weschler as potential successors.

But at Pimco there is now no clear plan B.

“Pimco investors should be worried,” said Erik Gordon, professor of business and law at the University of Michigan. “There should be a succession plan that doesn’t require Gross to be CEO at age 109,” he said.

TURNING THE TIDE

For Pimco, the abrupt shift in management comes at a critical time just as the decades-long bull run in bonds appears to be ending, and the bond market’s biggest influence, the Federal Reserve, is maneuvering to dial back its extraordinary policies that pushed bond yields to historic lows.

Gross’ Total Return fund had outflows of $42 billion, according to Lipper, and lost 1.92 percent last year. The fund underperformed 72 percent of comparable funds in 2013, data from Morningstar shows.

Burton Greenwald, an industry consultant who runs Greenwald Associates, said: “Bill Gross is well along in age and at some point he is going to want to hang up his hat. After all he wasn’t fixed income manager of the year last year, Dan Ivascyn was. This is a critical transition period for the firm as stocks are more on most investors’ minds.”

Because El-Erian managed only a fraction of the assets Gross oversees, his departure is unlikely to trigger the kind of redemptions asset manager TCW faced when star manager Jeffrey Gundlach left.

But it will raise questions, analysts said. Gross’s calendar will likely be jam-packed with meetings for weeks as pension funds, endowments and others stream to Pimco’s Newport Beach offices for an explanation of what is next.

In the meantime, deputy co-chief investment officers, Ivascyn and Balls, are considered rising stars, and highly capable. Ivascyn, 44, a mortgage credit expert, has just been named Morningstar’s fixed income manager of 2013 along with colleague Alfred Murata. Their Pimco Income fund gained 4.8 percent with the help of bets on nonagency mortgage-backed securities.

Andrew Balls, a former journalist turned portfolio manager, has been Pimco’s spokesman for the European debt crisis and has close ties in London where his brother, Edward Balls, is the Labour Party’s shadow chancellor.

It will fall to them, in part, to help Pimco bring in fresh money and turn the tide after last year’s outflows.

“Ivascyn has certainly demonstrated great skill as a portfolio manager,” Michael Rosen, chief investment officer at Angeles Investment Advisors said, adding “but whether he can continue to do that while he’s taking on increased responsibilities of being a deputy chief investment officer remains to be seen.”

SME community portal TowkayZone.com launched

SME community portal TowkayZone.com launched

Friday, January 24, 2014 – 20:25

AsiaOne

SINGAPORE – SPH Magazines has launched TowkayZone.com, an online portal designed and created with small medium enterprises (SMEs) in mind. The portal was soft launched in September 2013 and officially launched today.

Built in partnership with the Infocomm Development Authority of Singapore (IDA), the site provides a platform for the SME community to exchange ideas and seek advice on technologies that can transform their businesses as well as on other issues pertinent to them.

It also allows users to sign-up using their Facebook and LinkedIn profiles, which can further enhance the potential for them to broaden their networks within the community.

Since its soft launch, the site has gathered more than 15 partners, attracted about 4,000 unique visitors monthly and generated more than 400 forum threads.

The site was officially announced by Ms Sim Ann, Minister of State, Ministry of Communications and Information, at the DP Information Group’s 27th Annual Singapore 1000 & Singapore SME 100 awards dinner.

“I hope to see more SME owners, topic experts and industry players coming on board, to tap on TowkayZone to exchange knowledge, and to generate new ideas for your company and beyond,” Ms Sim said at the dinner.

Several business owners and experts have come on board TowkayZone.com as advisors, including Jackie Lee, CEO and founder of clickTRUE and Noisy Crayons; Prakash Somosundram, Social Media Director of YOLK; Eric Koh, founder ofTravelogy.com; Tiang Lim Foo, Market Development Manager for Evernote Asia Pacific and Dylan Hu Dingren, Director for Poli Medical.

Eric Koh, Founder of Travelogy.com, said: “The idea of having a forum for discussing startups and entrepreneurship is welcoming. There has been a lot more interest in this area recently, with the government chipping in to help kickstart the ecosystem. I don’t think there’s a credible online discussion forum yet in Singapore for entrepreneurs.”

“The next step for the site is probably to have more organisations like ACE, SITF and IHLs (Institutes of Higher Learning), etc. to come on TowkayZone and use it as a bridge to support their entrepreneurial efforts in Singapore. Young companies need all the publicity out there,” said Jackie Lee, CEO of clickTRUE and Noisy Crayons.

He added: “Be it as a mentor or an entrepreneur, I find TowkayZone to have the potential to reach out and generate efficient conversations beyond the traditional one-one mentoring, giving visitors a many-to-many scale. That’s where it will become a lot more interesting and useful.”

Terence Ang, Product Manager for TowkayZone.com, said: “Some business owners, or “Towkays”, have accumulated a wealth of experience over the years but have never really shared the secrets to their success openly. Over time, we would like them to share these experiences, and pass on their wisdom to future generations of business owners.”

