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Institutional Investor Magazine April 20th, 2011


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Anjum Hussain on cover page and an article on Risk Management page 34.

Anjum Hussain on cover page and an article on Risk Management page 34.

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  • 1. Performance Art Secondary Action Public Party Affiliated Managers Group Investors are flocking to new Smaller companies are combines the benefits of a big markets to trade Facebook keeping the Chinese IPO firm with those of a boutique and other private companies machine humming along APRIL 2011 WWW.INSTITUTIONALINVESTOR.COM No School Left Behind Still feeling the sting of the financial crisis, university endowments are turning to risk management to prevent a similar disaster from happening again. PAGE 34 Follow Institutional Investor on iimagAnjum Hussain, director of risk management, Case Western Reserve University
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  • 3. APRIL 2011 INSTITUTIONAL INVESTOR73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30SDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE APRIL FEATURES 2011 34 48 58 40 54 44 40 Back Pulling CAPITAL MARKETS the Curtain BY UDAYAN GUPTA 54 Lite?BANKING 34 COVER STORY Secondary markets that Reform trade shares of Facebook BY NEIL SEN and other privately held Britain’s appetite for tough companies are catching the attention of investors — 48 Bond Boom Asia’s CAPITAL MARKETS new banking reforms appears to be waning as and regulators. the government focuses on BY MATTHEW MILLER economic growth. 44 The region’s debt markets No School 58 Blossoms ASSET MANAGEMENT are growing in size and Left Behind Performance Art sophistication, giving investors another way CHINA BY FRANCES DENMARK BY JULIE SEGAL China Affiliated Managers to gain an investment BY ALLEN T. CHENG Still feeling the sting of the Group blends the foothold in Asia. Smaller Chinese financial crisis, university benefits of a big firm with companies keep the endowments are turning to those of a boutique. IPOs flowing despite risk management to market setbacks. prevent a similar disaster from happening again. VOLUME XLV, NO. 3 • AMERICAS EDITION WEB COMPANY SUPERANGELS VALUATIONS COUNTRY CREDIT MAP Compare top Is Internet 2.0 becoming Political unrest affects superangel investors. just another bubble? creditworthiness. COVER PHOTOGRAPH BY BILLY DELFS INSTITUTIONALINVESTOR.COM
  • 4. APRIL 2011 INSTITUTIONAL INVESTOR72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 3WISDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOP 7 ETC 7 RESEARCH & RANKINGS OPENING Ticker Japan’s crisis may be a catalyst for recovery. • Governments turn to sovereign wealth funds to fix everything from 64 The 2011 All-Japan bridges to potholes • Bank pay runs higher in Asia • Does Southern Research Team BY HENRY SCOTT STOKES Sudan’s independence mean the end of the region’s investment Opportunities abound stigma? Five Questions For Alabama Senator Richard Shelby in Japan for investors People Faces in Finance • Infobank that know where to look. 74 The 2011 Fund of Funds 50 BY IMOGEN ROSE-SMITH Many firms in our annual 18 20 MARKETS 26 DONE DEALS ranking seek to diversify their capital bases. Andale, Andale! ArabianKnight BY JAYNE JUNG BY LAURIE KAPLAN SINGH High frequency traders Abu Dhabi rides to the get a warm Mexican rescue of Aldar. 27 ALTERNATIVES embrace. 22 THE BUY SIDE Macro View Hot Commodities BY IMOGEN ROSE-SMITH 5 Inside II BY VIRGINIA MUNGER KAHN Hedge fund firm Balyasny 91 Unconventional Seeking alpha, investors are Asset Management returns Wisdom turning to active strategies. to global macro. 93 The Futurist 24 GLOBAL 28 GREEN SHOOTS 96 The Chartist SECURITIES SERVICES Hardly Sustainable JAPAN: TOMOHIRO OHSUMI/BLOOMBERG Taken into Custody BY KATIE GILBERT BY JULIE SEGAL Stock exchanges CAPITAL Private equity firms opt for face pressure to boost 18 third-party administrators. reporting standards. RAINMAKERS 25 FOREIGN EXCHANGE 30 CEO INTERVIEW Financial Engineer Betting on the News Worthy BY JAYNE JUNG Offshore CNH BY JULIE SEGAL To see the latest on these stories or provide Nomura’s Piero Novelli BY CHARLES WALLACE Thomson Reuters’s Tom feedback, visit predicts a new batch of The renminbi is on the Glocer sees a role for global M&A deals. rise in Hong Kong. traditional news. INSTITUTIONALINVESTOR.COM
  • 5. APRIL 2011 INSTITUTIONAL INVESTOR 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 2RKETS ALTERNATIVES NERD ON THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS EDITOR William H. Inman AMERICAS EDITOR Michael Peltz Sins of the Fortunately, freethinkers are emerg- INTERNATIONAL EDITOR Tom Buerkle CREATIVE DIRECTOR Nathan Sinclair Scholar ing among keepers of funds at schools such as Harvard, Stanford and the Uni- versity of Chicago. At Case Western MANAGING EDITOR Thomas W. Johnson Reserve, where a traditionally invested LONDON BUREAU Loch Adamson (Chief) pool of assets was drubbed, endowment ASIA BUREAU Allen T. Cheng (Chief) H.L. MENCKEN, IRASCIBLE officers rejected long-accepted tenets of WEB MANAGER Barry Whyte journalist and social critic, asset diversification, instead managing WEB EDITOR James Johnson admired scholarship but had a risk by cutting equity creeping unease about the way exposure and selling WEB PRODUCTION/DESIGN Michelle Tom WEB INTERN Franziska Scheven economics was taught and prac- College market volatility. ticed at American universities. He fund Doctrinal strategies SENIOR WRITER Frances Denmark STAFF WRITERS Imogen Rose-Smith, Julie Segal, questioned whether professors applied masters formulated by some Neil Sen (London) the same hard calculus to that business as seek new of the most influen- SENIOR CONTRIBUTING EDITORS Firth Calhoun, scholars did in other fields. “Colleagues tial economists in Nick Rockel of archeology may be reasonably called models. academia no longer SENIOR CONTRIBUTING WRITERS Pam Baker, free and their colleagues of bacteriology go unquestioned. Hugo Cox, Katie Gilbert, Fran Hawthorne, Jonathan Kandell, Leslie Kramer, and those of Latin grammar and sidereal “We’re looking at risk with a wider lens,” Scott Martin, Ben Mattlin, Craig Mellow, astronomy,” he wrote. But academic for- says Jane Mendillo, president and CEO Virginia Munger Kahn, Cherry Reynard, mulators of money theory, and their dis- of Harvard Management Co. To peer into David Rothnie, Harvey D. Shapiro, Henry Scott Stokes, Paul Sweeney, ciples in fund management, seem wedded the future of endowments, turn to page Stephen Taub, Charles Wallace to “obscurantist” writ, and having their 34 and Senior Writer Frances Denmark’s SENIOR EDITORS Tucker Ewing, Jane B. Kenney “freedom as plainly conditioned, though story, “No School Left Behind.” (Editorial Research) perhaps not as openly, as the faculty of ASSOCIATE EDITORS Denise Hoguet, Brian Murphy (Editorial Research) theology.” Econ academics, in fact, ranked COPY EDITORS Monica Boyer, Ruth Hamel, at the bottom of Mencken’s scale of free- Catheryn Keegan thinking, along with socialists and Meth- DEPUTY ART DIRECTOR Diana Panfil odists. Doubts became more intense the — WILLIAM H. INMAN ART DEPARTMENT Alex Agius, Israt Jahan, Bethany Mezick, John Miliczenko deeper Mencken read “solemn disproofs EDITOR, INSTITUTIONAL INVESTOR and expositions of the learned professors.” EUROMONEY INSTITUTIONAL INVESTOR PLC CHAIRMAN Padraic Fallon DIRECTORS Sir Patrick Sergeant, The Viscount Rothermere, Richard Ensor(managing director), Neil Osborn, Dan Cohen, John Botts, Colin Jones, Diane Alfano, Christopher Fordham, Jaime Gonzalez, Jane Wilkinson, Martin Morgan, SAVE THE DATE ! September 14, 2011, New York City David Pritchard, Bashar Al-Rehany INSTITUTIONAL INVESTOR, 225 Park Avenue South, NewYork, NY 10003; (212) 224-3300; Fax: (212) 224-3171. London Bureau: Nestor House, PlayhouseYard, London EC4V Delivering Alpha 5EX, U.K.; (44-207) 303-1703; Fax: (44-207) 303-1710 In a first of it’s kind, CNBC and Institutional Investor will host a unique, one-day meeting Hong Kong Bureau: 27/F, 248 Queen’s Road East,Wan Chai, composed entirely of the best-known hedge fund managers and the largest investors globally as Hong Kong; 852-2912-8030; Fax: 852-2842-7011 well as illustrious political and economic commentators moderated by II and CNBC editors. © 2011 Institutional Investor, Inc. (ISSN 0192-5660) No statement in this magazine is to be construed as a Advisory Board recommendation to buy or sell securities. Neither this publication • William Ackman, Founder and CEO, Pershing Square Capital Management LP • Scott Kalb, CIO, Korea Investment Corporation nor any part of it may be reproduced or transmitted in any form or by any means, electronic or mechanical, including • Steven Algert, Managing Director, Investments, J. Paul Getty Trust • Pierre Lagrange, Co-Founder and Partner, GLG Partners LP photocopying, recording or any information storage and retrieval • Clifford S. Asness, Ph.D., Managing and Founding Principal, AQR Capital • Jim Leech, President and CEO, Ontario Teachers’ Pension Plan system, without the prior written permission of Institutional Management • Jim O’Neill, Chairman, Goldman Sachs Asset Management Investor magazine. For reprints and web links, contact: Dewey • Peter L. Briger, Jr., Principal and Co-Chairman, Fortress Investment Group LLC Palmieri (212) 224-3675; Fax: (212) 224-3563; e-mail: • Anne Popkin, President, Symphony Asset Management Printed by Cadmus Specialty • Arpad A. Busson, Chairman, The EIM Group • Bruce Richards, President and CEO, Marathon Asset Management Publications, Richmond,VA U.S.A. For customer service • Leon G. Cooperman, Chairman and CEO, Omega Advisors • Jeff Scott, CIO, Alaska Permanent Fund inquiries please call (800) 945-2034; • Laurence D. Fink, Chairman and CEO, BlackRock • Ted Seides, Sr. Managing Director and Co-Founder, Protégé Partners, LLC Overseas: (212) 224-3745; Fax: (615) 377-0525. • Sonia E. Gardner, President, Managing Partner and Co-Founder, Avenue • Damon Silvers, Director of Policy and Special Counsel, AFL-CIO Capital CHAIRMAN, INSTITUTIONAL INVESTOR Diane Alfano • Thomas F. Steyer, Sr. Managing Member, Farallon Capital Management, LLC • Peter Gilbert, CIO, Lehigh University FOUNDER Gilbert E. 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  • 7. APRIL 2011 INSTITUTIONAL INVESTOR2 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 4T THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE INFOBANK RAINMAKER OPENINGApril 2011 News and views from the world of finance The BoJ’s Masaaki Shirakawa is responding aggressively to the disaster JAPAN and destruction, it of deflation. A number of early last resort but would extend to RALLYING JAPAN was not long before economic omens have been effectively underwriting a share THE CRISIS MAY BE hopes arose that not encouraging, amid the gloom. of the government’s reconstruc- A CATALYST FOR only would Japan be For a start, Bank of Japan tion costs by what amounts to RECOVERY able to rebuild but Governor Masaaki Shirakawa monetizing Tokyo’s debt. that it also would used a massive injection of Even before the earthquake, reap monetary, fiscal liquidity to shore up the coun- the bank had begun stepping TOMOHIRO OHSUMI/BLOOMBERG A silver lining was not what and other economic benefits try’s financial system. Indeed, up its purchases of Japanese anyone expected to find from the disaster, if at far too the sum was so large — ¥40 tril- Government Bonds (JGBs) in the radioactive cloud high a human cost. lion ($495 billion), or close to to prevent a rise in long-term that fanned out from Japan’s As callous as it may sound, one fifth of its balance sheet — yields from further damping Fukushima Daiichi nuclear the catastrophe may have been that it provoked speculation that Japan’s anemic recovery. The plant following March 11’s the catalyst the country needed the central bank’s white-knight pace is now bound to pick up. devastating earthquake and tsu- to galvanize its stagnant econ- role might not be restricted to In addition, the BoJ has nami. And yet, amid all the death omy and escape from decades that of short-term lender of doubled, to ¥10 trillion, its INSTITUTIONALINVESTOR.COM
  • 8. APRIL 2011 INSTITUTIONAL INVESTOR2 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56DE II OPENING TICKER FIVE QUESTIONS PEOPLE INFOBANK RAINMAKERS MARKETS THE BUY SID Japan Public Finances Libya’s Saif Gaddafi: Owning the Santa lion Abu Dhabi Investment Authority Monica freeway? could take a stake in bringing back existing program of purchasing the glory of aging LaGuardia Airport. government bonds, real estate To be sure, most sovereign wealth investment trusts and even some funds are prudent, patient investors, and they don’t pursue overt political equity instruments from finan- agendas, says Darrell West, Brook- cial institutions as a way to inject ings’s director of governance stud- liquidity into the economy. ies. “We looked at how they have Other dramatic measures invested,” he says. “They generally are being contemplated to help take a long-term perspective and do not seek controlling ownership.” with the recovery. In late March What’s more, they’ve got plenty the newspaper Sankei Shimbun of dough. Sovereign wealth funds reported that Japan’s Ministry control some $4 trillion, and eco- of Finance was considering PUBLIC FINANCES nomic trends suggest some will whether to issue ¥10 trillion SMOOTHING become even wealthier. of JGBs directly to the central THE BUMPS “In our integrated global econ- omy, capital is going to move across bank. However, Finance SWFS MIGHT FIX borders,” points out Gordon Gold- Minister Yoshihiko Noda said U.S. POTHOLES stein, one of the Brookings report’s co- “cautious debate” was needed authors. If the U.S. doesn’t embrace before the MoF asked the cen- Call it pothole politics — debate over how to fix such global investments, he says, other countries will, the U.S.’s infrastructure: failing commuter rail- and they will gain a competitive advantage. tral bank to underwrite govern- ways, crumbling bridges, ancient sewer lines, Nevertheless, the notion of the U.S. welcoming ment bond issues this way. decrepit electrical grids and, of course, pitted roads. national foreign investments as if it were some BoJ officials say in private that But discussion doesn’t get the job done if there’s no neo-emerging-markets country may be hard for they would be reluctant to see money, and there’s no money. So a think tank, the many politicians to stomach. “ a change in the rule barring the Brookings Institution in Washington, has come up Imagine, for instance, if the $70 billion Libyan with a possible solution: Recruit interest from flush sov- Investment Authority, founded by Muammar al- ereign wealth funds like China’s and Abu Dhabi’s. Gaddafi’s son Saif al-Islam Gaddafi, owned a big In a March 11 report, “Rebuilding America: The chunk of the Santa Monica Freeway. (It does, in fact, Role of Foreign Capital and Global Public Investors” own a small portion of the fabled Financial Times.) Japan’s real (, Brookings urges a budget- strapped U.S. to embrace investments from these Sovereign wealth funds represent a highly diverse universe of actors, Goldstein admits: “It GDP growth national piggy banks, particularly for infrastructure would be a mistake to characterize them in will be ‘around projects and new ventures such as green technology. Beijing’s $332 billion China Investment Corp. broad-brush terms.” Not so long ago, nobody would have envisioned multibillion-dollar Chinese zero’ this year could help fund President Obama’s vaunted plans holdings in U.S. Treasury bonds. but will rebound for a high-speed rail network; perhaps the $430 bil- — IMOGEN ROSE-SMITH in 2012. — Hiroshi Watanabe Japan Bank for ” International Cooperation engage in such a transaction.” the yen caused by speculators’ Hiroshi Watanabe, president Shijuro Ogata, a former vice betting that Japan will have to of the Japan Bank for Inter- governor for international rela- repatriate yen assets en masse national Cooperation and a tions at the BoJ, tells Institutional to pay for reconstruction. former vice minister of MoF, bank from underwriting govern- Investor that the bank will in the In multiple ways, then, the expects Japan’s real GDP ment bonds, even in an emer- meantime continue to provide BoJ is escalating its efforts to growth this year to be “around gency. They fear that relaxing additional liquidity by purchas- revive Japan’s battered econ- zero” but to rebound in 2012. the restriction could open the ing public debt, such as JGBs, in omy. The need for such stimu- Yet in another example of door to more general monetiza- the open market along with buy- lus is becoming all the clearer serendipity, the earthquake tion of government debt. ing up private sector commercial as estimates of the disaster’s perversely reminded many Nevertheless, one senior paper, corporate bonds, equities economic impact grow. dispirited Japanese of their JAMAL NASRALLAH/BLOOMBERG central banker, who insisted on and other instruments. The chief problem is the country’s continuing impor- anonymity, did indicate that the On top of all this, the bank loss of electric power caused tance to the global economy BoJ might agree to purchase has begun foreign exchange by the partial meltdown of the and especially to Asia’s. Har- proposed earthquake-recovery market intervention to further Fukushima reactor. Rolling uhiko Kuroda, president of bonds from the government as boost liquidity. The Group of power blackouts are likely to the Asian Development Bank, a “very, very exceptional case, Seven countries also intervened play havoc with production of describes Japan as the center on the condition that a new law massively in the forex market cars and parts and electronic of “Factory Asia” – a sophis- is enacted, allowing the BoJ to in mid-March to stop a spike in components for many months. ticated, highly integrated pro- INSTITUTIONALINVESTOR.COM
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  • 10. APRIL 2011 INSTITUTIONAL INVESTOR4 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58DE II OPENING TICKER FIVE QUESTIONS PEOPLE INFOBANK RAINMAKERS MARKETS THE BUY SID Japan Global Investing duction and distribution system civil war that led current investors in Petro- that accounts for Asia’s vast output to independence China, whose parent, China of goods — and which can’t func- but also gave rise National Petroleum Corp. tion without Japan. to a humanitarian (CNPC), does extensive Another surprise boon of crisis in Sudan’s business with the corrupt Japan’s misfortunes was Tokyo’s western region regime of Bashir, which has willingness to embrace help from of Darfur. Will been accused of genocide. China and Russia. Japan has been this hopeful new TIAA-CREF divested its on the brink of confrontation with peace hold? Does shares in PetroChina at the both of these countries over ter- Southern Sudan end of 2009 after it failed to ritorial disputes, so this bodes well have a future as a persuade CNPC to stop sub- for their future relations. Most of Sudan’s oil sovereign state? sidizing the violent activities of is in the south, but “ None of this muted good news An uneasy the Bashir government. “Our the north controls is to imply that recovering from distribution truce in the civil the calamity will be anything war has held since but a struggle. As of late March, GLOBAL INVESTING 2005, although the toll in dead and missing SUDAN CHANGE rebels in Darfur Investors ASSESSING THE should ask approached 27,000; the human agreed to their lat- cost will always be incalculable. FREE SOUTH est cease-fire only Tokyo puts the price tag for the last year. More- if they can damage at $200 billion, or twice over, the under- influence a that of the Kobe (Great Hanshin) earthquake in 1995. And Japan This July south Sudan is to become the Republic lying causes of the conflict remain sensitive: the south’s oil corporation. embarks upon this epic effort of Southern Sudan. In riches (and the north’s relative ‘If the answer with a debt load twice the size of January’s plebiscite nearly 99 lack thereof) and ancient tribal is no, then it’s its GDP and an economy that has been constantly on the verge of percent of southern Sudanese voted to secede from the north. rivalries and religious schisms. Freedom for the south could time to divest. ’ — David Raad ” stalling for many years. Sudan’s president, Omar exacerbate old tensions. Ex-diplomat Still, the Japanese have a prov- Hassan al-Bashir, has pledged The revolution casts a erb: Fall down seven times, get up to abide by the outcome. spotlight on the role played in eight. Perhaps the horrible events The creation of Southern Sudan by Western financial of March 11 will provide the impe- Sudan will conclude, symboli- firms, including Franklin sense after making this effort tus for that eighth time. cally as well as formally, more Templeton, JPMorgan and not having any success — Anthony Rowley than five decades of bloody Chase and Vanguard — all was that this wasn’t a way to leverage our ownership in the company,” says John Wilson, director of corporate gover- COMPENSATION nance for TIAA-CREF. PAY CHECK GO EAST, YOUNG BANKER Still, he adds that even with The British government’s push for banks to be more forthcoming about top earners’ pay is an independent south, the meant to shame them into being more circumspect about compensation. Paradoxically, the 2010 comp figures being released under the disclosure rules show that top U.K.-based same dubious financial links bankers earn significantly less than their foreign counterparts, especially in Asian markets. will remain between the oil HSBC awarded an elite group of 186 London-based “code staff” (that is, top traders, business and the government bankers and other nonsenior managers) an average of $1.22 million in salary and bonuses in Khartoum. “I don’t think OIL WORKERS: TREVOR SNAPP/BLOOMBERG; for 2010. By contrast, the bank typically paid members of an equivalent coterie of 280 star the fundamental factors of staffers outside the U.K. $1.6 million. HSBC is not unique in being extra generous to its Asia- based employees. Thomson Reuters confirms that the trend is widespread. our decision have changed HSBC CEO Stuart Gulliver was asked point-blank by a reporter: “Why do you pay people very much,” Wilson says. Sig- in the U.K. less? Is it because the market is hotter in Asia?” Gulliver’s response: “[Asian] econo- nificantly, the West’s broad mies are growing at a rapid pace, and that is where the pressure is on compensation.” PAPER: RICHARD MEGNA sanctions against Western oil It’s no wonder that U.K.-based bankers, feeling unloved and underpaid as well as over- companies doing business in taxed, migrate eastward. Christian Brun, a Hong Kong–based partner of recruiter Wellesley Partners, says he’s been steadily receiving CVs from bankers in London and New York seek- Sudan will remain in place ing work in Asia. The catch? Unless a banker has relevant expertise — say, in Hong Kong for now. IPOs (see page 58) — it can be tough to find a job in Asia. — CHRISTOPHER ALESSI Fidelity, too, essentially divested its PetroChina INSTITUTIONALINVESTOR.COM
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  • 12. APRIL 2011 INSTITUTIONAL INVESTOR6 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60KER OPENING FIVE QUESTIONS PEOPLE INFOBANK RAINMAKERS MARKETS THE BUY SIDE GLOB Global Investing holdings, perhaps in part because of a lobbying campaign by Investors Against Genocide, but the fact that it doesn’t really take care of too-big-to- 3 Can Fannie Mae and Freddie Mac be fixed? My idea is to get the govern- a privately funded Boston non- fail sets the stage ment out of the mortgage profit. IAG head Eric Cohen tes- in a sense for the business, not create a hybrid tified to Congress in November next crisis. Con- where you socialize risk to the that stricter transparency laws gress didn’t do the taxpayer and privatize gains to are needed so that investors can necessary work the stockholders. That is what readily discern whether their [and] hold the happened. We certainly don’t investments are, as he puts it to necessary hear- want to re-create something II, “genocide-free.” ings on the front like the Fannie and Freddie Fidelity sold all but a fraction end in the bank- mode, which failed. The of its shares in 2007 and today ing committees of administration hasn’t got any holds a “negligible percentage,” the Senate or the real idea where they want to “ according to a spokesman. On House to write a go. We need leadership from FIVE QUESTIONS FOR well-thought-out the administration. They are RICHARD law. Dodd- supposed to propose things, SHELBY Frank abdicates but I’ve seen no proposals Are we KNOCKING DODD- responsibility by worthy of the name yet. FRANK REGS comfortable Congress to regu- owning this company? lators. Regulators have failed in the Alabama’s Richard Shelby, past, and now they are in the 4 You oppose the nomination of Nobel Prize–winning MIT economist — John Wilson the ranking Republican on process of bringing out scores Peter Diamond to the Fed ” TIAA-CREF the U.S. Senate Banking of rules and regulations. We are board because you say it Committee, is outspoken in his going down the wrong road. already has too many criticism of the Obama admin- Keynesians. Didn’t Keynesians its web site the firm defends the principle of remaining invested istration’s financial policies. Yet his support for Big Banking 2 What’s the worst thing about the law? is by no means automatic. He The biggest flaw is a consumer save the world in the Great Depression? What we need are people on in a company as potentially the opposed George W. Bush’s agency [the Consumer Finan- the Fed who know something best way to influence it to mend bank bailout bill, objected to cial Protection Bureau] that is about monetary policy and its ways. financial deregulation in 1999 self-funding, accountable to no are mainline economists, not Former diplomat David Raad, — the only Senate Republi- one, gets about 10 percent of behavioral economists and who represented the U.S. in the can to do so — and resisted the Federal Reserve’s operat- champions of bailouts. Look negotiations that led to Sudan’s letting federally insured banks ing budget and is not subject at the Fed’s balance sheet. peace agreement, says investors sell insurance. He also was to the appropriations process It’s the largest in history, and should ask themselves if their par- early to fault Fannie Mae and of Congress. That is horrible. it’s going to be interesting ticipation can positively affect the Freddie Mac. I oppose a lot of the policies of how they deleverage. A lot of behavior of a corporation. “If the The senator, who has Elizabeth Warren [President commodities are indicative answer is no,” he says, “then it’s lately focused his wrath on Obama has put Warren in of future inflation, and once probably time to divest.” the Dodd-Frank Act, spoke charge of establishing the inflation takes off, it’s hard to TIAA-CREF is taking a wait- recently with Institutional consumer agency but has not bring back price stability. and-see approach to whether the Investor Senior Contributing yet nominated her to head it]. south’s independence justifies tak- ing another look at PetroChina. Writer Charles Wallace. This is a power grab if you have ever seen one in the Congress. 5 Some say the Republican Party is too close to banks. “We’re going to be asking the 1 Will Dodd-Frank prevent She would be the queen or the We’re not close at all. I’m JOSHUA ROBERTS/BLOOMBERG same questions we asked before,” the next banking crisis? czar of all. She would be telling certainly not close. I don’t own Wilson says. “Are we comfortable Absolutely not. Dodd-Frank financial institutions how to one share of stock in banks. But owning this company, and do we is flawed. It has probably insti- run, what products to offer, a good, solid bank that is well feel like we’re going to be asking tutionalized to some extent the everything. We don’t even capitalized but not overregu- our participants to profit from too-big-to-fail doctrine, and know the scope of her authority lated will create jobs. Who is genocide by doing so?” that is not good. Many things or what she would hope would going to create them if we don’t — Katie Gilbert in Dodd-Frank are problems, be her authority. have a fluid banking system? INSTITUTIONALINVESTOR.COM
  • 13. We’re out of line.We invest differently—often in challenges and problemsthat others have abandoned. We operate differently—with a business model intended to maintain growth andprofitability. We foster a different corporate culture—open, accessible, where a spirit of inquiry is the highestvirtue. This all tends to put us out of line with otherbiopharmaceutical companies. So does our record ofsuccess. We don’t toe the line. Which is precisely what lets usmove to the front of it. Learn more at The shape of cures to come.TM
  • 14. APRIL 2011 INSTITUTIONAL INVESTOR8 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62IONS OPENING PEOPLE INFOBANK RAINMAKERS MARKETS THE BUY SIDE GLOBAL SECURITIES S PEOPLE BOFA TAPS AMBANI; HEFNER GOES PRIVATE; PAULSON PLUGS PROPERTY MUKESH AMBANI GIVES BOFA BREADTH For a bank that operates in 150 countries and traces its roots to an institution founded by an immigrant to lend to other immigrants, Bank of America has been pretty provincial in its selection of board members. Only now is BofA getting around to naming its first for- eign director. But the choice should do a lot to make up for the oversight: Mukesh Ambani, 53, the chairman, managing director and significant owner of India’s biggest private sector company, Reliance Industries, an energy and materials conglomerate with a $75 billion market cap. (Mukesh’s brother, Anil, wound up with the telecom, raging bull. In his latest movie, tion, manipulation and old- Mubarak gave that obstinate financial services and enter- Limitless, De Niro, 67, takes an fashioned bribery. speech saying he wasn’t going tainment side of the family almost professorial role (think — Franziska Scheven to step down.” business after their father, of it as Professor Godfather Fattouh was impressed Dhirubhai, died in 2002.) teaching Gordon Gekko), AHMED FATTOUH that the demonstrators never Mukesh Ambani, a explaining through his own TALKS TAHRIR lost their “peaceful and nonvio- Stanford B-school dropout, experiences how Wall Street Once protesters in Cairo’s lent posture.” He told the crowd may be able to give BofA some climbers can make the ascent Tahrir Square discovered they had the support of the personal advice on a subject in a postcrash, Fed-regulated that Ahmed Fattouh speaks Egyptian diaspora in America. where it could use a tutorial: environment. Some of the Arabic and English, they Born in Egypt but raised mortgage financing. You see, comments sound timeless, asked the Egyptian-American in Connecticut (his family he owns the world’s most and some downright mafia- money manager to give them emigrated in 1978), Fattouh expensive house, the 27-story esque. “Climb up the greasy a speech. has kept up with Egyptian “Antilia” in Mumbai, which little rungs on the ladder,” De “I had gone over to politics; his great grandfather cost about $1 billion. Niro, who plays a corporate observe what was going on,” and grandfather were pre- AMBANI: PANKAJ NANGIA/BLOOMBERG; DE NIRO: RON SACHS/VIA BLOOMBERG — Niraj Bhatt raider, says to an ambitious says Fattouh, 37, who runs revolutionary party leaders. colleague who absorbs mental $200 million New York City Fattouh is optimistic, albeit ROBERT DE NIRO, powers by swallowing a pill; emerging-markets invest- wary of the future. “No matter GODFATHER GEKKO marry “the girl with the right ment firm Globalist Capital what happens,” he says, “we Actor Robert De Niro father”; and threaten, bribe Management.“I felt drawn to have begun a process that at has played a Machiavellian and charm your way into the notion of change. I didn’t the end of the day is creating mafia boss, a crooked Casino that “seat at the table.” Not expect to be speaking to tens of a living, beating constitution,” operator, a gun-wielding taxi only is greed good, as Gekko thousands of people. And I was the foundation of any robust driver, a master thief and a would have it, so are extor- on stage just before [Hosni] democracy, which, Fattouh INSTITUTIONALINVESTOR.COM
  • 15. 2 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 2SERVICES FOREIGN EXCHANGE DONE DEALS ALTERNATIVES GREEN SHOOTS CEO INTERVIEW COV Counterclockwise from top left: BofA director Ambani; Professor Godfather De Niro, Tahrir Square GOING GAGA FOR speaker Fattouh; ROBIN HOOD private person As this spring’s annual round Hefner; house seller Paulson; hedgie of hedge fund charity parties charmer Lady Gaga gets under way, the must-have ticket, as usual, is the Robin Hood Foundation’s do. To be held May 9 at New York’s Jacob Javits Convention Center, the gala is the alternative- investments answer to Lady Astor’s ball. The lavish party is always aswarm with hedge fund blue bloods, not least the members of the foundation’s board, including Robin Hood co-founder Paul Tudor Jones, CEO of Tudor Investment Corp.; board chair Lee Ainslie, managing partner of Maverick Capital, and co–vice chair Dan- iel Och, managing member of Och-Ziff Capital Management. Founded in 1988 to combat poverty in New York City, the foundation has become a phil- anthropic tour de force, giving away tens of millions in grants each year. In 2008 the gala raised $60 million from its din- hopes, will lead to an infusion of of Rizvi, proclaims that he is Paulson, a skeptic on the ner and auction. Typical prizes: foreign investment. — I.R.-S. pleased to be teaming up with strength of the dollar, told inves- enjoying a one-on-one lunch the author of the Playboy phi- tors he’s enthusiastic about with a star hedge fund manager HUGH HEFNER’S losophy as the “legendary brand hard assets like houses, includ- or having a classroom named PRIVATE AFFAIR enters a new chapter.” Never- ing second homes, and gold. after you. The fundraiser has Private is not a word one would theless, Kohn will want to be Paulson, 55, knows some- become famous not only for the ordinarily associate with Hugh paid back in more than pruri- thing of the vicissitudes of the amount of money it collects but Hefner, whose life has always ent interest. —F .S. second-home market. Back also for its A-list entertainment. been an open magazine, with in 2006 he bought a weekend Last year Stevie Wonder did the a foldout in the middle. But JOHN PAULSON’S home in Southampton for honors, and the year before that the octogenarian founder and HARD ASSETS about $13 million. When he it was the Black Eyed Peas. personification of Playboy He made his name and tried to unload it after buying an Still, this year’s featured per- LADY GAGA: BLOOMBERG NEWS; HEFNER AND HARRIS: Enterprises is taking his likewise fortune brilliantly shorting even bigger place, he got gored former is truly out of this world: aging empire of clubs and resorts the housing market in 2007, on his Ox Pasture Road pur- Lady Gaga. A one-time denizen WIREIMAGE; PAULSON: JIN LEE/BLOOMBERG private with financing from pri- precrash. But now John chase, taking a $3 million loss. of the City’s Lower East side, vate equity firm Rizvi Traverse Paulson, founder of $30 bil- But for Paulson that was Gaga, 25, who made $60 million Management and invest- lion hedge fund firm Paulson just the cost of doing busi- last year, is of course known for ment bank Jefferies. Despite & Co., tells investors to look at ness. His new weekend digs, provocative outfits and even Playboy’s dwindling readership real estate, buy a house or two, a Southampton waterfront more provocative behavior. and tough competition from and don’t hesitate to take out estate called Old Trees, cost At the Grammy Awards, she raunchier publications and the an extra mortgage. him $41.3 million in 2008, emerged from an egg. Indeed, anything-goes Internet, Hefner At a conference last month pocket change for the man who Gaga and top hedge fund man- will remain editor-in-chief. hosted by fund of hedge funds made billions betting correctly agers have this in common: out- Ben Kohn, managing director manager EnTrust Capital, against subprime. — I.R.-S. landish performance. — I.R.-S. INSTITUTIONALINVESTOR.COM
  • 16. APRIL 2011 INSTITUTIONAL INVESTOR10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 6OPLE OPENING INFOBANK RAINMAKERS MARKETS THE BUY SIDE GLOBAL SECURITIES SERVICES INFOBANK • THOUGHT EXPLAINING THE Two forces are rapidly shifting WAGE GAP; PAULSON the quality of jobs, reshaping the VS. GOLDMAN; CIVILIZATION’S distribution of earnings and job KILLER APPS opportunities, and redefining gender roles. Job opportunities are increasingly concentrated in high-skill, high-wage jobs and Given the rapid market rise ... and political in low-skill, low-wage jobs; and, tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis. reversing a gender gap, women’s — Carl Icahn, giving back money to investors rising educational attainment [contrasts with] men’s stagnating educational • NUMBERS GAME 3 2 , 5 00 attainment. — MIT economist David Autor, “U.S. Labor Market Challenges over the Longer Term” ( • 1 20 THAT W THEN AS “Robert Shiller believes that creating a derivatives market for home prices could reduce volatility — and help ensure that any fall in home values takes the HEDGE FUND PAULSON & CO., WITH 120 Countrywide was one of the greatest companies in the history of this country. — Angelo Mozilo, ex-CEO of the mortgage lender in newly released testimony before the Financial Crisis Inquiry Commission EMPLOYEES, MADE $5.8 BILLION FOR ITS form of a soft landing rather CLIENTS IN SECOND-HALF 2010, OR MORE than a burst bubble.” THAN GOLDMAN, SACHS & CO., WITH ITS — Institutional Investor, 32,500 EMPLOYEES, MADE IN NET PROFITS. April 2006 • WEB SITE TO BEHOLD • WORTH A READ Six killer apps set the West apart. One Asian country after another has now downloaded Evolutionary biologist Matt Ridley makes a levelheaded case for faith in progress. them — competition, Financial Times columnist Samuel Brittan describes Ridley’s most recent book, The Rational modern science, the rule Optimist: How Prosperity Evolves, as a “marriage of Adam Smith and Charles Darwin.” That of law and private property Ridley was nonexecutive chairman of Northern Rock, a bank rescued by the British government rights, modern medicine, the in the financial crisis, ensures his perspective is not Panglossian. Ridley on nuclear power: “Even if it were to get as bad as Chernobyl (which it won’t), Fukushima will kill few people, raise consumer society and the work cancer rates only slightly and cause no birth defects. Nuclear energy is pretty harmless, and ethic. — Harvard historian its environmental footprint is minuscule. The problem is it is safe but expensive.” Niall Ferguson in Civilization: The West and the Rest INSTITUTIONALINVESTOR.COM
  • 17. What I need is Europeanexpertise, delivered locallyCorporates & MarketsAs a leading bank at the heart of Europe’s largest economy, we have built a reputation fordedicated client focus and reliability – but also structuring expertise and market insight.Commerzbank Corporates & Markets delivers investment banking when and whereyou need it. So you can access smarter thinking in capital markets, equity and debtfinancing, trading, hedging, research and Achieving more togetherAsia - EMEA - Americas
  • 18. 76 77 78 79 80 81 82 83 84 85 86 87 88Novelli: A veteran deal makerwith cross-border smarts INSTITUTIONALINVESTOR.COM
  • 19. APRIL 2011 INSTITUTIONAL INVESTOR89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 TICKER FIVE QUESTIONS PEOPLE INFOBANK RAINMAKERS MARKETS THE BUY SIDE GLOBAL S CAPITAL I cent market share, according to Dealogic. But it’s 13th and 14th in global and European M&A, respectively, with less than 5 percent of both markets. “We want to use our global platform to take a much greater share of cross-continental deals,” Novelli says. He adds that the bank plans to become “global, narrow and deep,” with a focus on resources, energy and financials. Nomura’s strategy and operations are unaffected by the tragic events in Japan, Novelli says. Still, the father of two faces an uphill battle. This year Nomura has lost several star European bankers who came onboard after it bought some of Lehman Brothers Holdings’ European business in 2008. If anyone is up to the challenge, it’s Novelli, who was born and raised in Rome, where he earned an MSc in engineering from Sapienza – Università di Roma in 1989. Four years later, with a mas- ter’s in management from the Massachusetts Institute of Technology, he joined Merrill Lynch & Co. as an associate in New York. Edward Annunziato, who ran European M&A when Novelli started at Merrill, thinks the rainmaker benefited from his Financial spell in the U.S. At the time Merrill was exporting Ameri- Engineer can capitalism to Europe, which had no history of cross- IT’S AN IMPRESSIVE NUMBER BY ANY STANDARD: DURING Piero Novelli predicts more border deals. Novelli’s ability his 18-year career Piero Novelli has advised on almost $600 billion global deals as Nomura’s to bridge the cultural gap was worth of deals. The new co-head of mergers and acquisitions at co-head of M&A. an asset, says Annunziato, Nomura Holdings must now help steer Japan’s biggest investment BY JAYNE JUNG now chairman of London- bank toward its goal of becoming a global leader in M&A. After a and New York–based hedge two-year break from banking, he’s strongly enthusiastic. “I love the fund administrator GlobeOp M&A business,” says Novelli, 45. “It allows you a latitude of issues, Financial Services. clients, culture and complexities that very few other businesses could Novelli transferred to present to you.” London in 1994, when Novelli joined Nomura’s London office in January. He previously Merrill ranked 12th in M&A for Europe, the Middle East and led M&A at UBS, where his clients included Barcelona-based Gas Africa. He rose to prominence by focusing on consumer products Natural in its €22.5 billion ($28.2 billion) acquisition of fellow Span- and industrials. In a showcase of cultural sensitivity, Novelli advised ish energy provider Unión Fenosa in 2009. In 2007 he advised Italian French automaker Renault on its 1999 alliance with Japan’s almost- energy giant Enel on its €11.1 billion partial takeover of Spain’s bankrupt Nissan Motor Co. When he resigned as head of European Endesa and defended ABN Amro Bank against a successful €71 bil- M&A in 2004 to go to UBS, Merrill had climbed to fifth place. lion bid by Royal Bank of Scotland, Banco Santander and Fortis. At UBS, Novelli moved quickly: By 2007 the Swiss bank had Trained as an engineer, the soccer-loving Italian gets the math jumped from 12th to second in EMEA rankings. He quit UBS for and the politics of cross-border transactions. Take the Endesa deal, personal reasons in late 2009 after taking a sabbatical. a saga of three countries and four companies. Novelli’s UBS team Within five years, Novelli predicts, Nomura can crack the top ten advised not only Gas Natural on its hostile bid for Endesa but also in Asian and European M&A, by deal value and revenues. This global Enel on its winning counterbid with Spanish conglomerate Acciona, citizen is mindful of the rising power of state-owned enterprises.“For after E.On of Germany made a €29.1 billion cash offer. our advice to be valuable to our clients, particularly in the non–Anglo GIAN PAUL LOZZA As M&A co-head with Tokyo-based Kentaro Okuda, Novelli aims Saxon world, we need to place local values and principles front and to build Nomura’s European team and align it with the bank’s lofty center in our thinking,” he says. •• ambitions. Nomura, which has ¥30 trillion ($376 billion) in assets and 27,000 employees, ranks first in Japanese M&A, with a 40.1 per- COMMENT? GO TO BANKING & CAPITAL MARKETS AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 20. APRIL 2011 INSTITUTIONAL INVESTOR14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 6ERS CAPITAL MARKETS THE BUY SIDE GLOBAL SECURITIES SERVICES FOREIGN EXCHANGE DONE Andale, Andale! lasted 20 minutes, but it didn’t trigger any of the circuit breakers that High frequency traders exchanges use to halt trading when there are unusual market moves. get a warm embrace Javier Artigas, the BMV’s senior vice president of strategic plan- from the Mexican ning, is unfazed. He emphasizes that the BMV uses the same circuit stock exchange. breakers as the New York Stock Exchange does to buffer trading BY JAYNE JUNG errors, including the one introduced to address the flash crash: a five-minute pause after a price drop of 10 percent or more. The exchange is also following how U.S. regulators interpret the Dodd-Frank Wall Street Reform and Consumer Protection Act, which may require hedge funds that have at least $150 million in assets to report their positions and strategies. If that happens, increased operational costs could reduce high frequency trading. I “The concern that people have about high frequency traders add- ing volatility to the market more than anything else is unfounded,” says Benjamin Souza, head portfolio manager of $4.1 billion Mexican pension fund Afore InverCap.“They add depth and liquid- ity.” Souza explains that high frequency traders’ influence is limited to the biggest names — such as Mexico’s largest phone provider, N THE U.S. AND EUROPE THERE’S América Móvil — because they growing alarm over high frequency trad- profit from inefficiencies in very ing and its potential risks. High frequency liquid markets. traders use computer algorithms to profit That may point to con- from small, short-lived price discrepan- centration risk. But Homero cies. About 15 such U.S.-based shops Elizondo, a risk manager comprised 60 percent of average daily at Monterrey-based Afore volume in American equities in 2009, InverCap, says the BMV Boston consulting firm Aite Group reports. These proprietary houses needn’t worry about a repeat of and hedge funds took some of the rap for last May’s “flash crash.” May 6. Aite Group cofounder While U.S. regulators browbeat high frequency traders, Bolsa and managing partner Sang “ Mexicana de Valores, the Mexican stock exchange, is reaching out Lee agrees. Lee says the main to them. Last year the Mexico City–based BMV streamlined direct reason for the flash crash was market access for these traders and let them house their data servers that the U.S. equities market at the exchange to reduce latency. Starting this month it will route Mexico has the is highly fragmented, with the all derivative orders to the Chicago Mercantile Exchange’s Globex electronic largest venue, NYSE Euronext, trading system, where high frequency traders have a strong presence. accounting for just 25 percent The BMV is chasing high frequency traders for two reasons: capabilities to of trading. “But if you have a They’re a guaranteed source of liquidity in good times, and the host and single exchange dominating exchange faces pressure to grow as its global peers merge. “High fre- benefit from the marketplace, it’s difficult to quency traders are liquidity providers at any exchange,” says group chairman and president Luis Téllez. “Mexico has the electronic what high run into a situation where you don’t know why certain types of capabilities to host and benefit from what they are currently doing.” frequency moves are happening.” The BMV’s strategy is working: U.S. high frequency trading traders are Noting the speed at which firms now represent about 90 percent of average daily volume on currently markets react, Afore InverCap’s the Mexican exchange. To create its own ultrafast trading engine, which will launch in January, the BMV is working with engineers at doing. Elizondo thinks anyone who blames high frequency traders — Luis Téllez Carnegie Mellon University and consultants who helped develop Bolsa Mexicana de Valores for the flash crash has “a very ” Nasdaq’s OMX platform. narrow view of the problem that But according to last fall’s report on the flash crash by the day.” Rather than focusing on Commodity Futures Trading Commission and the Securities and trading errors, he says, regula- Exchange Commission, courting the speedy can be risky. On May tors should consider circuit breakers that get triggered by smaller 6, 2010, a fundamental trader executed an automated $4.1 billion price changes in times of relative stability. “It would be very helpful sell order of 75,000 futures contracts using an algorithm that kept to have lower triggers to prevent people from selling or buying out selling rapidly even though prices were plunging. When high fre- of irrational decisions like fear or greed.” •• quency traders and others began selling too, the Dow Jones industrial average lost almost 1,000 points before rebounding. The flash crash COMMENT? GO TO BANKING & CAPITAL MARKETS AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 21. STEVE REINTS PIERRE JOYAL Director, Teradata GE Capital“GREAT BUSINESSPARTNERSHIPS ARE ABOUTMORE THAN JUST MONEY.When GE Capital first began providing equipment financing for Teradata ten years ago, their main goal wasto find new customers and grow their revenue base. We worked to develop a digital marketing suite, includinga prospecting tool that helps Teradata employees efficiently find new customers to continue their growth asthe global leader in data warehousing and analytics. As Teradata’s partner, GE Capital offers them much morethan just financing to keep them going. We’re here to help them think of ways that will keep them growing.”GE Capital is invested in Teradata.