He added that there is also a mobile edition of the website that users can access using their smartphones.

Contagion Spreads in Emerging Markets as Crises Grow

Contagion Spreads in Emerging Markets as Crises Grow

ata Sons, the investment holding company of the TTata group, has set up an office in Singapore for the ASEAN

Tata Sons sets up ASEAN office

Friday, Jan 24, 2014

SINGAPORE- Tata Sons, the investment holding company of the Tata group, has set up an office in Singapore for the ASEAN region and appointed Mr K.V. Rao (left) as resident director, ASEAN – Tata Sons. The office is aimed at strengthening Tata Sons’ engagement with the stakeholders in the ASEAN region facilitating Tata group companies’ growth, through a focus on innovation, research and development and technology.

Mr Rao, a Singapore resident for 18 years, has served in the Singapore Civil Service as a director with International Enterprise Singapore. He is on the executive committee of the Singapore Indian Development Association, the Singapore Fine Arts Society and serves as vice-chairman of the South Asia Business Council of the Singapore Business Federation. He also continues to serve as the MD of Trust Energy Resources, a Tata Power subsidiary.

Lenovo Said to Have Beaten Fujitsu to IBM Deal After Dell Passed

Lenovo Said to Have Beaten Fujitsu to IBM Deal After Dell Passed

Batista Exit Boosts Outlook for ‘X’ Companies: Corporate Brazil

Batista Exit Boosts Outlook for ‘X’ Companies: Corporate Brazil

Jiang Tells CNBC That ICBC Won’t Compensate Trust Investors

Jiang Tells CNBC That ICBC Won’t Compensate Trust Investors

U.S. Auditor Ruling Sinks Baidu to Qihoo: China Overnight

U.S. Auditor Ruling Sinks Baidu to Qihoo: China Overnight

Musk Says China Possible Top Market for Tesla

Musk Says China Possible Top Market for Tesla

UBS Says Market Wants Default as Risks to Pile Up: China Credit

UBS Says Market Wants Default as Risks to Pile Up: China Credit

Alibaba, Yunfeng to Buy Control of Citic 21CN for $171 Million

Alibaba, Yunfeng to Buy Control of Citic 21CN for $171 Million

As Brewing Giants Push Craft Beer, Bud and Miller Suffer

As Brewing Giants Push Craft Beer, Bud and Miller Suffer

Behind Staid Steel, a Percolating Boardroom Drama

JANUARY 23, 2014, 11:59 AM  Comment

Behind Staid Steel, a Percolating Boardroom Drama

By DAVID GELLES

Updated, 12:57 p.m. | When Craig S. Shular, the chief executive of a small steel company called GrafTech International, retired on Tuesday, it looked like just another management changeover at a midmarket industrial company.

But behind the scenes, a complex corporate governance battle was playing out, pitting Mr. Shular and a clubby board of directors against an outsider who joined the board as part of an acquisition three years ago. And even though Mr. Shular’s departure as chief executive was effective immediately, the fight for control of the $1.5 billion company is not over yet.

The story of GrafTech, replete with accusations of mismanagement and suspicions of leaked confidential information, illustrates the complex dynamics when relations between directors and management turn sour. It also highlights the increased sensitivity inside the boardroom in an era of activist investors and insider trading.

The complications that have ensnared GrafTech began in 2010, when it acquired two companies controlled by Nathan Milikowsky, a small-time player in the big world of industrial steel. GrafTech paid about $850 million for the Carbide Graphite Group, which made a crucial piece of equipment for steel manufacturing called a graphite electrode, and Seadrift Coke, which made the raw material needed to produce the electrodes.

For Mr. Milikowsky, the deal was a windfall. In 2003, he had bought the assets of Carbide Graphite out of bankruptcy for about $6 million and turned the company around. In 2005, he acquired Seadrift Coke, allowing him to integrate an important supplier and ramp up revenue at both companies.

Cashing out to GrafTech made Mr. Milikowsky, his investors and dozens of his employees wealthy. And as part of the sale agreement, Mr. Milikowsky was guaranteed a seat on the GrafTech board as long as he and his associates held at least 12 million of the company’s shares.

Less than three years later, however, Mr. Milikowsky was pushed off the board — after management accused him of leaking material nonpublic information to a hedge fund — even though he still held 15 million shares.

Mr. Milikowsky maintains he was not the source of any leaks and that management and other directors ousted him because he was criticizing them and Mr. Shular as GrafTech’s share price plunged.

In recent weeks, Mr. Milikowsky was preparing to nominate a new slate of directors before the company’s annual meeting, setting up a showdown between an entrepreneur who contends he was improperly ousted and a company that says it is simply protecting itself.

But Mr. Shular’s abrupt resignation on Tuesday threw Mr. Milikowsky’s plans into disarray.