  • 22. APRIL 2011 INSTITUTIONAL INVESTOR16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 7KETS CAPITAL THE BUY SIDE GLOBAL SECURITIES SERVICES FOREIGN EXCHANGE DONE DEALS AL Stamford, Connecticut–based Jefferies Asset Management, which manages more than $1 billion in commodities. The unique challenges of indexing commodities have helped drive investors toward active strategies. Unlike broad equity indexes, commodities indexes turn over each month when the nearest-term futures contracts expire. Active inves- tors can profit by rolling contracts before or after the sched- uled trade. Such roll timing has recently added 30 basis points a year in outperformance, says David Hemming, portfolio manager at London-based Hermes Fund Managers, which invests $2 billion of its $40.1 billion in assets in commodities. The shape of the commodities futures curve can compli- cate matters. Starting five years ago, the curves for crude oil and several other commodities became upward-sloping, with longer-dated contracts priced higher than those closest to expiration, reflecting expectations that demand from emerg- ing markets and uncertainty about future supplies will boost prices. When index investors roll from the nearest, cheaper contract to the next, more-expensive one, they lose money. To combat negative roll yield, money managers buy con- tracts several months out, where the price curves for many commodities tend to flatten.“I can be away from the immedi- Hot Commodities ate contract and roll from the third- to the fourth-month contract to avoid some of the negative impact on returns associated with a futures Seeking alpha, investors in this asset class are curve that is upward-sloping,” says Johnson of Goldman, whose firm turning to active strategies. manages some $4 billion in commodities. BY VIRGINIA MUNGER KAHN Commodities can be rich sources of alpha, especially compared with equities and fixed income. Consolidated data on commodities is not widely available, says Michael Lewis, who is a principal and works in manager research at Mercer in Toronto. Also, because producers and consumers such as oil companies and airlines still A dominate commodities markets and they generally seek to lock in prices, financial players willing to accept price fluctuations can earn a premium for taking the other side of the trade. One manager with an all-in-one, passive-plus-active approach to commodities investing in a mutual fund format is John Brynjolfsson, CIO of Aliso Viejo, California–based Armored Wolf, subadviser to S INVESTORS POUR MONEY INTO the Eaton Vance Commodity Strategy Fund. Most of the fund aims commodities, they’re no longer content to merely buy the index. At to match the Dow Jones–UBS commodity index through a total the $225 billion California Public Employees’ Retirement System, for return swap. Armored Wolf adds an actively managed overlay com- example, active strategies make up 25 percent of the Sacramento-based ponent that can be long or short by as much as 5 percent of the index. pension fund’s $2.5 billion in commodities investments.“We’re seeing a Brynjolfsson uses active strategies from roll timing and curve posi- tremendous amount of interest from institutional investors in fully active tioning to relative-value trades based on geographic or qualitative strategies,” says Michael Johnson, vice president of commodities port- anomalies. He also makes directional bets on individual commodi- folio management at Goldman Sachs Asset Management in New York. ties. As of mid-March the Eaton Vance fund was up 19.75 percent As recently as 2005 global institutions placed nearly all of their since its April 2010 launch, versus 20.74 percent for its benchmark. commodities assets — then worth $73 billion — in passive, long-only The fund trailed the index partly because of a short-term cash posi- strategies, according to Barclays Capital. Last year enhanced index tion in the first weeks after inception. and long-short vehicles claimed $55 billion out of $376 billion. Investment managers and consultants predict that active com- MAXWELL HOLYOKE-HIRSCH “We’re still seeing strong inflows into passive strategies for diversifi- modities strategies will become even more popular. “Even if you’re cation, but investors now are looking to generate alpha as well,” says trying to invest passively, you need active management to keep up Philippe Comer, Barclays’s New York–based head of commodity with the indexes,” says Payson Swaffield, chief income investment investor structuring for the Americas. officer at Boston’s Eaton Vance Investment Managers. •• Demand for third-party managers is growing. “It is a natural maturation of the asset class,” says Adam De Chiara, co-president of COMMENT? GO TO ASSET MANAGEMENT AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 23. Morningstar category rankings are based on total return, do not take into account the effect of sales charges, and are calculated against all funds in the fund’s category as of 1/31/2011 using Class A shares. Past performance is no guarantee of future results. Performance by share class may vary. Top 10% Top 2% Top 1% Mech. (120 of 1,230) (15 of 1,115) (4 of 952) X xxx.10 xx Job No: xxxx-Axxxx Prudential JennisonJob Name: xx xxx 1 year 3 years 5 years Equity Income Fund Pub: xxx xxx xxx Issue Date: xxx xxx Morningstar Large Value Category Class A SPQAX page 4c Prod: bleed Class A Rankings as of 1/31/2011 Live: 7 x 9.75 Trim: 8.5 x 11 Equity income funds allow investors to get Bleed: 8.75 x 11.25 Top10% the upside potential of stocks with the ________ ACCOUNT downside protection potential of dividend income. With WRITING ________ a highly flexible style that allows for broad diversification by geography, ________ DESIGN market cap, sector and capital structure, ________ CREATIVE Prudential Jennison Equity Income Fund is ________ TRAFFIC among the top of its class. And a competitive ________ ART RIGHTS choice for your risk-averse clients’ portfolios. of its Morningstar category over ________ PROOFREADING 1-, 3- and 5-year periods For a fund fact sheet and a copy of our white ________ SPELL CHECK paper, Tap the Income Potential of Stocks, Prepared by investment professionals can call the Prudential Prudential Advertising, Investments sales desk or visit us online. 213 Washington St Newark NJ, (973) 802-7361 e Prudential Investments Fax (973) 367-6173 800-257-3893 Do Not Print a fund’s investment objectives, risks, charges, and expenses carefully before investing. The prospectus and, if available, thesummary prospectus contain this and other information about the fund. Contact your financial professional for a prospectus and, ifavailable, the summary prospectus. Read it carefully before investing.The Fund may invest in foreign securities, which are subject to currency fluctuation and political uncertainty; short sales, which involve costs andthe risk of potentially unlimited losses; and derivative securities, which may carry market, credit, and liquidity risks. These risks may result in greatershare price volatility. There is no assurance the Fund’s objectives will be achieved. Diversification does not assure a profit or protect against a loss indeclining markets. Dividends and distributions from the Fund also may be subject to state and local income tax in the state of residence. Please notethat the Fund’s distributions are taxable and will be taxed as ordinary income or capital gains, unless investing through a tax-deferred arrangement,such as a 401(k) plan or IRA. Such tax-deferred arrangements may be taxed at or upon withdrawal of monies from those arrangements.Past performance is no guarantee of future results. The Morningstar Large Value Category consists of funds that invest primarily in large-cap value stocks.The inception date for the Fund’s Class A Share is 4/12/2004.© 2011. Prudential Financial. Mutual funds are distributed by Prudential Investment Management Services LLC, a Prudential Financial company and member SIPC. Jennison Associatesis a Prudential Financial company. Prudential Investments, Prudential, Jennison Associates, Jennison, the Prudential logo, and the Rock symbol are service marks of PrudentialFinancial, Inc., and its related entities, registered in many jurisdictions worldwide.0196326-00001-00
  • 24. APRIL 2011 INSTITUTIONAL INVESTOR8 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 7SIDE CAPITAL GLOBAL SECURITIES SERVICES FOREIGN EXCHANGE DONE DEALS ALTERNATIVES Taken into Custody Private equity firms opt for third- third-party recordkeepers — institutional investors want private party administrators to appease equity shops to have better practices and systems. If those firms are investors and regulators. getting arm’s-length services from the big banks, then all the better. BY JULIE SEGAL With private equity accounting for as much as 20 percent of the global total, alternative assets under administration have swelled. Citco Fund Services’ alternative assets grew from $485 billion to $600 billion in the year ended October 2010, London-based hedge fund publication HFMWeek reports. Bank of New York Mellon F Corp.’s alternative administration business jumped to $356 billion from $211 billion during the same period, while Goldman Sachs Group’s grew from $164 billion to $203 billion. Some banks have made acquisitions to get their business off the ground. Last year, for instance, BNY Mellon bought Wilmington, Delaware–based PNC Financial Services Group’s global investment servicing division. Brian Ruane, CEO of BNY Mellon’s alternative investment services group, says the $2.31 billion takeover made ROM PEAK TO TROUGH, THE sense because “what we were building they had already done.” The past decade was a painful period for private equity. But if the asset bank puts its assets under administration at $400 billion, making class crashed and burned during the 2008 financial crisis, custodian it the second-largest servicer of alternative funds globally. Private banks have since made it one of their fastest-growing businesses. equity and infrastructure represents $40 billion of that total. Private equity is a juicy opportunity for custodians, which are ‘Transparency’ is the buzzword in the new world of private equity constantly on the lookout to bring automation to underserved areas administration. Since the financial crisis, hard-hit investors have and move up the value chain. Although there were $2.52 trillion in vowed to better understand how firms are investing their money. private equity assets in the second quarter of 2010, according to Ruane says BNY Mellon recently polled 102 general partners, lim- London-based alternative investment research firm Preqin, the ited partners and other industry players. The bank is tailoring many business is still a cottage industry when it comes to the back office. of its offerings around their responses. For example, Ruane explains, Regulatory reform and investor scrutiny are fueling the outsourc- general partners say they’re getting increasing requests for sharper ing trend. From taxes on carried interest to the Dodd-Frank Wall detail on portfolio companies, more clarity on returns and how a firm Street Reform and Consumer Protection Act, new requirements are achieved them, and stronger reporting capabilities. Unless general prompting private equity firms to consider hiring outside firms for partners splurge on technology and hiring experienced practitioners, processing and advice. And in the wake of the crisis and the Bernard they can’t deliver those things without contracting with a third party. Madoff Ponzi scheme — which flourished because there were no State Street Corp., which ranked third in HFMWeek’s survey with $342 billion in assets under administration, has added THE TEN LARGEST PRIVATE EQUITY GENERAL PARTNERS private equity capabilities as part of three acquisitions, most BY TOTAL FUNDS RAISED IN THE PAST TEN YEARS recently Channel Islands–based Mourant International ESTIMATED DRY Finance Administration in early 2010. The Boston-based FUNDS RAISED POWDER RANK FIRM ($ BILLIONS)* ($ BILLIONS) RECENT BUYOUT bank turns the opaque private equity industry on its ear by giving investors previously hard-to-access information. Its 1 Blackstone Group $77.1 $27.4 Polymer Group (New York) back-office system links performance analytics — deter- 2 GS Capital Partners 62.2 34.1 Michael Foods mining where returns are coming from — with account- (New York) ing and administration. Clients can view performance 3 Carlyle Group 59.4 21.2 CommScope and accounting data, such as a fund’s general ledger, then (Washington, D.C.) 4 TPG Capital 54.8 18.3 J. Crew Group download it for board presentations and other reasons. (Fort Worth, TX) George Sullivan, head of State Street’s global alternative 5 Kohlberg Kravis Roberts 47.8 10.5 Del Monte Foods Co. investment solutions group, says new regulations are also & Co. (New York) driving business. As a result of Dodd-Frank, banks may 6 Oaktree Capital Mgmt 47.6 7.6 SGD Group (Los Angeles) spin out private equity, forcing these stand-alone outfits to 7 Apollo Global Mgmt 38.4 8.0 Citi Property Investors create their own infrastructure.As well, private equity firms (New York) need advice to stay abreast of new rules.“Regulations such 8 CVC Capital Partners 37.0 15.5 PT Matahari Department as Dodd-Frank are making GPs aware of the complexity of (London) Store the business and their inability to keep up,” Sullivan says. 9 Bain Capital (Boston) 35.7 12.3 Gymboree Corp. 10 Apax Partners (London) 30.6 6.0 “Their burden is our sweet spot.” Advantage Sales and •• Marketing *Includes private equity, real estate and infrastructure fundraising. COMMENT? GO TO ASSET MANAGEMENT Source: Preqin. AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 25. APRIL 2011 INSTITUTIONAL INVESTOR7 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 7 CERVICES CAPITAL FOREIGN EXCHANGE DONE DEALS ALTERNATIVES GREEN SHOOTS CEO INTERVI HINA WOULD LIKE TO SEE THE renminbi gain a higher global profile, but it doesn’t yet want to make the currency convertible, which could drive up its value and threaten the country’s export industries. So the Chinese authori- ties have been fostering the growth of an offshore renminbi market in Hong Kong, similar to the Eurodollar market that sprouted in London half a century ago to avoid U.S. taxes and regulation. “Beijing has found a savvy way to use market forces to benefit Chinese companies without adopting those market forces itself,” says Marc Chandler, global head of currency strategy at New York–based Brown Brothers Harriman & Co. China authorized offshore renminbi accounts in 2004, but the market only took off last July, when the People’s Bank of BBH’s Chandler: The redback is China and the Hong Kong Monetary Authority signed an agree- no challenge to the greenback ment allowing nonbank financial institutions to open renminbi accounts in Hong Kong. The currency in these accounts is called CNH, while the onshore renminbi is called CNY. Betting on the CNH deliverable renminbi forward contracts, interest rate swaps, Trading in the CNH market has The renminbi is on the rise in Hong Kong, cross-currency swaps and mushroomed to between $500 million thanks to China’s currency liberalization. — most dramatic of all — and $700 million a day from $200 mil- BY CHARLES W ALLACE renminbi-denominated bonds lion to $300 million last July, according sold in Hong Kong. Issuance of to Enoch Fung, a Hong Kong–based such bonds, known colloqui- Asia economist for Goldman Sachs ally as “dim sum bonds,” greatly Group. The CNH is beginning to rival increased last year, with 33 deals the more-established offshore market in renminbi nondeliverable valued at a total of $6.3 billion, according to BBH. The market has forwards, or NDFs, which trade in such financial centers as New attracted such well-known corporate issuers as McDonald’s Corp. York and Singapore to the tune of about $3 billion a day. and Caterpillar. Strong investor demand has forced yields on dim sum The Chinese currency in Hong Kong accounts comes from Chi- bonds a substantial 1 to 2 percentage points below government bonds nese companies that settle their trade in renminbi offshore rather than issued on the mainland, according to Standard Chartered Bank. by sending dollars overseas. The CNH market has mainly attracted China knew that to promote trade settlement in renminbi, it companies with business interests in China that need cash renminbi needed to give companies a venue so they could hedge their posi- at the end of the day. NDFs, by contrast, are futures contracts priced tions, not just trade on the spot market. As a result, the U.S. dollar– in renminbi but settled in U.S. dollars; the market appeals mostly to CNH forward market is growing in liquidity. CNH forwards are now institutions such as hedge funds that are betting on the appreciation the most attractive vehicle for hedging out as far as one year, thanks of the renminbi. All of that could soon change, though. to the currency’s relatively flat yield curve, while the NDF remains a The CNH rate tracks the domestic spot renminbi rate, which is better bet for short-term hedging of up to three months, says Kelvin closely controlled by the Chinese central bank. On the other hand, Lau, an economist at Standard Chartered in Hong Kong. the NDF’s value already reflects an expected rise in the renminbi. “If Most analysts believe the CNH will gradually displace the NDF the one-year NDF is pricing in at 2 percent and the currency moves because of its greater variety of financial products and could ulti- by 3 percent, then you only make 1 percent,” says Richard Yetsenga, mately be the forerunner of a fully convertible renminbi. But few JIN LEE/BLOOMBERG global head of emerging-markets FX strategy at HSBC Holdings are willing to predict when that may happen. “It is far too premature in Hong Kong. “But if you are in the CNH market and the currency to speak of a challenge to the greenback by the redback,” BBH’s moves 3 percent, then you make 3 percent.” Chandler says. •• The CNH market is benefiting from a host of financial instru- ments recently introduced by the Chinese authorities, including COMMENT? GOTO BANKING & CAPITAL MARKETS AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 26. APRIL 2011 INSTITUTIONAL INVESTOR0 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 7NGE CAPITAL DONE DEALS ALTERNATIVES GREEN SHOOTS CEO INTERVIEW COVER STORY CAPIT O High finance: Aldar must sell assets to survive VER THE NEXT TWO YEARS, Abu Dhabi real estate developer Aldar Properties will profit from the sale of a series of eye-popping local assets to the emirate’s gov- ernment. They include Ferrari World Abu Dhabi (a glitzy indoor theme park based on the Italian sports car) and related infrastruc- ture on Yas Island, a 6,200-acre site off the coast of Abu Dhabi city that Aldar has transformed into an upscale entertainment center. These sales are part of an 19 billion dirham ($5.2 billion) rescue package to keep the cash-strapped public company afloat. The second government bailout of Aldar inside of a year, the deal highlights the financial woes of the United Arab Emirates’ real estate developers, who not long ago could count on stable property values to fund their construction projects. The emirate has good reason to prop up Aldar, its largest developer and a key player in Abu Dhabi 2030, an ambitious plan to turn the capital into a business mag- net and tourist destination. Launched in 2004, when global real estate mar- Arabian Knight ers betting the government will keep supporting the developer. kets were still booming, Aldar got into Abu Dhabi rides to the rescue of Aldar’s Malik says the new frame- trouble by piling up short-term debt distressed Aldar Properties. work is in the best interests of all stake- like many of its UAE peers did. “The BY LAURIE KAPLAN SINGH holders:“It has strengthened the capital financing made sense at the time, structure and positioned the company under the assumption the debt easily for sustainable, long-term growth.” But could be rolled over or repaid with pro- shareholders don’t like the impairment ceeds from property sales,” explains charge, which waters down their equity. Chet Riley, an equity analyst at Nomura International in Dubai. “Significant ownership dilution has occurred,” Abbas says. But with Abu Dhabi property values down 30 percent since 2008, The asset sales and convertible bond will generate enough cash sales are sluggish and financing is tough. “The crux of Aldar’s diffi- to meet Aldar’s debt obligations. But there’s concern that the com- culties was that the major portion of its outstanding debt — approxi- pany’s assets, particularly its hospitality portfolio, remain overstated. mately AED14 billion — comes due in 2011 and 2012,” Riley says. For this reason, Abbas doesn’t rule out another impairment charge in Aimed at strengthening Aldar’s balance sheet, the bailout includes the medium term.“Short-term the restructuring solves the problem, AED16.4 billion in asset sales, an AED10.5 billion impairment but longer-term there is still a funding gap,” notes Tommy Trask, an charge and an AED2.8 billion convertible bond. Aldar, which has equity analyst at the Dubai office of Standard & Poor’s. posted operating losses for five straight quarters, lost AED12.7 bil- Given its high capital expenditures, Aldar must roll over or refi- lion in 2010 after the impairment charge. CFO Shafqat Malik nance some short-term debt by the second half of this year. Trask says the company will return to profitability this year, but analysts expects the developer to secure extra funding from banks or the question its ability to sustain positive earnings. “Aldar still does not capital markets, reasoning that the balance-sheet overhaul should have a significant income-producing portfolio,” says Jad Abbas, a make it easier to obtain straight debt with maturities that more Dubai-based equity analyst with investment bank EFG Hermes. closely match the timelines of its remaining projects. He also thinks Aldar issued the convertible bond on March 7, placing it with Aldar may get more help in the form of government-sponsored work, government investment vehicle Mubadala Development Co. The asset acquisition and loans from government-controlled banks. bond pays a coupon of 4 percent — higher than most analysts “It’s very positive from a credit standpoint,” Trask says of the expected — and must be converted into equity in December at a restructuring. Meanwhile, shareholders pay the price for Aldar’s strike price of AED1.75 to AED2.30 per share. As of March 31, extravagances. •• Aldar’s stock was trading at about AED1.50. The bond, which raises Abu Dhabi’s stake in Aldar from 40 to 64 percent, has observ- COMMENT? GOTO BANKING & CAPITAL MARKETS AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 27. APRIL 2011 INSTITUTIONAL INVESTOR9 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 7E DEALS CAPITAL ALTERNATIVES GREEN SHOOTS CEO INTERVIEW COVER STORY CAPITAL MARK C HICAGO-BASED BAL- yasny Asset Management is back in the macro game. The $2 billion multistrategy hedge fund firm, which specializes in long-short equity investing, started doing global macro almost a decade ago. Macro investing is the business of profiting from major shifts in national economies or politics, often trading in securities or currencies affected by the changes. BAM’s original macro team left in 2006. Now the firm has another. Heading the new five- person group are former Stark Investments partner Ashok Bhatia and Colin Lancaster, who previously was president and COO of Milwaukee-based Stark. BAM plans to start offering macro as part of its multistrategy fund, then to create a stand-alone fund. Macro investors tend to thrive in extreme times: “What macro as a strategy needs is vola- Macro View the HFRI fund-weighted composite index. One big tility,” Bhatia says. There’s been plenty of that Hedge fund Balyasny Asset problem is finding talented lately. In a note to investors after last month’s Management returns to global macro and available managers, and earthquake in Japan, Bhatia and Lancaster, and big-think investment strategies. this partly explains why BAM who blend macro analysis with a fundamental BY IMOGEN ROSE-SMITH — whose earlier macro team approach, discussed the immediate to long- went independent — took so term outlook for Japanese equities. The pair long to rebuild its macro pres- also considered the cataclysm’s impact on com- ence. “We know firsthand how modities, the yen and global trading. Despite important it is to have a strong many unknowns, they asserted that a surge of macro component during these yen repatriation was likely and that the one or two weeks following volatile markets, but also how difficult it is to find a high-quality the crisis could see a rally in Japanese stocks before “a resumption team,” says managing partner Dmitry Balyasny. of weakness.” So far, Bhatia and Lancaster have been right. Luckily, Stark obliged. A victim of the credit crisis, the firm has Unfolding events are among the many opportunities for global seen its assets fall from some $13.7 billion in 2007 to $3 billion macro. Bhatia thinks the volatility and dispersion of global economic today. Key members of Stark’s macro team left in 2010, and after growth rates, particularly between developing and developed talks with BAM they decided the fellow Midwestern firm was a markets, should make macro an attractive strategy for at least five logical fit. BAM vice chairman Barry Colvin says the new hires more years. share BAM’s risk management approach. “Risk management No wonder macro managers have been raising capital. In the is not an overlay to the strategy,” says Lancaster. “It is an alpha- last quarter of 2010, macro funds had net inflows of $6.65 billion, generating strategy.” making them the most popular standard hedge fund strategy, And there’s another reason for BAM to return to macro. The according to Chicago-based Hedge Fund Research. And in a New York trial of Galleon Group CEO Raj Rajaratnam on charges Deutsche Bank alternative-investment survey published last of conspiring to trade based on insider information, and a federal month, 528 investors managing a total of $1.3 trillion predicted insider trading probe, have thrown a spotlight on multistrategy that macro would be among the top-performing strategies of 2011, long-short equity managers. Insider trading is rarely a problem while more than 40 percent of respondents planned to increase for macro — giving those big-thinking managers an extra boost KEITH NEGLEY their macro allocations. right now. •• Performance has lagged demand, however. The HFRI macro index was up 8.18 percent in 2010, compared with 10.32 percent for COMMENT? GOTO BANKING & CAPITAL MARKETS AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 28. APRIL 2011 INSTITUTIONAL INVESTOR2 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 7 SIVES CAPITAL GREEN SHOOTS CEO INTERVIEW COVER STORY CAPITAL MARKETS ASSET MANAGE TEVE WAYGOOD LEADS AN EFFORT whose goal he describes as “making capitalism work better.” Head of sustainability at $420 billion, London-based asset manage- ment firm Aviva Investors, Waygood is calling on the world’s stock exchanges to encourage listed companies to step up environmental, social and governance (ESG) reporting.