In stepping down, Mr. Shular said he made “the personal decision to retire from day-to-day management in order to spend more time with my family.” He will stay on through the year as executive chairman.

Mr. Milikowsky’s camp, however, says it believes Mr. Shular may have retired to avoid a public fight. This month, Mr. Milikowsky signaled he was on the verge of taking his nominees to GrafTech’s shareholders.

Whether Mr. Milikowsky proceeds with his plan to nominate new directors remains to be seen. On Wednesday, he applauded the resignation of Mr. Shular and called the promotion of Joel L. Hawthorne to chief executive “a good first step in the fundamental turnaround that is necessary to save the company and increase shareholder value.” But Mr. Milikowsky maintains that he deserves to be a director, and he vowed to continue to fight for a seat on the board.

Neither side expected the dispute when Mr. Milikowsky joined the GrafTech board in 2010. He was respected in the steel industry and initially on good terms with Mr. Shular and his fellow directors.

After Mr. Milikowsky spent a year on the board, however, his opinion of management and his fellow board members plunged. He thought the company was underperforming, spending too much on overhead and making poor strategic choices.

“This has been my only public company experience, and I was amazed,” he said in a recent interview. “The C.E.O. knew something about graphite electrodes, but the rest of the directors don’t know anything about the business.”

Some of his discontent can be chalked up to an entrepreneur’s discomfort with outsiders managing a business he built, and GrafTech did underperform its peers. But the last few years were going to be rough for GrafTech regardless of management choices as demand for its products waned in the wake of the financial crisis. Since Mr. Milikowsky joined the board, GrafTech shares have fallen 40 percent.

“I wouldn’t say it’s primarily on management why they’ve had poor performance,” said Michael Gambardella, a JPMorgan Chase analyst who covers GrafTech. “It’s the market.”

Nonetheless, Mr. Milikowsky said the company should have been doing better. “By late 2011, I had come to a distressing preliminary conclusion: Things aren’t as rosy as people say they are,” he said. “We’re turning down orders that we should be taking. So we’re losing market share. The inventory is ballooning.”

In early 2012, Mr. Milikowsky began meeting with other directors to make his case. At least one was openly supportive, he said, and another was sympathetic to his concerns but wary of confronting management without a majority of board members aligned.

Yet before Mr. Milikowsky’s campaign could gain traction, inquiries from a hedge fund, Samlyn Capital, put the company on edge. The hedge fund, which had been a passive investor in GrafTech for years, began asking pointed questions in May 2012 about the company’s operations.

Correspondence reviewed by The New York Times indicated that management and other directors believed that Samlyn appeared to have confidential information about the company, including details that were known only by a small circle of insiders, including the board. GrafTech management was worried that there could be insider trading in the stock, or that Samlyn could be using the information to make its case for change. And to Mr. Shular and some members of the board, Samlyn’s criticisms of the company sounded uncannily like those presented by Mr. Milikowsky.

The correspondence did not cite any specific examples of GrafTech insiders giving the hedge fund information. Samlyn, which no longer holds any GrafTech stock, has not been accused of any wrongdoing. Samlyn declined to comment.

Undaunted, Mr. Milikowsky pressed to replace Mr. Shular in a letter addressed to GrafTech’s lead director, Mary B. Cranston, a retired chairman of the big law firm Pillsbury Winthrop Shaw Pittman, who is also a director at Visa.

But by late 2012, Ms. Cranston and others inside the company had become convinced that Mr. Milikowsky was the source of the leaks. Samlyn had contacted Mr. Milikowsky’s brother, Daniel, who is also a GrafTech shareholder. And despite Mr. Milikowsky’s denials, he was pinned as the culprit.

GrafTech contends it referred the matter to the Securities and Exchange Commission. Meanwhile, it granted Mr. Shular whistle-blower status, protecting him from any related litigation. The S.E.C. appears never to have pursued the matter.

“They dreamed up this whistle-blower nonsense as a total sham excuse to protect Shular, and they dreamed up this leak as an excuse to force me off the board,” Mr. Milikowsky said.

At last year’s annual meeting, Mr. Milikowsky was not nominated for re-election and was subsequently removed from the board.

Since then, he has been working with law firms to make his case to the company that he was improperly ousted. Stephen Fraidin, a top lawyer at Kirkland & Ellis, took on his cause last year, adding legal firepower to the dispute.

But GrafTech has not budged so far. In letters to Mr. Milikowsky’s lawyers, GrafTech contends that Mr. Milikowsky violated the company’s corporate governance guidelines and did not return confidential information after his board service ended.

The company declined to answer questions about Mr. Milikowsky or the board.

After nearly a year away from the company, Mr. Milikowsky concedes he may never return to the board and expressed disillusionment about his experience as a director.

“It really gets to the heart of American capitalism,” he said. “You have this amazing business, and then you have management playing these games. If all public companies are like this, that is horrifying to me.”