“We have yet to see leader- ship from large developed-market stock exchanges on this,” he says. Though governments are pushing investors to be long-term Aviva’s Waygood: and sophisticated in their analysis of companies, Waygood asks Better reporting how that’s possible when companies themselves often provide can reduce risk thin, short-term information. He has a personal stake in this question given that Aviva mostly invests on behalf of institutional investors like pension funds, endowments and foundations. “Many of these sustainable development issues can cause huge risks within the global macro economy,” says Waygood, who started his career as ethical investment manager at the U.K. arm of the World Wildlife Fund and led the investor Hardly Sustainable companies’ environmental and social impacts. London Stock responsibility team at London’s Insight Stock exchanges face pressure to boost Exchange CFO Doug Webb Investment Management. “If that’s not listed companies’ reporting standards. and Tokyo Stock Exchange dealt with now, the absolute value of the BY KATIE GILBERT Group CEO Atsushi Saito sit portfolios we invest in will decline, since on the committee. they’re subsets of the global economy.” Conceding that exchanges The role that exchanges can play in may not go as far as Waygood addressing this problem was the main wants, Clifford says they’re jus- topic at last September’s Sustainable Stock Exchanges 2010 Global tified in holding back. With initial public offerings on the decline, Dialogue, convened by the United Nations and cosponsored by Aviva stock markets must take care not to discourage companies from as part of the World Investment Forum in Xiamen, China. Waygood listing. “When that happens, there’s no transparency at all,” he says. notes that regulators and exchanges from emerging markets are the It may be unreasonable to ask exchanges in more-developed biggest proponents of the sustainable exchanges initiative. jurisdictions to unilaterally change their listing rules, says Dan Siddy, He points to Bursa Malaysia, which started publishing corporate founder of Oxford, England–based sustainable investment advisory social responsibility guidance for its companies in 2006. In Novem- firm Delsus. What’s possible in emerging markets — where exchange ber the exchange introduced a business sustainability program that and regulator are often the same — doesn’t necessarily translate for includes a guide for corporate directors on ESG practices and report- the EU or the U.S. “Exchanges in these markets are just one part of ing and an online portal containing information about sustainability a much more complex ecosystem,” Siddy says. tax incentives, laws and case studies. The world’s regulators could be steering that ecosystem toward Waygood thinks emerging-markets exchanges are keen to raise more disclosure. Jane Diplock chairs the executive committee of the ESG reporting standards partly to differentiate themselves. But he International Organization of Securities Commissions (IOSCO), contends that for strategic and other reasons, exchanges in developed whose current focus is finding and fixing the systemic risks that led markets have as much to gain. “In broader society they long hadn’t to the financial meltdown. As IOSCO and the regulators under its been seen as institutions that could affect the quality of the econ- umbrella improve their understanding of systemic risk, Diplock omy,” Waygood says. “Postcrisis that is now very well understood.” predicts, exchanges will better grasp how ESG reporting can reduce Peter Clifford, deputy secretary general of the World Federation that risk and how it helps keep markets healthy. This convergence, of Exchanges (WFE), says his organization and several of its 130-odd she says, “will be seen as the mark of a modern exchange.” •• member exchanges are involved with the International Integrated Reporting Committee, which is developing guidelines for reporting COMMENT? GOTO GREEN INVESTING AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 29. We are pleased to announce the closing of EnerVest Energy Ins Fund XII with equity commitments of $1,500,000,000 for the and developmentof long-life, onshore operated oil and natural gas proper es in North America Ins Private Equity Contacts: Jim Vanderhider Ex ve Vice President and CFO 713-659-3500 Rainey Janke Manager, Ins Marke ng 713-659-3500
  • 30. APRIL 2011 INSTITUTIONAL INVESTOR04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57E DEALS ALTERNATIVES GREEN SHOOTS CEO INTERVIEW COVER STORY CAPITAL MARKE N“NO ONE EVER SAID TO ME, ‘NO, Tom, you can’t do X.’ So I kept tak- ing on more,” confides Tom Glocer, the 51-year-old CEO of Thomson Reuters. That formula for success took this Upper East Side New York City boy from Columbia University (class of 1981) to Yale Law School (’84) to the prestigious New York law firm of Davis Polk & Wardwell, where he did mergers and acquisi- tions work. That specialty in turn helped Glocer make the leap in 1993 to Reuters America, the U.S. arm of the British news and financial data company, as deputy general coun- sel. Taking on more, he proved to be as good at business as law, and in 1997 he was named CEO of Reuters Latin America. Within five years he had become CEO of the whole Reuters Group, where his M&A background was to really come to News Thomson Reuters’s Glocer: the fore: In 2008, Reuters sold itself to rival media company Thomson Worthy for $17 billion, and Glocer, taking Thomson Reuters’s old school, new tech on still more, wound up heading Tom Glocer sees a role uct launches, but did perk up in 2010’s final quarter. Since Thomson Reuters. for traditional news- Thomson Reuters started trading in April 2008, its stock is Glocer’s chief chore at the com- gathering in the Twitter era. up about 20 percent, to $39, as of March 29. bined journalism and data enterprise BY JULIE SEGAL Though he’s an avid blogger (, Glocer AXEL SEIDEMANN/BLOOMBERG NEWS has been to transform Thomson, has never formally been a journalist — a fact he insists is an whose roots are in Canada and the advantage: It keeps Thomson Reuters’s journalists safe from U.S., into a global force through the editorial meddling. more international Reuters’s brand. Institutional Investor Staff Writer Julie Segal recently But on the side, he has had to battle another journalism–data dis- spoke to Glocer in his capacious office high above New York’s Times penser, Bloomberg. Revenues last year, at around $13 billion, were Square about the prospects for traditional Thomson Reuters–style fairly flat but with a bump up in the fourth quarter; operating profits journalism, particularly in light of the alternative media’s coverage declined 10 percent for the year, chiefly because of a batch of prod- of (and role in) the upheavals in the Middle East. INSTITUTIONALINVESTOR.COM
  • 31. APRIL 2011 INSTITUTIONAL INVESTOR6 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 8OOTS CEO INTERVIEW COVER STORY CAPITAL MARKETS ASSET MANAGEMENT CAPITAL MARKET Bloggers and social networks are now widespread “At always understood the importance of knowing what’s information sources, as we saw again in the Middle East. Thomson going on faster and more accurately. And we’re now What does that mean for traditional media? doing it not only for financiers.We recognize that other It raises the need for, and puts a premium on, an Reuters professionals — lawyers, accountants, pharmaceuti- authoritative voice. It is truly remarkable that so we’ve gone cal research execs — also have a need for specialized much social media technology — Twitter, Face- from news as part of their day. So we’re hiring a lot of jour- book, etc. — is being used for its democratizing potential. Think about your average African coup 100 percent nalists this year in those areas. How goes your own shift from paper to digital? 20 years ago: One tank went to the presidential print to It’s by and large complete. I don’t think any other palace, another to the radio station, because who- verging on media company has done as much. About 90 per- ever controls that can broadcast that general so-and- 100 percent cent of our $13 billion in revenue is electronic. so’s loyal forces are in power. You can’t do that anymore. It’s harder to get a stranglehold on com- electronic There’s a huge amount of hand-wringing in the music industry, in the newspaper industry [over this munication, for better and worse. without process]. But we’ve gone from 100 percent print to But where does traditional media fit into this scenario? having the verging on 100 percent electronic without having the The challenge becomes, how do you assess, from a bottom bottom drop out of our profits. And also without a lot stream of tweets, what is really going on? One way is of “Oh, we need to reinvent ourselves” or “There you follow a particular person on Twitter. Or maybe drop out should be a government subsidy” or “We can’t make there’s an algorithm to determine that 90 percent of of our a go of it with our business model.” what’s coming in says [Muammar] Gaddafi will profits.” What have you learned from writing resign, and therefore you can give it more credence. a blog. And do you write it? But the other way, of course, is to have eyewitness I write it. I’m sure McKinsey would write me a reporters on the ground. People can rely on the fact that we’ve vetted study of the phenomenon of blogging for a million bucks, and I’d and hired the particular journalist [on the scene], that there’s X get a 100-page thing with lots of graphs and information. I’d prob- amount of training involved, that there are editing standards. We have ably learn some things. But I’m not sure they would stick with me a reputation. If you get it wrong enough, people will turn you off. or change me. The alternative is experiential learning. When I Then, does conventional journalism still have a future? started the blog, I just said, Well, let me try to do it and see what Well, we at Thomson Reuters have an easier task than journalism at happens. What I found was, No. 1, as long as I don’t have to do it large because our clients are professionals who need not just news five times a day, I quite like it. And I have particularly good interac- but also the data and analytics to interpret it. tion with people in the company. Although I do all the normal Are you optimistic about ordinary journalism? communication things internally, writing something that goes Listen, I’m pretty optimistic. A lot of people have gotten stuck on the outside the company, that anyone can get at, somehow makes it idea that newspapers equal journalism and that since a bunch of more authentic. People in the company — and we now have 57,000 U.S. newspapers have died and the ones still alive seem to be strug- or so — can get to know me. There’s more intimacy that comes gling (or at least were until this year), quality journalism is therefore from writing about my kids or writing about my grandmother’s dead. That’s untrue — and rather unimaginative, actually. There is struggles with a computer. today, and there will continue to be, an increasing amount of quality How do you stay on top of a company that operates journalism. It may emanate from institutions with different names, in more than 150 countries? but we at Reuters are very dedicated to being one of them. The old Reuters ran on quite a simple model. It was geographic. Speaking of newspapers, how will people be getting their news? When I ran the business in Latin America, I had a great deal of To me, “multiplatform” just means that you need to reach people autonomy. I had to deliver a certain number, but how I went about and tell them stories in ways that fit the way they live. We do more it could differ greatly from how the person in Canada or Switzerland and more things on a mobile basis; therefore, mobile has got to be did it. Now, there are benefits to that approach. You’re close to an important part of it. Video is important as well. We launched a your customers. You don’t need to go back to London or New York service last year called Reuters Insider that is an innovative, clip- for an answer. However, our clients were becoming more global- oriented business video system. We’re going to see more of a col- ized. Deutsche Bank wanted the same application in London, New laboration between citizen journalism and Twitter-type things and York and Buenos Aires, and wanted the same level of service, and established journalism. wanted a single bill, and wanted a single point of contact. The Reuters combines journalism with data. What’s magical challenge of organizing country by country started to be too great. about that pairing? Today our markets division is essentially organized by sales and What’s magical is that our users really need the content. We don’t give trading; by investment and advisory, which is essentially off the people raw news. We integrate news into an all-around product that trading floor; by enterprise; and by our media business. The busi- fits the way folks work. Back in the 1850s the very first subscriber to ness is now aligned and organized around the client, not a geo- the Reuters News telegrams was the Rothschild Bank, which suppos- graphic region. •• edly made a killing by getting news of some particular battle in the Crimean War earlier than other firms. The financial community has COMMENT? GO TO BANKING & CAPITAL MARKETS AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 32. RESEARCH&RANKINGS In Depth Coverage & AnalysisDecember/January: The Power 50 • Best Hotels by City February: All-Europe Research Team • All-AmericaExecutive Team March: • Emerging EMEA Research Team April: • All-Japan Research Team • All-EuropeExecutive Team • Fund of Funds 50 May: Hedge Fund 100 • All-Asia Research Team • Europe’s Most GreenCompanies June: All-Russia Research Team • Captains of Asia Finance July/August: II 300 • All-ChinaResearch Team September: All-America Fixed Income Research Team • All-Brazil Research Team• Online Finance 40 • Latin America Research Team • Asia 100 • Country Credit Ratings • Global CustodyOctober: All-America Research Team • Online Finance 30 November: Euro 100 • Best Hotels by City ADVERTISE Christine Cavolina, International Publisher ~ Europe: Lena Mas ~ Asia: Doug Mulcock ~ Caribbean/Latin America: Craig Leon ~ Africa/Latin America: Lorna Solis ~ Online: Michael Feinberg ~
  • 33. APRIL 2011 INSTITUTIONAL INVESTOR16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 COVER STORY No School Left Behind Still feeling the sting of the financial crisis, university endowments are turning I to risk management to prevent a similar disaster from ever happening again. By Frances Denmark PHOTOGRAPH BY BILLY DELFS IN 2003, CASE WESTERN RESERVE UNIVERSITY’S NEW PRESIDENT, Edward Hundert, introduced an ambitious three-year Vision Investment Plan that he hoped would transform the Cleveland-based institution into what he called “the most powerful learning environment in the world,” tapping into its cash reserves and leveraging the strength of its endowment fund. But by the next year annual losses became the order of the day when philanthropic support and research funding did not meet revenue expectations at Ohio’s largest private research university. By 2006, after receiving a vote of no-confidence from the arts and sciences faculty, Hundert resigned. In July of the following year, newly appointed president Barbara Snyder arrived on campus to take on the $20 million annual deficit. That October the board of trustees adopted a fiscal austerity plan designed to bring the school back into the black. With the help Anjum Hussain and Sally Staley hope to of tuition and enrollment increases and a few medical school grants, Snyder reduce the risk in Case Western Reserve managed to balance the budget just in time for the close of the academic year University’s $1.3 billion endowment on June 30, 2008. Then disaster struck. In the summer of 2008, the financial markets began their nine months’ long downward spiral, punctuated by the September bankruptcy filing of investment INSTITUTIONALINVESTOR.COM
  • 34. 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 INSTITUTIONALINVESTOR.COM
  • 35. APRIL 2011 INSTITUTIONAL INVESTOR30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 COVER STORY bank Lehman Brothers Holdings and the government bailouts of mortgage giants Fannie Mae and Freddie Mac. Case Western Reserve’s endowment fund fell in tandem, losing 19 percent of its market value. The endowment, which provides 10 percent of the school’s operating bud- get, was seen as a key element of the fiscal recovery plan. With time running out for the red-ink-soaked medical, engineering and management school budgets, endow- ment CIO Sally Staley and her investment team were under pressure to turn those losses around. “It very nearly derailed our fiscal recovery at the uni- versity,” explains Staley, who oversees a $1.3 billion portfolio today, down from $1.8 billion at its height before the financial crisis. “We had to set aside the typical investment objective of the endowment model, which is to maximize return at any cost.” Schools across the U.S. have been struggling to dig themselves out of the hole created when the markets crashed and there was nowhere to hide (save gold and Treasury bonds). The ten largest endowment funds alone lost a combined $36 billion before the sinking markets began to stabilize in March 2009. As every asset class correlation went to one — that is, they all produced similar returns, bad — the holy writ of portfolio manage- ment theories developed by financial gurus like Harry Markowitz and William Sharpe and disseminated for decades by U.S. business schools, investment consul- tants and leading investors like Yale University’s David Swensen went for naught. To access or backstop dwin- Johns Hopkins University CIO Kathryn Crecelius says that running an dling cash reserves, many of the most prominent schools endowment is very different from trying to be No. 1 in a sport resorted to floating long-term taxable bonds, obligating them to years of debt (see “College Bound,” page 38), and cut back managers and, in some cases, put on short trades to hedge out the risk on myriad programs, construction projects, staff and professors. in long-biased, illiquid hedge funds. By November, Hussain began “Risk has changed significantly at endowments,” says Tanya actively taking advantage of the very high market volatility and skew, Beder, founder and chairman of advisory firm SBCC Group in New or divergence from the normal distribution in the options markets, York, where she heads the global strategy, risk, derivatives and asset by selling volatility. Then he went even further. In the midst of the management practices. “The aftermath has been so painful, there’s market’s mayhem, the risk director added a sophisticated option a sea change in how people are approaching risk management.” structure to the equity portfolio. As custodians of the largest pool of assets on campus, endow- Until 2008 some of the smartest — and most dedicated — invest- ment officers are taking a new, hard look at risk. Recently hired ment professionals managed school endowment pools believing and deployed risk officers have been taken out of the basement and that asset diversification and historical portfolio and markets data given a seat next to the chief investment officer. At schools with represented state-of-the-art risk management tools. As financial the resources to hire specialized staff — and the inclination to do markets went into free fall, it began to appear that endowment so — risk management techniques are front and center across all officials had been walling themselves off in their ivory towers with portfolios. It took a crisis to bring the truth into sharp focus: Risk a 100-year investment perspective rather than managing more- exists in every division and department across campus. In response immediate, previously unforeseen challenges like institutionwide to this new holistic view, risk management is fast becoming the holy liquidity and counterparty risk. That realization has given rise to grail at educational institutions as school administrators — presi- today’s new thinking: The most important risk of all is permanent dents, treasurers and finance officers — look to partner with their loss of capital. The question of how to manage that risk is a work in investment officers in an effort to avoid a repeat of the frightening progress as schools look at risk with fresh eyes. 2008–’09 academic year. “Continuous improvement in risk management is critical in what At Case Western Reserve, Staley and her director of risk and remains a very volatile environment,” says Jane Mendillo, president strategy,Anjum Hussain, have implemented a new active investment and CEO of Harvard Management Co., which oversees Harvard DANIEL BEDELL strategy that can deliver both positive returns and downside protec- University’s $27.4 billion endowment. At Harvard — whose endow- tion, with small amounts of capital. Between June and August 2008, ment dropped $10 billion in value for the fiscal year ended June 2009 the investment office cut equity exposures by terminating long-only — officials are working overtime to build a new, universitywide risk INSTITUTIONALINVESTOR.COM
  • 36. 7 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 management operation. “We have a more robust risk management Crecelius, whose school had the fourth-highest return — 15.6 percent process than we had two or three years ago,” Mendillo explains.“Part — among large endowments for the year ended June 2010. “It’s not of that is we’re looking at risk with a wider lens.” Risk is no longer just about putting up top numbers if you can’t meet payout.” defined solely through portfolio volatility or value-at-risk model- The risk manager’s job is changing too. As Eric Upin, former ing, says Mendillo, who had been CIO of Wellesley College before CIO of Stanford Management Co. delicately phrases it, “In the taking the reins at Harvard from Mohamed El-Erian, now Pacific past, you hired some highly educated quant geek and put him in the Investment Management Co.’s CEO and co-CIO, at the outset of the basement where he churned out different charts with Greek letters.” annus horribilis in July 2008. “We’re looking at what could happen Upin, who left Stanford in April 2009 to become CIO at Makena to the market and what could happen to our particular portfolio.” Capital Management in Menlo Park, California, has seen the risk No one predicted the crash — with the possible exception of a few position elevated to the C-suite, as schools like Harvard, Stanford savvy hedge fund managers. Much of the problem was that getting and the University of Michigan have hired chief risk officers during risk management right is like trying to nail Jell-O to a tree. Good luck. the past two years. First there was the folly of relying on risk systems and software. Quan- In July 2009, Mark Schmid was brought on to run the endowment titative approaches have been a mainstay of risk management since at the University of Chicago, based in part on his experience building value at risk, or VaR, was created in the 1980s within the U.S. banking risk management programs complete with risk officers for the pen- system to forecast how much a portfolio might lose, using historical sion funds at Boeing Co. and DaimlerChrysler. In early 2010 Schmid data. The problem with forecasting future events based on history is hired that school’s first CRO as well as a chief strategy officer. “The that it works well only in the very near term. During the financial crisis philosophy and strategy is a total enterprise approach,” Schmid says. these risk management programs failed miserably. “It takes a page from asset-liability management and the corporate Then there is the sheer number of risks to tackle. Looming finance approach. I thought the endowment should be managed in the large is the risk of not having the liquidity to meet university or context of the total entity, not just from an investment perspective.” private equity capital commitments. There is the risk of investing in asset classes with greater volatility, but when investors try to THE ENTIRE HISTORY OF RISK MANAGEMENT HAS BEEN reduce it by creating less-volatile portfolios they introduce a new one of reaction to crisis and catastrophe. As previously unforeseen risk — underperformance. There are also risks associated with risks arrive, new methods are sought to deter them. But for all the markets, leverage, portfolio asset concentration, operations, credit advances in financial engineering, a dismal science that steals a page and counterparties, and balance sheets. There is strategic risk — from Thomas Carlyle’s famous 19th century pronouncement on the potential impact to an organization’s long-term strategy and economics, most agree that quantitative forecasting tools didn’t work investment policy owing to fundamental shifts in external factors. when the U.S. financial system nearly got plowed under. There’s even gift risk as donations tend to diminish in tandem with Financial risk management first appeared on the scene in the a drop in the equity market. 1980s, after financial theorists like Markowitz (efficient portfo- Endowment officials can tackle risk in multiple ways. They can lios) and Sharpe (capital asset pricing) laid the groundwork. Barr take a granular, bottom-up, security-level, multifactor approach, Rosenberg, an economist and finance professor at the University slicing and dicing portfolios along industry sectors or geographic of California’s Berkeley campus, applied these theories to build regions. They can assess risk from the top down, coordinating computer models that balanced risk-and-return trade-offs in pen- sion fund portfolios at his firm, Barra. Not long after, in response to the development of complex new financial instruments called “Continuous improvement derivatives, J.P. Morgan & Co. developed a tool called value at risk, designed to forecast portfolio losses using historical data. Later, Barra in risk management is critical and RiskMetrics, the firm spun out from J.P. Morgan’s VaR creators, in what remains a very volatile were bought by the index company now known as MSCI Barra. environment.” Risk system providers bemoan the lack of essential data needed — Jane Mendillo, Harvard Management Co. to measure portfolio risk. “People with risk assessment systems only had about 80 percent coverage,” complains Dan DiBartolomeo, president of Boston-based Northfield Information Services.A major with other school officials including the treasurer, comptroller and roadblock to devising a viable risk control program at endowments is CFO. Lastly, they can address risk through active hedging within that current prices on private investments — equity, venture capital the portfolio, using derivatives to mitigate tail risk, or the risk that and real estate — aren’t available to feed into a risk management events considered statistically unlikely to occur actually take place. program. “There has to be something in the chain to make sure for Reinventing risk management means having to ask questions not every asset we own, we have the data to describe and understand it,” previously in the lexicon. Schools are focusing in ways they weren’t DiBartolomeo says. in the past, observes Kathryn Crecelius, CIO at Johns Hopkins “Even today, coming up with a good system to model these [pri- University in Baltimore since 2005.Achieving the highest performance vate investment] inputs and outputs is impossible,” agrees Johns had become the No. 1 goal of endowment offices, she says, drawing Hopkins’s Crecelius, who served as director of marketable alternatives an analogy with college team sports.“Being No. 1 in sports and going at the Massachusetts Institute of Technology under longtime CIO to the finals is very different from managing endowments,” says Allan Bufferd from 1998 to 2005. “That’s the challenge we face. The INSTITUTIONALINVESTOR.COM
  • 37. APRIL 2011 INSTITUTIONAL INVESTOR32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 COVER STORY College of Moody’s higher education finance group: “All of these potential pitfall is you spend a lot of time on a model but quality isn’t there because the inputs are unknown.” Bound forces, plus the need to park some liquidity on their balance Investment officers have come to doubt the continued utility of Endowments sheets, led these institutions to go to the market and issue debt. risk management tools with a short-term perspective for endow- took on billions This was a counterintuitive crisis ments with long-term investment horizons. Deborah Kuenstner, for one, used quantitative models offered by Barra and Northfield in debt during of the wealthy.” It’s yet one more example of during almost a decade managing long-only equity portfolios at the the crisis. the short term colliding with the DuPont Pension Fund in the 1990s. “The models are only as good as long term during 2008 and 2009. their assumptions, and their assumptions are fairly squirrelly,” says Colleges and universities University treasurers and endow- Kuenstner, who took over Wellesley’s $1.5 billion endowment in blessed with generous ment managers had no idea endowments and successful how or when the investment 2009 as CIO after Mendillo departed for Harvard.“There’s so much investment policies have been markets might recover, and risk that goes into your assumptions, and you get false comfort.” able for years to distribute large even after trimming operating The frustration with risk systems makes sense given that 52 per- supplements to their institutions’ budgets and deferring capital cent of endowment funds are allocated to typically opaque private annual budgets: In the fiscal spending, needed to defend investments and alternatives, according to the 2010 survey of 850 year ended June 30, 2010, their endowment funds against endowments with more than further large withdrawals and U.S. institutions of higher education by the National Association of $1 billion in assets upstreamed build cash reserves for future College and University Business Officers and Commonfund. The on average 17 percent of their spending. At Cornell University, largest endowments hold 61 percent. schools’ operating revenues, for example, operating revenues Endowment officers have historically thought of risk management according to the National included endowment distribu- in qualitative rather than quantitative terms. Yale CIO Swensen first Association of College and tions of $227 million in 2009 and University Business Officers. But $196 million in 2010, up from an developed the endowment model of investing in the mid-’80s by cre- any academic institution with a average of $180 million in the ating highly diversified portfolios of many asset classes invested with long-term mission is able to two years prior — notwithstand- superior asset managers. The model has been blamed for the steep make only limited adjustments ing a fall in endowment asset losses during the last crisis, but the finger pointers have got it wrong, to its programs in the short run, values of 27 percent for the year because a diversified portfolio is only one piece of the puzzle. Getting it so during the high-stress fiscal ended June 2009 to $3.8 billion. years 2009 and 2010, schools The 2009 distribution from the were obliged to keep drawing endowment alone accounted from their endowments’ shrink- for 8 percent of assets. “The best risk management ing liquidity even as investment Institutions’ borrowing was returns fell, new gifts dropped off meant to cover shortfalls not just tool is a properly constructed and alternative investment in the endowment pools but in portfolio.” funds made capital calls. day-to-day operating funds as — L. Erik Lundberg, University of Michigan Some endowments raised well. In the years leading up to cash by selling the most liquid the financial crisis, some institu- portions of their prized portfolios tions had directed some of their right means having access to top managers, generating new investment — public equities, bonds and cash toward the endowment ideas and implementing long-term, consistent oversight on top of it all. hedge funds that allowed exits office to take advantage of the — but the downturn also rich and irresistible returns. “The most important task is to select the best partners,” says touched off a coast-to-coast Moody’s Nelson cites such Donna Dean, CIO at the Rockefeller Foundation in New York and surge in bond issuance in 2009, investment as common practice a Swensen disciple, having managed the real estate portfolio at Yale amounting to $7.25 billion in tax- among the largest schools, and from 1989 to 1995. “People thought they could duplicate the Yale able borrowing among 15 elite notes that in June 2009 the 15 model, but with partners who weren’t as strong. That’s where they schools (see the accompanying borrowers reported to Moody’s table). Notes John Nelson, head that just 28 percent of their ran into trouble.” As portfolios became larger and more complex, schools sought better risk controls. Soon after the global stock markets suffered their worst one-day percentage drop on October 19, 1987, the University of Notre Dame hired alumni Scott Malpass in 1988 to ting some fat-tail hedges on is appropriate selectively,” Malpass says. take over its $425 million endowment portfolio. Malpass, who now His team makes use of an extensive reporting structure to monitor oversees $6 billion, did not disappoint. From the outset he sought top key risk factors and does risk forecasts and scenario analysis. managers in many asset classes. “It starts on the front lines with asset The 1998 collapse of hedge fund Long-Term Capital Manage- allocation,” he says, adding that access is essential in determining ment, which lost more than $4 billion in the wake of the Russian what kinds of risk each manager is taking, what environments they debt crisis and had to be bailed out by a consortium of 14 banks, will do well or poorly in and what factors drive their returns. set off another scramble among universities to see whether they Consistent oversight is another factor in risk management for had the proper safeguards in place. The next year the University of Malpass’s investment team of 15 mostly Notre Dame alumni. In early Michigan established an investment office. Newly appointed CIO 2008 Malpass tapped longtime investment staffer William James as L. Erik Lundberg, who had worked at the Ameritech Corp. pension full-time risk manager. James is responsible for monitoring exposures fund, set out to create a team and investment process to oversee the in the investment pool and portfolio-level hedging strategies. “Put- second-largest public university endowment (after the University of INSTITUTIONALINVESTOR.COM
  • 38. 9 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 BONDS ACROSS AMERICA portion of Duke University’s not devastating to U.S. higher January 2009 $500 million tax- education as a whole. Enroll- In the wake of the financial crisis, large U.S. colleges and able issue yields 5.2 percent. ments rose 7 percent in fiscal universities issued more than $7 billion in taxable bonds. The members of the taxable 2009, to about 21 million, and net class of 2009 are the largest tuition revenues rose 8 percent, TAXABLE OPERATING CASH AND bond issues many institutions according to a February 2011 BONDS ISSUED EXPENSES, FISCAL 2009 INVESTMENTS, JUNE 2010 have undertaken. At Dartmouth, report from the Department of INSTITUTION ($ MILLIONS) ($ MILLIONS) ($ MILLIONS) the $250 million taxable bonds, Education’s National Center on plus other net issuance, sent Education Statistics. Although Harvard University $1,500 $3,756 $34,099 total debt higher by 74 percent gifts to institutions fell by 12 per- Princeton University 1,000 1,162 14,487 during 2009, to $950 million. With cent to $28 billion in the year Stanford University 1,000 4,800 21,065 its $500 million issue plus other ended June 2009, they held new borrowing, Duke’s total steady in 2010, albeit at levels Yale University 1,000 2,493 18,456 debt grew 45 percent to $2.6 bil- equal to 2006, according to the Cornell University 500 2,825 5,437 lion. Johns Hopkins University’s Council for Aid to Education. $400 million taxable issue, plus Even outside the circle of Duke University 500 3,975 8,141 other new debt, raised its total 45 elite institutions with stellar Johns Hopkins University 400 3,790 3,962 percent to $1.5 billion. credit ratings, however, col- In spite of the added burden, leges and universities have Dartmouth College 250 735 3,916 just a few schools suffered down- been relying for years on more Emory University 250 3,022 6,348 grades in their credit ratings. and more debt financing. Moody’s, for instance, down- Moody’s cites a median debt Vanderbilt University 250 3,057 4,399 graded Dartmouth from Aaa to balance of $93 million for pri- George Washington University 200 938 1,705 a still-sturdy Aa1. The agency vate institutions for fiscal 2009, also issued negative outlook their most recent tally, up 33 University of Notre Dame 150 773 6,297 reports on Cornell and Amherst percent from 2005; private Amherst College 100 161 1,925 College but later reversed its out- schools rated Aaa added 66 look to stable for Amherst. percent over the period. At Brown University 100 637 2,537 Notwithstanding the size of public institutions, median debt Pepperdine University 50 266 745 the bond issues, the institutions reached $177 million in fiscal should be able to make good to 2009, a 31 percent increase Total 7,250 32,390 133,519 lenders when the bonds mature from 2005. Growth in borrowing Taxable borrowing by large higher education institutions, December 2008 to December 2009. come 2014 to 2019. Colleges and was far more rapid than the Source: Moody’s Public Finance Group. universities typically hold bal- underlying business of higher ances in investments that far education: Since 2005 enroll- investments could be liquidated corporate debt, with ten-year outweigh their borrowings, and ments have gained just 13 per- within a month, as compared maximum maturities. the group of 15 elite 2009 bor- cent, and revenues 25 percent, with 39 percent for a group of “We obtained excellent terms rowers is especially asset-heavy. according to Moody’s. 270 other institutions. for this debt… with our taxable For instance, at June 30, 2010, “It’s actually tough to put a Many of the bond issues were ten-year bonds yielding 4.96 per- Johns Hopkins reported long- college out of business, equal to two or three years’ cent,” wrote Dartmouth College term debt of $1.5 billion, against because they often have high- worth of recent distributions from treasurer Adam Keller in a note total investments of $3.8 billion, net-worth individuals on their their respective schools’ endow- to the school community on plus cash and equivalents of boards who can raise enough ments and were available at the June 5, 2009, of the $250 million $166 million. Duke showed donations to keep them going comparatively low rates that taxable bond issue a few days $2.9 billion in debt at 2010 fiscal for a while,” says Nelson. “But high-grade companies could earlier. The ten-year slice of year end, versus investment many small schools, to avoid get. Because the bonds’ pur- Stanford University’s $1 billion assets of $7.9 billion and cash closing or selling out to for-profit pose was liquidity manage- issue, brought to market on April and equivalents of $251 million. companies, will likely have to ment, the debt had to be issued 23 of that year, carries a coupon Even accounting for the merge with other institutions.” at taxable rates; most resemble of 4.75 percent. The ten-year credit crisis, 2008 and 2009 were — John Keefe California system). Lundberg began working more closely with the saw the endowment drop from $7.5 billion to $6 billion during the school’s treasurer and CFO after the bursting of the dot-com bubble 2008–’09 period. It was back up to $6.5 billion by December 2010 in 2000. Lundberg and his team of 13 investment professionals per- after putting up a 12.5 percent return over the year. form risk management without a computer-based system, although It would be difficult to find a school more actively involved in they rely heavily on internally generated reports to mitigate portfolio hedging its portfolio risk than Case Western Reserve. “We have concentration risk. Last year he created a new role for compliance created a hybrid investment model by not placing all our eggs with officer Rafael Castilla, a former Wall Street attorney who originally managers,” explains CIO Staley. “We might be at the beginning of came on board to help the endowment with partnership agreements. a change in the endowment culture.” With the help of an analyst, Castilla’s primary role is to make sure that Staley was a bit ahead of the crowd when, in 2006, she hired Michigan’s portfolio managers look at all the risks in their portfolios. Hussain, the school’s first director of risk, who built a proprietary “The best risk management tool is a properly constructed portfo- risk management system dubbed Carma — Case asset and risk lio and how it fits together with the other parts,” says Lundberg, who continued on page 78 INSTITUTIONALINVESTOR.COM
  • 39. APRIL 2011 INSTITUTIONAL INVESTOR6 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 CAPITAL MARKETS Pulling Back the Curtain Secondary markets that trade the shares of Facebook and other privately held companies are catching the attention of investors — and regulators. By Udayan Gupta ILLUSTRATION BY MICHAEL KIRKHAM INSTITUTIONALINVESTOR.COM
  • 40. 4 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 11
  • 41. APRIL 2011 INSTITUTIONAL INVESTOR36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 CAPITAL MARKETS D for entrepreneurs founded four years ago by journalist Bambi Francisco Roizen. “Even if the SEC finds no wrongdoing or foul play in its investiga- tions, the fact remains that many people could be taking unwise risks by investing money in companies without the proper knowledge about those companies’ financials,” wrote another blogger. “In proper investment rounds, VC firms and angels know all about the state of the new addition to their portfolio. Investing without know- ing a company’s potential as a business is ludicrous.” Despite the fearmongering, secondary marketplaces are creating a much needed alternative for firms looking to raise capital. The IPO market for venture-backed companies is in shambles. From 2004 DAVID WEIR WAS USING THE INTERNET TO ACT AS A GO- through 2010 fewer than 400 venture-backed companies went public between for nonpublic companies and investors as far back as 2000. — an average of 57 companies a year — raising less than $40 billion, That was the year that the former JPMorgan & Co. technology according to the National Venture Capital Association. Last year banker joined OffRoad Capital, a small West Coast start-up trying to was a slight improvement, as 72 venture-backed companies went help private companies raise money online from individual investors. public, raising a total of $7 billion. And if the IPO market continues At a time when interest in investing in Internet outfits was at a to languish, experts predict, the trades in privately held stocks could peak, OffRoad was highly successful. During its first year alone, the well exceed the $7 billion or so projected for 2011 by NYPPEX, a firm raised more than $50 million for a dozen-odd companies, says New York–based private market advisory, trading and research firm. Weir, who was co-president and co-CEO. But when the Internet “You wouldn’t need a secondary market if you had a vibrant IPO bubble burst in 2000, OffRoad — which in 1999 had raised $6 mil- market,” says NVCA president Mark Heesen. “These secondary lion in venture capital to get going — found itself in trouble. In May markets are helping. You don’t want to starve your entrepreneurs. 2001, Weir left OffRoad, which was later sold in a fire sale to a New You just want them to be hungry.” York private equity firm. Companies like Facebook and Twitter don’t have to do IPOs; Now Weir is back on his quest. In November he was appointed they can raise the large chunks of the capital they need outside the CEO of SharesPost, a San Bruno, California–based marketplace for public markets. Smaller start-ups, not comfortable with prices in privately held securities. This time Weir is not alone. SharesPost is the current IPO market, are going back to their own investors for competing with a host of private marketplaces such as SecondMarket additional rounds of capital, waiting for public market conditions to and exchanges like Xpert Financial and Gate Technologies to provide improve. Still, the fact is that all these companies need capital — to a place where investors can buy and sell shares in the current genera- make acquisitions, fund expansion, attract employees and allow tion of hot Internet enterprises — Facebook, Groupon, Twitter and investors to cash out. Zynga. These nonpublic social media companies currently have The lines between the public and private markets have blurred. an aggregate valuation in excess of $100 billion, led by Facebook’s Companies are recognizing that being public isn’t key to their busi- $50 billion valuation based on its most recent private financing. ness existence. In the 1980s and in the 1990s, start-ups, especially The buyers and sellers on these private networks and exchanges are in information technology, needed the public markets, says veteran a varied lot. They include mysterious foreign investors such as Digital New York investment banker and asset manager Sorrell Mathes. Sky Technologies, founded by Russian software entrepreneur Yuri Young entrepreneurial companies involved in new technologies Milner, and venture capital firm Kleiner Perkins Caufield & Byers, depended on Wall Street bankers to mediate their deals and equity one of the high priests of Silicon Valley, as well as a slew of individuals analysts to help understand the companies and explain them to and institutions that simply want in on the action. Even banking giants investors, notes Mathes, who had been head of emerging growth Goldman Sachs Group and JPMorgan Chase & Co. are using second- companies and technology investment banking at Merrill Lynch ary markets to try to meet their own clients’ needs for private shares. and chairman of Merrill Lynch Venture Capital before starting The frenzied activity in the private marketplace is drawing scru- New York–based investment management firm Mathes Co. in 1997. tiny from regulators — in particular, the Securities and Exchange Going public wasn’t simply about raising capital, Mathes adds, it Commission, which has been tasked with trying to apply securities also was a way to establish market presence. But with the visibility laws that were written nearly 80 years ago. The SEC is being asked that digital media companies such as Facebook, Twitter and Grou- to act — to design a set of rules more appropriate to 2011, protect pon already have, they don’t need the public markets the same way investors who are increasingly distanced from knowledge about what companies in the past did. “The private equity market is becoming they are buying and make sure that companies themselves are not the financing vehicle of choice until companies reach $1 billion to gaming their investors and regulators. $2 billion in size,” Mathes says. “I recommend that the SEC halt all trading in Facebook, Twitter, The SEC first took aim at the private equity market in December LinkedIn and Zynga stock since it invites speculation and further when Goldman revealed that it planned to do a $2 billion private abuse, and that these companies must disclose their financial infor- placement for Facebook. In what would be a transaction governed by mation to all holders of Facebook shares effective the end of year Regulation D of the Securities Act of 1933, Goldman said it would 2010,” a blogger wrote late last year on, an online network invest $500 million of the firm’s money in Facebook and raise another INSTITUTIONALINVESTOR.COM
  • 42. 3 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 $1.5 billion from institutions and wealthy clients whose assets it man- doesn’t equate to market sophistication, says Caruso, who is chair- aged.Almost everything about the transaction met the guidelines, but man of the Financial Industry Regulatory Authority’s National Arbi- then regulators found an obscure provision that required a nonpublic tration and Mediation Committee. There is nothing in the financial issuer of primary securities to make sure it did not have more than 500 regulations that says that if you are rich, “you waive the rights to full shareholders. If the offering created more than 500, the nonpublic disclosure,” he adds. Brokerage firms have a dual responsibility — to company would have to be treated as a public company and subject to those who they raise money for and to those they sell the shares to, all public company regulations, including financial disclosure. says Caruso: “The two obligations go side by side.” Could Facebook prove that on completion of the financing it The overriding concern, of course, is that this is another bubble, and wouldn’t have more than 500 investors? Was it prepared if it went that regulators’ failure to address the issues will reprise the market crash over the 500-investor rule to make the necessary disclosures required that followed the bursting of the Internet bubble. The private markets of a public company? still are not fully equipped to handle questions about accreditation Facebook didn’t want to take the chance. Meanwhile, in mid- and legitimate investors.“They are not asking questions about where January, Goldman decided to amend the offering, reducing the the money is coming from or who is behind the money,” Caruso says. amount to be raised to $1 billion, and to use another provision of the The specter of insider trading conspiracies also hangs over this Securities Act: Regulation S, a safe harbor provision that exempts community. It’s no secret that the IPO market has traditionally securities from U.S. registration requirements if they are sold only been an insider’s market. Underwriters — in spite of elaborate road to foreign investors and not offered within the U.S. shows — have placed many IPOs directly with “family and friends,” Facebook and Goldman dodged the SEC bullet. But concern relying on them to publicize the offering and create the aftermarket that large companies and large banks are finding ways to circumvent buzz. During the Internet bubble it wasn’t unusual for venture regulation has only intensified. Regulators, rule makers and securi- capitalists and senior executives at many established IT companies ties lawyers all argue that the absence of disclosure and transparency to have routine distributions of initial public offerings, solicited or is harmful, to both institutional and individual investors. unsolicited. And now, more than ever, IPOs are distributed to an Prior to Goldman’s Facebook flap, the SEC had already decided even more select group of buyers. to move in on private marketplaces. In December it sent information Veteran venture capitalist Alan Patricof believes that the entire requests to several participants, including SecondMarket and Shares- system is broken. “Small companies simply can’t go public,” says We needed to transform the landscape and come up with a way that companies could get liquidity without disrupting their businesses. —Thomas Foley, Xpert Financial Post. It also is said to have requested information from investor groups Patricof, the founder and managing partner of New York–based such as GreenCrest Capital Management and Felix Investments Greycroft Partners. “The economics are not there.” that had formed funds specifically to buy private shares in Facebook With the zealous prosecution of insider trading in the U.S. courts and resell them. SEC spokesman John Nester wouldn’t elaborate on — although most currently involve hedge funds traders — many what the requests contained. The companies would only say they had senior executives at these social media companies worry about responded to the questions and that the matter was settled. transparency and rules about disclosure and insider trading. They Securities lawyers familiar with the SEC say that the commission are also concerned that full disclosure puts them at a competitive bungled the investigation. The issue isn’t whether there are 500 disadvantage with their rivals, many of which are still private, and investors — that question does need clarification — but whether with recruiting key employees. existing regulations are too burdensome and costly for many com- Given the environment, very few entrepreneurs have the incentive panies wanting to go public. “There are too many unknowns,” one to go public, says Patricof. In the business plans that he has seen since lawyer says. “What do we know about the investors? How reliable is he launched Greycroft in 2006, “95 percent say they expect liquidity the information? And what happens if there is a glitch? Where does through acquisitions,” he says. “We need a new approach. Maybe we the investor go for redress?” should go back to manual markets.” Lawyers point to the fact that the private market exchanges have no incentives to curb excesses. Since their fees are based entirely on SECONDMARKET HOLDINGS IS THE BRAINCHILD OF BARRY the value of the transactions, the more a company gains in valua- Silbert, a former New York–based investment banker for Houlihan tion, the more the exchanges stand to gain. All these private market Lokey Howard & Zukin, a specialist in financial restructurings and exchanges need to do is make sure that the investors are accredited, bankruptcies. It was there, in 2002, while Houlihan Lokey was in the event that something goes wrong. And even then the SEC isn’t selling off pieces of then bankrupt Enron Corp., that Silbert came really vigilant, lawyers contend. up with the idea to create an automated trading platform for private “There is the erroneous assumption that if an investor is accred- or restricted securities. He recognized that these instruments were ited, he must be sophisticated,” says Steven Caruso, a securities hard to sell in person, not only because it is difficult to identify buyers attorney with Maddox Hargett & Caruso in New York. What the but because the buyers — and the sellers — often prefer anonymity. financial markets have learned in the last few years is that wealth continued on page 81 INSTITUTIONALINVESTOR.COM
  • 43. 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 01 02 03 04 05 06 07 08 09 10 11 12 13 14 INSTITUTIONALINVESTOR.COM
  • 44. APRIL 2011 INSTITUTIONAL INVESTOR14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 7 ASSET MANAGEMENT Per form ance Art Affiliated Managers Group CEO Sean Healey coaxes returns from star managers by staying in the shadows. PHOTOGRAPHS BY COLBY KATZ By Julie Segal Don’t mess with Sean Healey.William D’Alonzo, now chief executive of money manager Friess Associates, remembers inviting the Affiliated Managers for long stretches in places like Vietnam and Okinawa, Healey was used to working hard. He got his elk — on the fifth shot, Nutt points out — and the challenge gave him a taste for more. He has gone Group CEO and AMG founder William Nutt in 2001 to join on to master hunting, tracking down everything from moose and him and an associate elk hunting at Ted Turner’s Vermejo Park brown bear in Alaska to Cape buffalo in Africa. Ranch in New Mexico a few weeks after AMG had purchased a Healey’s competitive fire is hard to beat. Whether hunting prey stake in his firm. D’Alonzo, an experienced hunter of elk, turkeys in Tanzania or making sure he captures the best-performing money and pronghorn antelope, says Healey was up for the four-day managers for AMG, Healey doesn’t stop until he wins. Since the trip. The challenge was that Healey, a varsity wrestler during his financial crisis bottomed out in early 2009, the onetime Goldman, undergraduate years at Harvard College and later editor of the Sachs & Co. investment banker has been on a buying spree, taking Harvard Law Review, had never fired a rifle before. But that didn’t advantage of the market dislocation and his company’s cash-rich stop him. A Marine Corps brat whose father was stationed overseas position to do six deals with money managers, including a strategic During the past two years, CEO Sean Healey, a former investment banker, has overseen AMG’s busiest M&A period ever INSTITUTIONALINVESTOR.COM
  • 45. APRIL 2011 INSTITUTIONAL INVESTOR40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 ASSET MANAGEMENT partnership with Value Partners, the biggest hedge fund manager into the high teens and Healey — along with chief operating officer in Asia. During the past two years, Healey — who took the CEO Nathaniel Dalton, a former M&A lawyer, and Darrell Crate, AMG’s reins on January 1, 2005, from Nutt — has overseen AMG during CFO, who is retiring next month after 13 years with the company its busiest M&A period ever, adding $70 billion in assets, putting to join a private equity firm — was constantly on the defensive as $1.4 billion to work and turning the company into a formidable investors questioned AMG’s strategy. international and alternatives manager. (Those two businesses now As markets stabilized in early 2009, Healey and his team were represent more than 70 percent of earnings.) resurgent. They were ready to do deals and entered the market with “Sean is very competitive, and he gets what he wants,” says checkbook in hand just as other buyers, like capital-starved banks D’Alonzo, whose firm manages the well-regarded Brandywine and insurance companies, were exiting and selling off money man- mutual funds and was founded in the mid-1970s by legendary agement properties. AMG completed more deals than at any point growth investor Foster Friess. in its history. In 2010 alone it sealed four transactions, some in the Healey and Nutt have mastered the art of performance. Since pipeline since before the market crash, with high-profile managers the mid-1990s they have unlocked the age-old asset management including Pantheon, one of the world’s largest private equity fund conundrum of how to find talented investors, determine what of funds; Artemis Investment Management, a chiefly U.K. equity makes them tick and create a financial structure in which they manager in Edinburgh; and Trilogy Global Advisors, a New York– have the incentives to continue to outperform and care deeply based institutional global growth manager. about the future growth of their firms. The AMG model weaves From the start, AMG eschewed the idea of buying 100 percent the entrepreneurial spirit found in independent boutiques with of an investment firm. AMG wanted a piece of great firms, but it the benefits that a large organization can provide when it comes to needed managers to keep on doing exactly what they had been distribution, funding and operations. doing, not cash out. Instead, it chose to buy mostly majority stakes “If money managers can’t produce good long-term returns, of companies to make sure that founders stayed hungry enough they’re going to die, period,” says Steven Levitt, whose investment to continue generating top returns. It’s a strategy that’s key in an banking boutique, Park Sutton Advisors, specializes in asset man- industry that lives and dies by returns and in which disappointed agement. “Talented managers can’t thrive in a bureaucracy. AMG investors often turn to low-margin index funds. The asset manage- has figured out how to knit them together, while keeping intact what ment business has been riddled with the detritus of failed mergers, attracted them to a great investor in the first place.” spin-offs and start-ups for 20 years, and great money managers and Nutt, who was formerly president and chief operating officer of institutional investors have lost out every time as performance has Boston Co. and CEO of its subsidiary Boston Safe Deposit & Trust fizzled. It may have taken a group primarily from outside the asset Co., founded AMG in 1993 with backing from private equity firm management business to create a viable model that keeps talented TA Associates. It has grown from a handful of employees and about portfolio managers generating outsize returns. $18 billion in assets under management in October 1996 to $320 bil- “Asset management is different from most businesses. It’s about lion in assets and 110 people today. In 1997 the company went public people, not machines,” says the 49-year-old Healey. “We represent “ at $15.67 a share on a postsplit basis; in late March the ideal approach of keeping alpha-generating bou- the stock was trading at $105. tiques alive and independent while also offering the AMG owns stakes in 27 money managers, span- benefits of a large global firm behind them,” he adds ning U.S. and international equity and some of the from his office in a mansion overlooking the pristine best-known alternative-investment shops, includ- If money wooded campus of AMG’s headquarters in Prides ing AQR Capital Management, co-founded by Clifford Asness, who built Goldman Sachs Asset managers Crossing, Massachusetts. The mansion, complete with a widow’s walk, is the former estate of arch- Management’s quantitative hedge fund business. can’t produce conservative William Loeb III, the late publisher of AMG’s stable of affiliates includes Harding Loevner, good long- the Manchester Union Leader. a highly regarded global and non-U.S. equity man- term returns, “I knew what happened after managers were they’re going ager, founded by former managers for the Rockefeller bought: Their interest went away,” Nutt explains. family; Third Avenue Management, whose founder, “So I said, ‘How do you retain the incentives — the Martin Whitman, is a famed value investor; Genesis to die, period. spark — that created this great asset management Asset Managers, a well-respected emerging-markets AMG has business in the first place? And how do you pass that investor; and ValueAct Capital, founded by three managers, including Jeffrey Ubben, an activist inves- figured on to the next generation?’ The enduring AMG business model is to buy only a portion of equity, tor.AMG seeks out only active managers. In the fourth out how to leaving a material part with the management team.” quarter of 2010, its earnings per share grew 49 percent knit them George Wilbanks, an asset management partner and assets under management grew 54 percent com- together. pared with the year-earlier period, even as investors — Steven Levitt at Russell Reynolds Associates in New York who has worked closely with many affiliate model firms over ” in general continued to pour money into low-margin Park Sutton Advisors the years, says that at some of AMG’s competitors bond funds, of which AMG has almost none. there is little communication between the investment The company isn’t immune to large swings in the firms and headquarters and often griping.“AMG has market. During the financial crisis its stock dropped enormous credibility with its affiliates,” he says, add- INSTITUTIONALINVESTOR.COM
  • 46. 1 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 Trust Corp., which has $4 billion of its program in boutiques, including AMG affiliates, explains it like this: “There’s a big performance benefit in a lack of bureaucracy at the boutiques, as well as a nimble investment process. Smaller and midsize managers do better in down market environments and are less indexlike.” Vella says smaller managers outperform by 150 to 200 basis points after fees, compared with the Russell 3000 stock index. The AMG model is not for everyone. For starters, the company takes a percentage of affiliates’ revenue — typically about 30 percent — rather than their profits. During boom times, if revenue jumps by, say, 20 percent, both the affiliated manager and AMG enjoy the growth. But during tough times — when revenue may be down slightly but profits tumble — the manager shoulders most of the pain. In addition, the AMG model creates a high hurdle for innovation. If an affiliate launches a new product, it has to eat the cost of research and development, while AMG continues to take its share of revenue. As AMG has gotten larger, its affiliates have also grown in size. Between 1994 and 1998, an AMG affili- ate averaged about $3 billion in assets. That average is now about $12 billion. Although AMG misses out on the initial explosive growth from some managers, it also misses early disasters. Healey and Dalton, who will take on the role of presi- dent in addition to COO after AMG’s annual meeting in May, along with Jay Horgen, who will become CFO when Crate retires and also runs new investments, aren’t resting on their laurels. They have been building an international distribution platform, stationing sales- people who can represent multiple affiliates across the globe. The distribution effort has reached critical mass and shown good results, Dalton says, but it is still in the early stages. Performance fees from alternative invest- ments are also starting to be a meaningful part of profits. What’s more, the 16 years that Healey and other COO Nathaniel Dalton will become president of AMG in May members of the AMG team have spent on the road courting money managers is paying dividends, espe- ing that he directly witnessed this credibility come about, the result cially in the U.S. Now calls are inbound, and when AMG doesn’t of Nutt’s charisma and personal connection with people as well as his get a deal, it’s often because it won’t pay what it sees as an inflated willingness to roll up his sleeves and do hard work. This engendered price or because the managers aren’t a good cultural fit with the firm. goodwill among the affiliates. “Affiliates don’t complain about AMG Big competitors such as Legg Mason and Nuveen Investments as they feel it always has something concrete to offer,” Wilbanks says. have continued to look at firms as well, but each is dealing with its Large money managers — think BlackRock, Fidelity own problems. Nuveen is saddled with debt, as it was taken private Investments and Vanguard Group — have come to dominate at the height of the market by Madison Dearborn Partners, and Legg asset management during the past decade. The business has some Mason is still dealing with some fallout from investor outflows after of the best margins of any industry, and firms quickly realized that poor performance during the financial crisis. Other competitors it was even more lucrative to spread the costs of research, technol- with similar multiboutique asset management models include Asset ogy and service across a larger asset base. But the gunslingers of Management Finance, BNY Mellon Asset Management, Natixis asset management — that was Institutional Investor ’s description Global Asset Management and Northern Lights Capital Group. of John Hartwell, whose firm was AMG’s first investment, in “Other managers are trying to structure deals like AMG, leaving 1994 — don’t always come out of the larger firms. Christopher meaningful equity at the affiliates,” says Michael Kim, an asset Vella, head of research for the multimanager group at Northern continued on page 83 INSTITUTIONALINVESTOR.COM
  • 47. APRIL 2011 INSTITUTIONAL INVESTOR15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 CAPITAL MARKETS ooM Asia’s Bond B The region’s debt markets are growing in size and sophistication, giving investors another way to gain Asian exposure. By Matthew Miller ILLUSTRATION BY KEITH NEGLEY In the days following Japan’s devastating earthquake and tsunami last month, many bankers worried that the catastrophe would disrupt global capital markets and halt a burgeoning rally in emerging Asia debt. After all, such interruptions have occurred frequently in the past. Last April, for instance, when rating agencies downgraded Greece to junk status, Asia’s offshore bond market shut down for nearly two months. This time, however, the market came back rapidly, notwithstanding the incalculable toll of death and damage in Japan. Just ten days after the earthquake, the Republic of the Philippines made an international offering of $1.5 billion of 15-year bonds. The securities attracted orders from 280 investors from Asia, Europe and the U.S. “There is volatility, but the markets are open, and opportunity is there,” says Patrick Tsang, Hong Kong–based head of fixed income for Asia at Deutsche Bank, one of the issue’s book runners. “More bonds are in the pipeline.” The rapid expansion of Asia’s international and local currency bond markets shows little sign of slowing down, even if several countries in the region are beginning to boost interest rates in a bid to contain inflation. INSTITUTIONALINVESTOR.COM
  • 48. 2 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 12 INSTITUTIONALINVESTOR.COM
  • 49. APRIL 2011 INSTITUTIONAL INVESTOR44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 CAPITAL MARKETS Global appetite for Asian debt remains voracious, and the list of gov- Over the past decade, however, Asian economies have come ernments and companies lining up to sell bonds at home and overseas roaring back, led by China’s rise as a global export powerhouse. continues to grow. Cross-border bond sales in Asia, excluding Japan, Governments across the region have built up unprecedented foreign Australia and New Zealand, amounted to $27.9 billion between currency reserves. The Asian Development Bank worked with January and March 28, up 25.5 percent from the same period a year national Treasuries and central banks to develop a bond market in a earlier, according to data provider Dealogic. That pace puts the region bid to keep the region’s surpluses at home to foster regional growth. on track to surpass last year’s record volume of $101.7 billion. The results have been dramatic. Emerging East Asia’s inter- Corporations are leading the bond bonanza, accounting for national and domestic bond issues amounted to $463.7 billion almost half of all Asian international issuance this year, compared last year, three times the volume of $154.6 billion issued in 2006, with just 22 percent a year earlier. Most companies borrow in the so- Dealogic statistics show. The region’s share of global bond issu- called G-3 currencies — the dollar, euro and yen. Recent issuers have ance has more than tripled since the Asian financial crisis, reaching included such blue-chip firms as Singapore Telecommunications, 7.4 percent last year, compared with 2.1 percent in 1997, according Southeast Asia’s biggest telephone company, which sold $600 mil- to the ADB. lion of 10.5-year bonds in March, and South Korea’s Woori Bank, The value of bonds outstanding in the region’s domestic bond which raised ¥50 billion ($610 million) with a three-tranche offering markets reached $5.2 trillion at the end of 2010, representing an of one-year, 18-month and two-year bonds in Japan. 18.3 percent gain from a year earlier and a threefold increase from The market for cross-border issues in local currencies, which five years earlier, according to the ADB. And there’s still plenty of barely existed five years ago, has also taken off, with issuers raising room to grow. The size of the emerging East Asia bond market is $4.8 billion in the first two months of the year, approaching the now about 60 percent of the region’s gross domestic product, less $5.53 billion total for all of 2010. A surge in so-called dim sum than half of the size of comparable bond markets in the United bonds, or Chinese renminbi-denominated bonds sold in Hong States and Japan. Kong, is fueling the growth. Roughly 50 borrowers have tapped The market still has some ways to go to develop the liquidity and the market since Chinese and Hong Kong authorities relaxed rules robustness of debt markets in Japan, Europe and the U.S. A greater in July to allow companies and investors to hold more renminbi variety of issuers would help, given that East Asia’s domestic bond in Hong Kong, more than doubling the total amount outstanding markets continue to be dominated by banks and other financial insti- to the equivalent of about $13 billion. Investor demand for the tutions. In the case of China, where the government is moving slowly steadily strengthening Chinese currency has led such fund manag- and deliberately to liberalize the use of its currency, debt markets still ers as HSBC Global Asset Management and Hong Kong’s Income act mainly as a conduit between the government and state-owned Partners Asset Management to start offshore renminbi bond funds. institutions. “Regional governments have been cautious, and some The rush has even led to the creation of synthetic offerings — bonds have been downright cowardly and are being dragged along,” says denominated in renminbi, or yuan as the currency’s unit is called, Marshall Mays, director of Emerging Alpha Advisors, a Hong but settled in U.S. dollars. In March, China’s Evergrande Real Kong–based fund manager and adviser. Estate Group sold 9.25 billion yuan ($1.4 billion) of synthetic No one doubts that the Asian bond market is here to stay, though. renminbi bonds in two tranches. In addition to setting a record for If manufacturing and trade served as the backbone for emerging a synthetic deal, the issue represented the biggest Asian high-yield Asia’s three decades of sustained economic development, credit bond ever. The bonds carry a B2 rating from Moody’s Investors arguably will provide the fuel for regional growth in the years ahead. Service and BB– from Standard & Poor’s. “This is just the beginning of an explosive boom in “ “Asia fixed income has become an exciting Asian credit,” says Soofian Zuberi, head of Bank of and interesting asset class,” said Hon Cheung, America Merrill Lynch’s global markets distribution the Singapore-based regional director for official for Asia-Pacific. institutions at State Street Global Advisors. “That’s A strong regional economy is driving the growth unusual to say about bond markets, since equity There is of the bond market. Bolstered in the wake of the markets are supposed to be sexy and exciting.” State Street is putting its money where its mouth is. The volatility, global financial crisis by more than $720 billion in fiscal stimulus and low interest rates, develop- firm now manages about $2.5 billion in Asian local but the ing Asian economies grew by 9.3 percent in 2010, currency bonds, up from $1 billion five years ago. markets are according to the IMF. The pace of expansion is The fervor surrounding Asia’s bond markets is a open, and expected to ease to 8.4 percent this year, but that is opportunity decided turnaround from the late 1990s, when the still some 2 percentage points above the average for Asian financial crisis snuffed out a first attempt to all developing economies globally. The IMF predicts get a regional bond market off the ground. The crisis is there. that China will continue to drive the global economy caused credit to dry up across the region, forced More bonds with growth of 9.6 percent this year, compared with several governments to devalue their currencies and turn to the International Monetary Fund for are in the 10.3 percent in 2010. Bond deals are getting bigger, driven largely by bailouts and prompted dozens of borrowers — led pipeline. Chinese government agencies and state conglomer- by Indonesian and South Korean companies — to — Patrick Tsang ates selling debt on the country’s domestic market. Deutsche Bank default on more than $40 billion worth of bonds. State Grid Corp. of China, the mainland’s leading INSTITUTIONALINVESTOR.COM
  • 50. 5 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 6 ASIA’S INTERNATIONAL BOND MARKET* MATURITY ISSUER NATIONALITY VALUE DATE COUPON (%) BOOK RUNNERS Asian Development Bank Philippines $2,750 m Mar 2016 3 Goldman Sachs, HSBC, JPMorgan, RBC Capital Markets CNOOC Finance 2011 China $1,500.0 m Jan 2021 4 Bank of America Merrill Lynch, Citi, Goldman Sachs, JPMorgan, Barclays Capital, Bank of China $500.0 m Jan 2041 6 Bank of America Merrill Lynch, Barclays Capital, Bank of China, Citi, Goldman Sachs, JPMorgan Republic of the Philippines $1,500.0 m Mar 2026 6 Goldman Sachs, HSBC, JPMorgan, Citi, Philippines Deutsche Bank, UBS Country Garden Holdings China $900.0 m Feb 2018 11 Goldman Sachs, JPMorgan, Deutsche Bank Korea Development Bank South Korea $750.0 m Sep 2016 4 Bank of America Merrill Lynch, HSBC, RBS, Standard Chartered Bank, UBS, KDB Bank of India (London) India $250.0 m Sep 2015 5 HSBC, Standard Chartered Bank, Barclays Capital, Deutsche Bank, RBS $500.0 m Feb 2021 6 HSBC, Standard Chartered Bank, RBS, Deutsche Bank, Barclays Capital Hyundai Capital South Korea $700.0 m Jul 2016 4 JPMorgan, RBS, Standard Chartered Bank, ING, Services Morgan Stanley SK Engineering South Korea 30 b SK won Mar 2013 5 Hana Bank, KDB & Construction Co. 130 b SK won Mar 2014 6 Hana Bank, KDB ¥40.7 b Mar 2014 Libor + 368 bp Hana Bank, KDB Woori Bank South Korea ¥20.9 b Feb 2012 Libor + 115 bp Barclays Capital, Morgan Stanley, Nomura, RBS ¥2.6 b Aug 2012 Libor + 125 bp Barclays Capital, Morgan Stanley, Nomura, RBS ¥26.5 b Feb 2013 Libor + 135 bp Barclays Capital, Morgan Stanley, Nomura, RBS Singtel Group Treasury Singapore $600.0 m Sep 2021 5 BNP Paribas, HSBC, Morgan Stanley *Largest issues, January 1, 2011, through March 28, 2011. Source: Dealogic. utility, sold 30 billion yuan in ten- and 15-year bonds in the biggest expand operations. Moody’s took 32 positive ratings actions on local-currency corporate deal last year. Other Chinese state-owned Asian companies last year and 32 negative ones, compared with 87 corporations — including Bank of China, China National Petroleum negative actions and 20 positive ones in 2009. The improving credit Corp. and PetroChina Co. — also issued local bonds approach- trend is allowing businesses throughout the region to gain greater ing $3 billion or more. Chinese agencies, government ministries, access to cross-border bond markets. In October, India’s Reliance banks and companies accounted for all 20 of the biggest Asia local- Industries, an energy conglomerate, made its first appearance in currency bond deals in 2010. In the cross-border market, the top 20 the international market by selling a total of $1.5 billion in ten- and Asia ex-Japan bond issues in 2010 each totaled $1 billion or more. 30-year bonds. Eight days later, South Korea’s Pohang Iron and Steel Asia’s strengthening economies have led to improved credit pro- Co., the world’s third-biggest steel manufacturer, sold $700 million files for many governments and companies, which in turn is helping of ten-year notes, the first global deal of that maturity by a South to drive the growth of bond borrowing. In November, Moody’s raised Korean company since 2007. its sovereign debt rating on China by one notch, to Aa3. Standard Corporate bonds now comprise roughly 30 percent of the region’s & Poor’s matched that move in December by lifting its China rating domestic bond markets — or about 45 percent of emerging East Asia to AA–, and also raised its ratings on several Chinese companies, markets if China is excluded. Still, corporate leverage remains low. including China Life Insurance Co. and China National Offshore Net debt stands at 1.1 times companies’ earnings before interest, Oil Corp. Indonesia, the Philippines and Thailand also received tax, depreciation and amortization, on average, down sharply from ratings upgrades over the past year, making it easier for them to tap 5.5 times ebitda at the end of the 1990s, according to analysts at the markets. The governments of Indonesia, Malaysia, Sri Lanka and BofA Merrill Lynch. Vietnam each sold $1 billion or more of international bonds last year. In 2010 more than 50 Asian companies and banks sold their Creditworthiness among the region’s corporations also has first overseas debt, primarily in the G-3 currencies. Many turned rebounded, allowing more banks and companies to raise funds and to high-yield issues, or junk bonds, a trend that Paul Au, Asia head INSTITUTIONALINVESTOR.COM
  • 51. APRIL 2011 INSTITUTIONAL INVESTOR46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 CAPITAL MARKETS of debt syndication for UBS, finds encouraging. “Now you’re seeing not only your typical triple-A issuers like Temasek Holdings hitting the market but speculative-grade China property names, coal miners from Indonesia, gaming companies from Macau and the Philippines,” he says. Cross-border “ You’re seeing not only triple-A issuers like lion, according to World Wealth Report compiled by Capgemini and Merrill Lynch Wealth Management. “In 2007, to launch a high-yield deal you had to fill the order book in the U.S. and Europe to get any traction in Asia,” said Graham Conran, head of origination for Asia ex-Japan at Nomura International (Hong G-3 junk issues amounted to $18.7 billion last year, Temasek Kong). “Now, it’s just the opposite. The core market more than double the volume of 2009, according to Dealogic. Holdings but is here. Depending on the investment grade and the terms, the likelihood of getting across the finish line Asian companies are also selling debt as a means speculative- without a robust Asia book is very much diminished.” to improve their capital structure, lower existing grade China One indication of global appetite for Asia debt can interest payments and extend debt maturities. Last property be found in HSBC’s latest quarterly survey of fund names, coal year, Bank of China (Hong Kong), which is two- managers. The poll, released last month, showed the thirds owned by China’s third-biggest lender, sold world’s biggest fund managers remained relatively $2.5 billion in subordinated debt to replace an exist- miners from optimistic about Asian bonds in the first quarter even ing subordinated loan from its mainland parent. Indonesia. as they shifted assets away from Asia ex-Japan stocks ” Other companies are issuing bonds to finance — Paul Au, UBS in favor of North American equities. strategic activities, including offshore mergers and The flood of cash rushing into local markets buyouts. Last month, Hyva Global, a Dutch maker hasn’t been lost on some regional governments, of truck hydraulic systems, raised $375 million with a which have posted barriers and regulations aimed at high-yield bond offering to help fund the company’s stemming cross-border capital flows and dampen- €525 million ($730 million) leveraged buyout by ing currency appreciation, even as they raise inter- Hong Kong–based private equity firms Unitas Capital and NWS est rates. In recent months the Indonesian central bank stopped Holdings. The deal was the first LBO in Asia in more than three years. auctioning three-month paper, and started auctioning nine- and The wave of international bond financings has given a welcome 12-month paper, while imposing a minimum 28-day holding period. boost to global banks such as HSBC Holdings, JPMorgan Chase In October, Thailand reinstated a 15 percent withholding tax on & Co. and Deutsche Bank, and many banks continue to add staff to capital gains and interest income on foreign holdings of domestic service the expanding market. When Tsang joined Deutsche eight government, state enterprise and central bank bonds. The following years ago, the Frankfurt-based bank’s debt capital markets team in month South Korea announced it was reinstating a withholding tax Asia basically served only sovereign and quasi-sovereign borrowers. on foreign investment in local bonds, sparking a sell-off of foreign- That has changed. “We now also cover frequent corporate issuers, held treasury bonds at the end of last year. high-yield as well as leverage and acquisition financing,” Tsang says. Asia’s rapidly growing bond markets, surprisingly enough, are Regional bond offerings are attracting increasing interest from grounded in the wreckage of the Asian financial crisis, which began international fund managers and affluent local investors. The propo- in 1997 and brought to light, among other things, the serious balance sition remains simple: Asian bonds, and in particular junk debt, sheet problems of the region’s banks and their clients. Financial pay outsize coupons and give investors exposure to currencies institutions from Bangkok to Seoul had taken out massive loans in that are expected to continue to appreciate. Investment flows into U.S. dollars and Japanese yen and then lent those funds to businesses emerging Asia debt rose to $62.4 billion in 2010 from $45.2 billion that earned their revenues in domestic currency. The mismatch a year earlier, according to the Institute of International Finance, a helped to inflate local asset prices and led to outsize borrowing by Washington, D.C.–based association of financial institutions. local companies. The development of local credit markets has attracted a wide The crisis crippled local currencies and ravaged regional econ- range of global investors. BlackRock, State Street Global Advisors omies. “That was a watershed,” said Sabyasachi Mitra, senior and bond fund manager Pacific Investment Management Co. have economist at the Office of Regional Economic Integration of the been active in Asia for years, but increasingly they are now rubbing ADB. “A strong local currency bond market could have mitigated shoulders with European and U.S. private banks that are expanding these problems.” in the region.“Asian markets are providing a source of diversity rather By 2002, Thailand’s then–prime minister, Thaksin Shinawatra, than a source of risk for investors,” said Gregor Carle, investment was leading the call for development of local-currency debt markets. director for fixed income at Fidelity International in Hong Kong. “Isn’t it time for Asia to explore setting up an Asian bond market Assets managed at Carle’s Asian High Yield fund have increased as a financial instrument to help in maximizing our continent’s tenfold over the last two years, to $2.2 billion. potential and prevent exploitation of our reserves by others against Demand isn’t just coming from international buyers. Primary the interests of ourselves,” Thaksin told regional leaders at the World buyers of many bond issues, including high-yield issues, now reside Economic Forum in Kuala Lumpur that year. in Asia. “There’s been a huge increase of wealth and affluence, and Prodded by the ADB, regional governments launched a series that creates a greater pool of savings,” said State Street’s Cheung. of programs aimed at detecting financial and macroeconomic risk, Asia-Pacific’s population of high-net-worth individuals increased while encouraging the development of local-currency debt markets. to 3 million in 2009, while their wealth grew 30 percent to $9.7 tril- continued on page 86 INSTITUTIONALINVESTOR.COM
  • 52. APRIL 2011 INSTITUTIONAL INVESTOR30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 BANKING Reform Lite? By Neil Sen IN THE CLASSIC 1980S BRITISH TELEVISION comedy series Yes Minister, the show’s manipulative senior civil servant, Sir Humphrey Appleby, recommended to his boss that the best way to sidestep a political scandal was to appoint a committee of investigation. There was just one caveat, he explained: “Never set up an enquiry unless you know in advance what its findings will be.” The real-life government of Conservative Prime Minister David Cameron is discovering the uncomfortable truth behind that satire. Just weeks after taking power last year, the government in June 2010 appointed the Independent Commission on Banking to consider wide-ranging reforms for strengthening the banking system and reducing the risk of failure by major institutions. Chancellor of the Exchequer PHOTO ILLUSTRATIONS BY DIANA PANFIL Conflict of interests? Banking commission chairman Sir John Vickers (left), RBS CEO Stephen Hester and Chancellor George Osborne
  • 53. 7 88 89 90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133
  • 54. APRIL 2011 INSTITUTIONAL INVESTOR50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 BANKING George Osborne, who set up the panel, vowed that the commission The banking commission’s chairman, Sir John Vickers, said in a would examine everything from encouraging more competition to speech in London in January that the commission was “unlikely mitigating moral hazard to forcing a separation of retail and invest- to favor radical forms of limited- or narrow-purpose banking,” ment banking — a modern-day variation of the Glass-Steagall Act, which would separate the deposit-taking activities of retail bank- which divided those industries in the U.S. until the late ’90s. The ing from riskier investment banking. Even the idea of ring-fencing government, having effectively nationalized three major banks the retail activities of systemically important financial institutions during the financial crisis to avert a banking collapse, would do into separately capitalized subsidiaries, an idea the commission what was necessary to steer the industry back to health and avoid has explored, would run into problems of “practicability,” he said, future bailouts, Osborne said in announcing the commission: “The especially if there was no international agreement on the issue. experience of the last three years means that fundamental reform Industry observers have scaled back their expectations of the com- is an absolute requirement. We simply cannot afford to continue mission, which will issue a preliminary report this month and submit as we did before.” final recommendations to the government in September. “The Lately, however, the government’s appetite for reform appears commission’s bark will be worse than its bite,” says Ian Gordon, to be waning. With the country’s economic recovery having stalled banking analyst at Exane BNP Paribas. at the end of 2010 and with a £113 billion ($182 billion) pack- Still, the commission’s report may make for uncomfortable age of spending cuts and tax increases due to begin this month, reading for the banks, even if it does eschew dramatic structural Cameron and Osborne are more eager to spur growth than to changes in the industry. Treasury sources and industry analysts say break up big banks. To that end, Osborne in February reached an the commission is likely to focus on conventional remedies such agreement with the U.K.’s top five banks under which Barclays, as increasing capital requirements and fostering greater competi- HSBC Holdings, Lloyds Banking Group, Royal Bank of Scotland tion in the retail banking market. Such reforms, although far from Group and Santander U.K. promised to increase their combined radical, could be significant. Bankers contend that boosting capital lending by 6.1 percent this year and all but Santander agreed to pay standards above Basel III levels would cut their returns on equity lower bonuses to their staffs for 2010 in return for the government’s and serve to restrict lending. commitment to maintaining the financial sector’s competitiveness. Any move to weaken the regulatory reform agenda may cause As Osborne put it in announcing the deal, “Britain needs to move political problems for the government.The Conservatives’ coalition from retribution to recovery.” partners, the Liberal Democrats, ran in last year’s election on a plat- “I can’t tell if the government is placated, but there has certainly form calling for the separation of retail and investment banking, and been a shift in tone since the agreement,” says Nick Forrest, a direc- the party rarely misses an opportunity to bash bankers. “I am like tor in the economics department at PricewaterhouseCoopers who anyone else: You want to wring the neck of these wretched people advised the banks on the lending accord. who behaved so irresponsibly,” Nick Clegg, the party’s leader The government’s role as a major bank shareholder is also and Cameron’s deputy prime minister, said in a radio interview curbing its enthusiasm for tough new regulatory changes. The last month. Vince Cable, a senior Liberal Democrat who serves U.K. spent a total of £115 billion to acquire all of as Business secretary, said recently that he wasn’t PREVIOUS SPREAD: VICKERS: SIMON DAWSON/BLOOMBERG; OSBORNE: ELLIOTT FRANKS/EYEVINE/REDUX; mortgage lender Northern Rock, 83 percent of RBS softening his views on banking reform: “I think there “ HESTER: DANNY LAWSON/PA WIRE/AP IMAGES; BANK OF ENGLAND: CHRIS RATCLIFFE/BLOOMBERG and 41 percent of Lloyds between February 2008 will have to be change, and it will have to be radical.” and January 2009, and officials are eager to begin What qualifies as radical is being defined downward, selling off those holdings later this year or early next year to recoup the Treasury’s money. Robin Game- however, as the financial crisis recedes and banks gradually return to business as usual. Budenberg, CEO of UK Financial Investments changing (UKFI), the Treasury arm that manages the state’s reforms are THE IDEA THAT BRITAIN WOULD EVEN CON- holdings in the banks, whose priority is to maximize already template such ambitious structural reform would profits for the government, said in January that a have been unthinkable only a few years ago. The breakup of RBS and Lloyds would be “negative taking place, country prided itself on the success of its financial for value.” and we seem services sector, which in 2008 accounted for 8 per- The banks, meanwhile, have stepped up their lob- to be the only cent of gross domestic product, a bigger share of the bying against regulatory reform. They believe that country economy than in any other industrial country. (The enough reforms are already in the pipeline — most comparable figure for the U.S. is 6 percent.) The notably the Basel III global accord on higher capital having this government and industry alike touted the U.K.’s requirements — and that any additional measures sort of so-called light-touch regulatory regime, which relied could put them at a disadvantage relative to competi- discussion on principles rather than the copious rules of the tors in the U.S. and Europe.“Game-changing reforms are already taking place,” says Paul Chisnall, executive about legalistic U.S. framework. The financial narrative for most of the past decade had London and its market- director of financial policy at the British Bankers’ Asso- structural friendly environment steadily winning share from ciation,“and we seem to be the only country having this reform. New York and continental European centers. sort of discussion about structural reform.” — Paul Chisnall The financial crisis prompted a dramatic British Bankers’ Association The pressure appears to be having an impact. rethinking, however. Although the crisis had its INSTITUTIONALINVESTOR.COM
  • 55. 1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 6 Shocked by the scale of the crisis, Britain’s financial watchdogs began calling for emphatic measures to rein in risk-taking. In August 2009, Adair Turner, chairman of the Financial Services Authority, questioned whether many investment banking activities were “socially useful.” Two months later, Mervyn King, governor of the Bank of England, went even further by advocating the separation of what he called the banks’ “utility” operations, such as deposit-taking, from their “speculative” investment banking operations. Brown’s Labour government had firmly rejected any suggestion of structural reform, but the Con- servatives and Liberal Democrats swept to power in May 2010 in good part by riding a wave of public anger at the banks. The two parties’ views were not exactly in harmony. The Conservatives’ campaign platform called merely for an investigation into the impact of RBS and Lloyds on competition in the banking sector, while the Liberal Democrats argued for a breakup of retail and investment bank- ing. As part of their coalition agreement, the parties papered over their differences by setting up the Independent Commission on Banking. By appointing five heavyweights to the commis- sion, the government signaled that it was serious about reform and not merely looking to duck the issue. Sir John, the chairman, who is head of the University of Oxford’s All Souls College, served as chief economist of the Bank of England in the late ’90s and later as director general and then chairman of the Office of Fair Trading, the U.K.’s chief antitrust regulator. He developed a reputa- tion as an advocate of consumer choice when the Lloyds CEO António Horta-Osório (foreground) and UKFI chief Robin Budenberg OFT in 2001 blocked a takeover bid by Lloyds for the former Abbey National on the grounds that it origins in the U.S., the fallout in the U.K. was more severe. would reduce competition for current accounts, which are similar Liquidity concerns triggered an old-fashioned run by depositors to U.S. checking accounts. on highly leveraged Northern Rock, leading the government to The other commission members also enjoy solid reputations nationalize the mortgage lender in February 2008. The collapse and, for the most part, strong reformist credentials. Martin Taylor of Lehman Brothers Holdings in September 2008 undermined is a former chief executive of Barclays who dismantled most of that investor confidence in RBS, which had a major presence in the bank’s investment banking operations in the mid-’90s. “After I left U.S. mortgage-backed-securities market, and in HBOS, then Barclays, I said the investment banking activities of a universal the U.K.’s largest mortgage bank. The Labour government bank were at all times parasitic on the retail bank balance sheet,” of former prime minister Gordon Brown propped up RBS in he remarked last year at the Future of Banking Commission, a November 2008 by buying almost its entire £15 billion share private sector effort organized by the consumer magazine Which?. HORTA-OSORIO: JON ENOCH/EYEVINE/REDUX; BUDENBERG: DAVID CANNON/GETTY IMAGES issue, giving taxpayers a 58 percent holding, a stake officials “I used the word carefully, and I would not change it now.” Martin would later increase. The government also encouraged Lloyds Wolf, chief economics commentator of the Financial Times and a TSB to acquire HBOS but had to step in to support the enlarged former World Bank economist, has written frequently about the institution. In addition to those direct stakes, the government need for structural reform in banking but criticized the so-called also extended hundreds of billions of pounds of asset guarantees Volcker rule, the plank of the Dodd-Frank Wall Street Reform and and liquidity facilities to prop up the banking sector. The U.K.’s Consumer Protection Act that bars banks from proprietary trad- various support measures reached a massive £955 billion, or 69 ing, saying it fails to address the core problem of banks being too percent of GDP, by December 2009, according to the National big and interconnected to fail. Clare Spottiswoode, an outspoken Audit Office. The economic and financial recovery reduced that former energy regulator, in November publicly bemoaned the fact amount to £512 billion at the end of last year. continued on page 87 INSTITUTIONALINVESTOR.COM
  • 56. APRIL 2011 INSTITUTIONAL INVESTOR27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 CHINA Going Flow with the Smaller Chinese companies keep the IPOs coming despite market setbacks and valuation concerns. A By Allen T. Cheng FTER DOMINATING THE GLOBAL IPO market for the past three years, Chinese companies took a pause at the start of this year. Stock prices were sliding in Shanghai and Hong Kong amid fears of Chinese mon- etary tightening and a slowdown in global growth, while many investors complained about the heavy supply and high prices of recent initial public offerings. Reflecting the cautious mood, in late January, China Hongqiao Group, the country’s largest private aluminum maker, withdrew at the last minute a planned IPO on the Hong Kong stock exchange that had been expected to raise as much as $2.2 billion. The lull didn’t last for long. Last month China Hongqiao lowered its sights and got its deal done. The company cut the size of its offering in half and priced the shares at HK$7.20 apiece, the low end of the indicated range, raising HK$6.4 billion ($822 million). The shares rose a modest 2.2 percent on the first day of trading. Some other companies have been far more successful. Just a few days after China Hongqiao’s share debut, Qihoo 360 Technology, maker of a popular Internet browser and online security products, raised $175 million with ChinaCache CEO Wang Song says Chinese ILLUSTRATIONS BY UPSO tech companies are eager to bring IPOs INSTITUTIONALINVESTOR.COM
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  • 58. APRIL 2011 INSTITUTIONAL INVESTOR54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 CHINA an IPO on the New York Stock Exchange and saw its share price surge 105 percent on their first day of trading, to $29.74. China Hongqiao and Qihoo 360 can expect plenty of imitators before long. Although political unrest in the Middle East and Japan’s devastating earthquake, tsunami and nuclear disaster have shaken global markets in the past two months, China’s IPO machine continues to pump out deals at a rapid pace. Investor demand for exposure to China’s booming economy remains strong, and the country’s corporate sector is only too happy to satisfy that appetite. Chinese companies raised a total of $16.5 billion with 98 IPOs in the first three months of this year, not far off the $18.3 billion raised in 104 IPOs in the same period in 2010. Bankers and analysts say the pipeline of businesses looking to conduct IPOs is larger than ever, and predict there could be as many as 700 offerings in 2011 if conditions remain favorable. “We see more IPOs this year in terms of number of issues and volume,” says Patrick Tsang, Shanghai-based co-head of public offer- ings at audit firm Deloitte Touche Tohmatsu CPA, a leader in helping Chinese firms prepare for public share sales. Last year China produced 472 IPOs worth a total of $105 billion, repre- senting 37.5 percent of the global total. Small and midsize companies are increas- ingly leading the wave of companies coming to market. The trend is a notable change from CCB International’s Paul Schulte sees a strong pipeline of IPOs from China recent years when big state-owned enterprises, especially in the financial sector, made head- lines with jumbo offerings. “We expect many small and medium-size that there is a huge appetite for Chinese IPOs globally,” ChinaCache offerings,” says Kester Ng, Hong Kong–based Asia-Pacific head CEO Wang Song told Institutional Investor in an interview in his office of equity capital markets at J.P. Morgan. “There will be plenty of on the outskirts of Beijing. “Among our clients, we have at least 15 to $200 million to $1 billion deals, but you’re not going to see a $22 bil- 20 companies that are preparing for IPOs in 2011.” It’s not hard to see lion deal like the Agricultural Bank of China [ABC].” The bank’s why. ChinaCache’s flotation made Wang and Jean Kou Xiaohong, his dual IPO on the Shanghai and Hong Kong stock exchanges last wife and co-founder, instant millionaires: The 20 percent stake they summer was the world’s largest ever. own was worth $126 million after the first day of trading. Internet and technology stocks are generating some of the greatest For some investors, the rush for Chinese technology stocks is all buzz, as well as the occasional controversy over pricing. ChinaCache too reminiscent of the late-’90s U.S. tech craze. Although Chinese International Holdings, a Beijing-based provider of caching services stocks led by and ChinaCache accounted for four of the that speed Internet transmissions, a Chinese equivalent of Akamai top five IPO debuts on U.S. stock exchanges last year, China also Technologies, raised $84 million with an IPO on the Nasdaq Stock produced the five worst debuts, led by Sky-mobi. The provider of Market last fall. On October 1 the company’s shares soared 95 per- mobile-phone applications saw its shares drop 25 percent below their cent above the offering price to close the first day of trading at $27.15. $8.00 IPO price on their first day of Nasdaq trading. (The stock has The premium represented the highest trading debut for a U.S. IPO since rallied strongly to trade late last month at $12.69.) In the first since October 2008. The mark didn’t stand for long, though. On three months of this year, six of the ten largest Chinese IPOs closed December 8,, an Internet video company comparable the first day of trading below their offering price, according to data to YouTube that raised $203 million with an IPO on the New York provider Dealogic. Stock Exchange, saw its shares surge 161 percent above their offering Michael Chiu, Hong Kong–based manager of the $395 million price on their first day of trading, to close at $33.44. ING (L) Invest Greater China Fund at ING Investment Management “The strength of our share price on the first day of trading indicates Asia-Pacific, says the fund avoided Chinese IPOs late last year because INSTITUTIONALINVESTOR.COM
  • 59. 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 7 of concerns about valuations, but believes the decline in Chinese plans to sell as many as 12 billion H shares in Hong Kong later this stock prices early this year has made recent pricings more reason- year; the deal could raise up to $7 billion to shore up its capital base. able. China’s CSI 300 index was trading at 3,256.08 late last month, Sources say Everbright has hired China Everbright Securities (HK), down 8.5 percent from its recent top in November after touching a China International Capital Corp., J.P. Morgan and Morgan Stanley low of 2,919.16 in January.Australia’s AMP Capital Investors, which to handle the offering. This follows the Beijing-based midsize bank’s manages A$98 billion ($101 billion), has also shunned recent IPOs $3.2 billion A-share offering in Shanghai in August, the world’s because of pricing concerns but considers the broader Chinese market tenth-largest IPO last year. New China Life Insurance Co., a major well supported. “Valuations on Chinese shares are now quite reason- insurer, and Guangdong Development Bank will each raise in excess able,” says Shane Oliver, the firm’s chief economist and strategist. of $2 billion with share offerings in the coming months. “Though “The forward price-to-earnings ratio of around 13 times is quite low none of the listings to come will be the size of ABC, you will see three for a country with 20 percent earnings growth, and the historic P/E is or four IPOs of mid- to large-scale range, anywhere from $2 billion well below its average of the last decade.” to $5 billion each,” Taylor says. Although the recent cooling off of the market has deterred some China’s next megalisting likely will come from state-owned issuers, the return of more-modest valuations could be laying the Citic Group, one of China’s leading financial conglomerates whose foundations for a sustained flow of equity offerings, bankers and holdings include Hong Kong–listed China Citic Bank and Shanghai- analysts say. “With markets volatile and valuations depressed versus listed Citic Securities, the country’s biggest publicly traded broker- recent highs, some companies are choosing to hold off on launch- age firm in terms of market share. Market sources say the company ing,” says Rupert Mitchell, managing director and head of equity aims to raise some $12 billion with a Hong Kong IPO some time in syndicate for Citi Asia-Pacific in Hong Kong. “Investor risk appetite 2012. Future megalistings will come only when the State-owned has been reined in, but there is always a home for a good story. Assets Supervision and Administration Commission of the State Medium term we remain optimistic that deal flow will pick back up. Council is ready to allow more of its portfolio of nearly 100 state- We have a strong backlog of high-quality transactions to execute.” owned companies to sell shares in public markets, sources say. Despite volatile markets in the aftermath of the Japanese earth- “SASAC is still in the process of merging state-owned companies,” quake and tsunami, Citi went ahead last month with a Hong says the senior government adviser. Kong IPO for Sichuan-based China Kingstone Mining Holdings, The strong flow of IPOs has been a boon for banks, both Chinese China’s leading producer of beige marble for high-end office and international. Last year CICC led all underwriters in the domes- towers, hotels and luxury residential complexes. Chairwoman tic A-share market, arranging four offerings worth a total of $7.1 bil- and CEO Chen Tao said the company had been preparing its lion, followed by Citic Securities, Bank of China, China Galaxy offering for months and didn’t want to delay. The offering raised Securities Co. and Guotai Junan Securities Co. CICC declined to HK$1.3 billion, which Kingstone will use to expand production comment on its pipeline for 2011, but Raymond Lee, Hong Kong– and acquire mines. based head of corporate finance at Citic Securities International, Most of the Chinese IPO flow this year will come from private says the firm has a several clients preparing to sell equity. “There are companies like Kingstone rather than state-owned enterprises. The a number of IPOs related to the financial sector,” he says. “We have government and its advisers are working with the private sector to IPOs coming from metals and mining and energy. We have a whole come up with a draft list of 1,500 to 2,000 names of potential listing string of IPOs that will run in the range of $500 million or less.” candidates over the next two years, according to one senior govern- In Hong Kong, Morgan Stanley topped the league table for ment adviser who spoke on condition of anonymity. Bankers and underwriters of Chinese H-share issues, handling 12 issues worth analysts expect several companies to launch IPOs $4.7 billion last year. J.P. Morgan, Deutsche Bank, “ of $1 billion or more in coming months, including Goldman Sachs Group and Macquarie Group Taikang Life Insurance Co., a midsize insurance rounded out the top five. company; Huaneng Renewables Corp., an alterna- Hong Kong attracted 63 Chinese IPOs worth a tive energy producer; New Century Shipbuilding total of $28 billion last year, ranking it just behind Co. and Shanghai Pharmaceuticals Corp. W expect e Shenzhen’s $29.8 billion in initial equity offerings Some of the greatest IPO activity last year came many small and ahead of Shanghai’s $26.8 billion, according and medium- from the retail, technology, manufacturing, natural to Dealogic. Mainland companies now account for resources and energy sectors, says George Taylor, almost 20 percent of Hong Kong’s 1,400 listed com- Hong Kong–based co-head of equity capital markets size offerings. panies. The city’s robust IPO market is attracting the at Morgan Stanley. “This year there seems to be a You’re not attention of companies elsewhere, something that similar pipeline of companies,” he says. “Consumer retail continues to grow. The other sectors we think going to see Hong Kong officials and executives at Hong Kong Exchanges and Clearing, which runs the local stock will be active will be clean energy, wind power, a $22 billion market, are only too happy to encourage. assemblers and producers, and financial services deal like the Glencore International, the giant Switzerland- such as insurance.” Agricultural based commodities trading firm, is expected to float its The financial sector will produce some large offer- ings, albeit nothing on the scale of Agricultural Bank, Bank. IPO, estimated at up to $8 billion, in Hong Kong this year and has hired Deutsche Bank as lead underwriter, — Kester Ng, J.P. Morgan bankers and analysts say. China Everbright Bank Co. continued on page 89 INSTITUTIONALINVESTOR.COM
  • 60. CONTACT INFORMATION II Christine Cavolina International Publisher 44 207 303 1703 Lena Mas Associate Publisher 44 207 303 1729 CHINA has been named one of the top Shuguang Xi analytical sites in China 8610 6588 5053 by 21st Century Entrepreneur Magazine ASIA Doug Mulcock 852 2912 EUROPE Nora Lamoudi 44 207 303 1761 USA Joy DeSanto 212 224 3348 Mark Lee 212 224 3140 Doug Campbell 212 224 3299 For global financial professionals looking to communicate with the elite of the Chinese financial community, Institutional Investor China Online provides a first rate INTERNET editorial environment for your advertising message. Technology & Online Publisher Michael Feinberg 212 224 3320
  • 61. APRIL 2011 INSTITUTIONAL INVESTOR36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 INSIDE: THE 2011FUND OF FUNDS 50 Many firms in our annual ranking look to diversify their capital bases. Page 74 The 2011 All-Japan Research Team Multiple disasters have slowed but not stopped Japan’s economic rebound. Investors can still find opportunities — if they know where to look. Page 64 INSTITUTIONALINVESTOR.COM
  • 62. APRIL 2011 INSTITUTIONAL INVESTOR8 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 1HINA RESEARCH THE 2011 ALL-JAPAN RESEARCH TEAM FUND OF FUNDS 50 UNCONVENTIONAL WIS E JAPAN WILL RISE THE 201 ALL-JAPAN RESEARCH TEAM 1 positions; it wins 15 spots this FROM THE RUINS Recovery Slowed, year. Rounding out the top five is Citi, which holds the same but Not Stopped rank and the same number of team positions — 13 — as it did in 2010. Results are based Japan will recover from disaster, analysts say — on responses from nearly 1,000 and investment opportunities abound. investment professionals at some 270 institutions that col- BY HENRY SCOTT STOKES lectively manage an estimated $1 trillion in Japanese equities. Profiles of the top-ranked Each April, Institutional Investor B efore the devastating earthquake, tsunami and nuclear crisis shattered the leaks will worsen and contami- nation will spread. As the country struggles to analysts in each of the sur- vey’s 31 sectors appear in the pages that follow; profiles of publishes our ranking of country on March 11, Japan return to normalcy amid the analysts in second and third Japan’s top equity analysts as determined by the world’s appeared to be well on the way destruction and uncertainty, place, along with deeper data, leading money managers. to economic recovery. Last year equity analysts have been busy can be found on our web site, Polling for the 2011 All-Japan the nation’s real gross domestic assessing the disaster’s eco- Research Team had been product grew 3.9 percent — the nomic impact as they provide Please note: Reporting on concluded, the results tabu- fastest among the Group of investment insight to clients. the sector profiles was com- lated and the winners inter- Seven industrialized nations — Each year II asks money man- pleted before the March 11 viewed when the region and exports increased for the agers to weigh in with their Tohoku earthquake. was rocked by an earth- first time in three years, surging opinions on which of these ana- BofA’s spectacular advance quake so powerful that it 24.4 percent year-over-year. lysts do the best job of covering may seem surprising, but it’s in shifted the planet’s axis. The “We are bullish on Japa- Japanese companies, and the line with the bank’s plan to be quake triggered a tsunami nese equities right now,” Jun winners are inducted onto the Japan’s top foreign brokerage, that slammed miles inland, Konomi, director of Japanese All-Japan Research Team. Poll- according to Yohei Osade, leaving death and destruc- equity research at Nomura ing for this year’s survey, our director of Japan research. BofA tion in its wake, and crippled Securities Co., told Institutional 18th annual, had already con- is “virtually the only firm that’s nuclear reactors. In follow-up Investor in mid-February. cluded and the results tabulated been building up its business” interviews analysts and research directors indicated “Emerging markets, which per- by the time disaster struck. in Japan in recent years, he that they are soldiering on formed very well last year, are BofA Merrill Lynch Global notes. Last April, Osade and that they believe Japan now in danger of inflation, and Research catapults from announced that he intended to will recover and rebuild. So interest rates will hike eventu- No. 11 to share the top spot on expand his research depart- even as we celebrate this ally. Here in Japan we enjoy a the 2011 All-Japan Research ment’s coverage universe by year’s winners, we extend our combination of earnings growth Team with returning champ some 13 percent, to 360 com- sincere condolences to all and very low interest rates, with Nomura; the firms each cap- panies, by December 31. He who have been affected by abundant money temporarily ture 24 total team positions. came close: By the end of last these disasters and our best moving away from emerging UBS, with 18 positions (three year, BofA researchers were wishes to the people of markets, which should push up fewer than in 2010), holds tracking 340 stocks, up from Japan as they struggle Japanese equities.” steady in third place. Daiwa 316 at the time of Osade’s dec- through the difficult weeks Just a few weeks later, the Securities Group, which tied laration. The firm employs 32 and months ahead. mighty temblor — one of the for No. 1 last year, tumbles to analysts — one more than last — Thomas W. Johnson most powerful ever recorded, fourth place after losing nine year — and 13 of them appear measuring 9.0 on the Richter in the runner-up position in this scale — convulsed the region year’s survey. In fact, BofA Managing Editor and spawned a 30-foot tsunami that killed thousands “GLOBAL more than triples its number of runners-up, and that helps fuel Thomas W. Johnson Senior Editors and wiped entire communities INVESTORS the firm’s remarkable rise. Tucker Ewing Jane B. Kenney off the map. Explosions and a partial meltdown at the quake- ARE TAKING When a place weight is assigned to each position, how- Associate Editors damaged Fukushima Dai-ichi ANOTHER ever, Nomura clearly outper- Denise Hoguet Brian Murphy Generating Station in north- eastern Japan have kept the LOOK AT forms all rivals (see “Weighting the Results”). The Japanese Cover illustration by country — and the world — JAPAN.” firm also increased the number Brian Stauffer on edge, fearful that radiation of stocks its analysts cover, INSTITUTIONALINVESTOR.COM
  • 63. 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 7SDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE INFOBA from 587 to 605, despite a net THE LEADERS loss of five researchers, to 61, to BofA and other competitors. TOTAL TEAM RANK POSITIONS FIRST TEAM SECOND TEAM THIRD TEAM RUNNERS-UP Poaching has been rampant, 2011 2010 FIRM 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 Konomi says, and has led to “a 1 11 BofA Merrill Lynch Global 24 7 2 1 4 2 5 0 13 4 change in the geography of Research equity research in Tokyo.” 1 1 Nomura Securities Co. 24 24 6 7 6 7 4 3 8 7 That change is evident in the 3 3 UBS 18 21 9 10 3 2 2 3 4 6 strong gains made by two firms: Deutsche Securities bolts from 4 1 Daiwa Securities Group 15 24 1 1 4 8 4 5 6 10 ninth place to tie for sixth with 5 5 Citi 13 13 3 2 2 1 4 6 4 4 Morgan Stanley MUFG Securi- 6 9 Deutsche Securities 12 8 4 0 0 3 2 3 6 2 ties Co., which shared 11th- place honors last year with BofA. 6 11 Morgan Stanley MUFG 12 7 0 0 2 1 3 0 7 6 Securities Co.1 “Global investors are taking 8 7 Credit Suisse 8 9 2 1 1 0 2 4 3 4 another look at Japan,” Orlando Faulks, Deutsche’s head of 9 13 Barclays Capital 7 5 0 0 3 0 0 1 4 4 Japanese research, told II in 9 7 Goldman Sachs Japan Co. 7 9 0 1 1 3 3 2 3 3 February. “Stocks look cheap in 9 4 Mitsubishi UFJ Morgan Stanley 7 16 2 4 1 1 0 2 4 9 Japan right now, particularly Securities Co.2 because a large proportion of 1Rank and team positions in 2010 were for Morgan Stanley Japan. In May 2010, Mitsubishi UFJ Morgan Stanley Securities listed firms are industrials. Co. and Morgan Stanley MUFG Securities Co. were formed through a joint investment by Mitsubishi UFJ Financial Group and Morgan Stanley. Those firms are particularly 2Rank and team positions in 2010 were for Mitsubishi UFJ Securities Co. In May 2010, Mitsubishi UFJ Morgan Stanley sensitive to any increase in sales, Securities Co. and Morgan Stanley MUFG Securities Co. were formed through a joint investment by Mitsubishi UFJ Financial Group and Morgan Stanley. which should cause profitability to rise disproportionately.” for Morgan Stanley MUFG our global equity strategy.” to assess the short- and long- In response to renewed inves- in November, notes that before Has that attitude changed term outlook for his or her sec- tor interest, the German bank the joint ventures, Morgan since March 11? Not at all. A tor. While noting that “it is far has been hiring star analysts — Stanley Japan employed 28 ana- mere ten days after the twin nat- too early to grasp the full impli- among them Masao Muraki, lysts; he has since increased that ural disasters and even as the cations of the tragedy,” Pendert who joined the firm in Septem- number by four and ramped up Fukushima nuclear crisis was told clients to expect a “short, ber from Daiwa and is this year’s stock coverage from 249 compa- still unfolding, Pendert’s team sharp downturn, followed by a top-ranked researcher in Insur- nies to 284. Japan, he said in published a report, “Tohoku U- or V-shaped recovery” and ance — and increasing coverage. February, “continues to be a Earthquake: First Assessment,” reminded clients that “every dip Deutsche’s 23 analysts currently critically important market in in which each analyst was asked is a dip to buy.” follow 220 stocks, and Faulks Nomura’s chief strategist expects to add a whopping 90 arrived at a similar conclusion. WEIGHTING THE RESULTS more this year. “Although we expect this earth- Yet another Western bank This table shows the top firms if a rating of 4 is assigned to a first-teamer, quake to provide further impetus 3 to a second-teamer, 2 to a third-teamer and 1 to a runner-up. sees incredible opportunities in to the correction in Japanese Japan and is repositioning itself RANK BY RANK IN equities that has been occurring WEIGHTED LEADERS WEIGHTED to capture a bigger portion of FORMULA TABLE FIRM TOTAL since mid-February, we do not that market. In May, New York– 1 1 Nomura Securities Co. 58 envision a serious correction,” based Morgan Stanley formed Seiichiro Iwasawa stated one 2 3 UBS 53 two joint ventures with Tokyo’s week after the disaster. “We think Mitsubishi UFJ Financial 3 1 BofA Merrill Lynch Global Research 43 the intraday low — Nikkei aver- Group: Morgan Stanley MUFG, 4 5 Citi 30 age: 8,227; Topix: 725 — on which primarily serves global and 4 4 Daiwa Securities Group 30 March 15 is likely to have been institutional investors, and the bottom for Japanese stocks.” Mitsubishi UFJ Morgan Stanley 6 6 Deutsche Securities 26 Put another way, researchers Securities Co., which focuses on 7 6 Morgan Stanley MUFG Securities Co. 19 are convinced that Japan is domestic investors (and ties for 8 8 Credit Suisse 18 ready to bounce back, and ninth place). The firms, includ- investors that share their opti- 9 9 Mitsubishi UFJ Morgan Stanley 15 ing their equity research depart- Securities Co. mism can find reliable guidance ments, operate independently. 10 9 Barclays Capital 13 through the recovery from the Stefan Pendert, who was analysts on the 2011 All-Japan 10 12 J.P. Morgan 13 named head of Japan research Research Team. INSTITUTIONALINVESTOR.COM
  • 64. APRIL 2011 INSTITUTIONAL INVESTOR0 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18HINA RESEARCH THE 2011 ALL-JAPAN RESEARCH TEAM FUND OF FUNDS 50 UNCONVENTIONAL WIS The Best ket through his visits with buy-siders worldwide,” says for “good knowledge of the industry, with special exper- Analysts one fund manager. tise on how to make his way through the maze of financial of the regulation, as well as good stock picking skills.” Year INDUSTRIES BANKS Hironari Nozaki Citi The buy side says: AUTO PARTS “He’s able to distill everything down to one bullet point.” Kunihiro Matsumoto UBS The buy side says: “Matsumoto-san’s accurate C all him “Mr. Informa- tion.” That’s how one investor describes Citi’s BEVERAGES, FOOD & TOBACCO Ritsuko Tsunoda views help lift our returns.” Hironari Nozaki, who BofA Merrill Lynch AUTOS Tatsuo Yoshida K unihiro Matsumoto of UBS is No. 1 for four years running. Supporters single out claims first-team honors for an eighth straight year. “If I want a number, chances are Global Research The buy side says: “Ritsuko works night and day UBS the 45-year-old analyst’s July he has it, and his response to and clearly loves her job.” The buy side says: “He has strong insights on new products.” 2009 upgrade of Denso Corp. from neutral to buy, at ¥2,690, after the Aichi-based compo- inquiries is lightning fast — I don’t think he ever sleeps,” this client adds. Nozaki, 47, “F requent value-added updates on all her cov- erage,” in the words of one D ubbed “a superb analyst” by one grateful client, Tatsuo Yoshida of UBS nents manufacturer reported an earnings jump. When the stock dipped below ¥2,300 last also makes money for people. His January 2010 valuation- based buy on Tokyo’s Aozora money manager, help Ritsuko Tsunoda rise one rung to finish in first place for repeats in first place. In July August, on concerns about Bank, at ¥99, anticipated a the first time. The BofA Mer- the 51-year-old Yoshida vehicle sales following recalls by near doubling of the stock rill Lynch Global Research astutely anticipated an earn- Toyota Motor Corp. of Aichi, price, to ¥188 — and analyst also wins praise for her ings recovery at Nissan Motor Matsumoto pounded the table, trounced the sector by a phe- strong stock calls, such as a Co. and upgraded the stock citing rising demand from nomenal 88.4 percentage June buy on Ajinomoto Co., a from neutral to buy as a bar- Detroit’s General Motors points — as of early February Tokyo-based producer of gain at ¥657. Sales of the Co. and other automakers for 2011, when he downgraded cooking oils, seasonings and Yokohama-based automaker Denso’s next-generation, high- the stock to hold, again on val- sweeteners. Tsunoda believed took off, and the stock rallied margin fuel-injection and uation. By the end of that the company’s strategy of cut- 27.1 percent, to ¥835, hybrid-electric power train sys- month, the share price had ting costs and diversifying its through February, outpacing tems. Sure enough, sales rallied, slipped 2.1 percent, to ¥184. product offerings would lead the sector by 1.9 percentage and through February the stock One buy-sider praises Nozaki to margin improvement, and points. “He loves cars, which careered to ¥3,055, a gain of she was right. In January, Aji- puts him way ahead of other 13.6 percent since the upgrade nomoto raised its outlook for analysts who don’t even that beat the sector by 4.2 per- the fiscal year ended in drive,” observes one apprecia- centage points. Constituents HIRONARI March, revising operating tive investor. Fans also applaud a recent jump in also applaud Matsumoto’s occasional visits to manufactur- NOZAKI OF profit from ¥66 billion to ¥69 billion (up from ¥64 bil- Yoshida’s travels, which the ing plants throughout Asia — CITI HAS A lion in fiscal 2010) and net analyst confirms is because of a loosening of his purse such as in India’s Delhi in October and China’s Guang- “GOOD profit from ¥24 billion to ¥27 billion (up from strings. “There have been zhou region in January. “He KNOWLEDGE ¥16.6 billion). By the end of many helpful discussions after his visits to the overseas plants demonstrates the benefits of expansion into international OF THE February, the stock had posted gains of 18.4 percent, of Japanese automakers, and hubs of production,” declares INDUSTRY.” from ¥793 to ¥939, and led he really understands the mar- one backer. the sector by a very tasty 13.9 INSTITUTIONALINVESTOR.COM
  • 65. 8 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 7SDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE INFOBA percentage points. A graduate Rikkyo University with a 23.5 percent since the origi- of Japan Women’s University, bachelor’s degree in econom- nal buy recommendation that Tsunoda began her career as a ics, Watabe joined Deutsche beat the sector by 12.2 per- beverages, food and tobacco in 2003 from Merrill Lynch centage points. analyst at Cazenove & Co. in Japan Securities Co. London in 1997 before mov- ing to Merrill Lynch Japan in April 2000. CHEMICALS Takato Watabe Deutsche Securities The buy side says: “He has a clear grasp of the technical changes going ELECTRONICS/COMPONENTS on in this space.” CONSTRUCTION Fumihide Goto BROADCASTING J umping one tier to the pinnacle of the roster is Deutsche Securities’ Takato Toshiya Mizutani Mitsubishi UFJ Morgan Stanley Securities Co. UBS The buy side says: “His knowledge of the end Shinsuke Iwasa Watabe, 43. A February 2010 The buy side says: markets is the best on the Street.” UBS The buy side says: upgrade of Mitsubishi Chem- ical Holdings Corp. from hold “He has a broad, holistic view of the construction industry.” F umihide Goto, 42, who repeats in first place, is “Iwasa-san is smart and hardworking.” to buy, at ¥402, largely on the recent downsizing of its T oshiya Mizutani, 52, of Mitsubishi UFJ Morgan applauded for “prophecies that turn out to be true,” as one buy- S hinsuke Iwasa captures the top spot for a third con- secutive year — and for the unprofitable petrochemicals business, proved wise. Earn- ings at the Tokyo-based devel- Stanley Securities Co. locks up first-place honors for a fifth straight year. “He covers all side enthusiast puts it. Specifi- cally, the UBS analyst foresaw that demand for smartphones fourth time in five years. “The oper of pharmaceuticals and the names and does a good and tablet computers would sector was very unpopular last electric-car components bal- job, especially of breaking outpace the appetites for TVs year, with poor earnings looned, and through Febru- down their overseas and and other equipment, and in momentum and problematic ary 2011 the stock leapt 48.5 domestic expenses using a May upgraded from neutral to corporate governance,” recalls percent, to ¥597, shooting top-down approach,” one buy two suppliers of specialty one portfolio manager. “But past the sector by 37.9 per- money manager explains. capacitors and other gear for while many other analysts just centage points. “His recom- Top calls include a February those markets: Tokyo’s Alps gave up on it, Iwasa-san kept mendation about Mitsubishi 2010 upgrade on Taikisha Electric Co., at ¥623, partly on knocking on the door — and Chemical really helped our from buy (first upgraded its recent cost-cutting restruc- caught the bottom of the cycle performance,” cheers one from neutral back in Novem- turing program, and Murata in late 2010.” Iwasa, 38, urged buy-side backer. In October, ber 2009, at ¥1,200) to Manufacturing Co. of Kyoto, investors to buy Dentsu in Watabe raised Nitto Denko strong buy, at ¥1,433. as a bargain at ¥4,410. November, at ¥2,056, making Corp. from hold to buy, at Mizutani noted that the Through February 2011 the the case that the Tokyo-based ¥3,115, on the strength of its Tokyo-based contractor — high-tech-parts makers’ shares advertising, marketing and pub- display-screen coatings. No. 1 in Japan and No. 2 bounded 75.4 percent, to lic relations agency would bene- Through February shares of worldwide for auto-painting ¥1,093, and 37.9 percent, to fit from a surge in spending on the high-tech-materials facilities — expected to be ¥6,080, respectively, while the advertising. In late January, after maker, which is headquar- generating 60 percent of its sector inched up only 2.9 per- the stock bolted 27.8 percent, to tered in Osaka, bolted 58.1 orders overseas by the third cent. Goto “favored Murata ¥2,628, and blew past the sec- percent, to ¥4,925. Watabe quarter of fiscal 2011, which while other analysts said the tor by 12.7 percentage points, “came in with a fantastic and ends March 31, 2012, the stock was expensive, and he was he downgraded it to hold, early call on Nitto Denko — it highest overseas weighting right — he’s a good indepen- largely on valuation. Good call. was a really well-argued among domestic construction dent thinker,” observes one By the end of February, ad report with the vision to look companies. The stock had money manager. Another adds spending had begun to slow and forward and analyze where shot up to ¥1,694 by late that “Goto’s knowledge of com- Dentsu’s shares had slipped 1.2 the company was going,” April before drifting back ponents and devices is the best, percent, to ¥2,596, lagging the cheers one grateful investor. A down, closing February 2011 and his data on the industry and sector by 2.3 points. 1989 graduate of Tokyo’s at ¥1,482 — for a gain of the economy are very useful.” INSTITUTIONALINVESTOR.COM
  • 66. APRIL 2011 INSTITUTIONAL INVESTOR2 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20HINA RESEARCH THE 2011 ALL-JAPAN RESEARCH TEAM FUND OF FUNDS 50 UNCONVENTIONAL WIS bachelor’s degree in interna- Yamasaki, 42, joined Nomura in tional law from Tokyo’s 1992 after earning a bachelor’s Sophia University in 1991 and degree from Tokyo Institute of worked as a technology ana- Technology’s department of lyst at Daiwa Institute of physical electronics. Research before joining Deutsche in 2001. ELECTRONICS/CONSUMER ENERGY & UTILITIES Yasuo Nakane Toshinori Ito Deutsche Securities UBS The buy side says: The buy side says: “He’s one of the hardest-working “His industry knowledge analysts, and he has definitely is deeper than any of helped our performance.” ELECTRONICS/PRECISION his competitors’.” C F INSTRUMENTS limbing the final rung to or a fifth consecutive year, finish on top for the first ELECTRONICS/INDUSTRIAL Kunihiko Kanno UBS analyst Toshinori time is Yasuo Nakane of Masaya Yamasaki Credit Suisse Ito lands in the winner’s cir- Deutsche Securities. Clients Nomura Securities Co. The buy side says: cle. Clients praise the 51-year- praise Nakane for being “well The buy side says: “He is tops in traditional, old researcher’s bullish view informed about the latest “He has had amazing fundamental, bottom-up of large domestic petroleum developments in the LCD recommendations.” research.” suppliers, based primarily on markets” and for his ability to speak Mandarin — “an asset for getting information from M asaya Yamasaki of Nomura Securities Co. rises one level to finish on top “C omprehensive cover- age, including careful channel checks,” as one allitera- capacity reductions and rising prices. Case in point: A long- standing buy on Idemitsu Taiwan and China.” He also for the first time. In January tive buy-side backer puts it, Kosan Co. paid dividends for wins kudos for downgrading 2010 he astutely upgraded helps propel Credit Suisse ana- Ito’s clients as shares of the Sharp Corp. from buy to hold Hitachi from neutral to buy, at lyst Kunihiko Kanno up two Tokyo-based oil, gas and coal in May, dubbing the shares ¥293, after the Tokyo-based notches to the top of the roster provider gushed 47.7 percent overpriced at ¥1,226, then diversified manufacturer jetti- for the first time. In October, in the 12 months through lowering it to sell three soned its unprofitable Kanno upgraded Seiko Epson February 2011, shooting past months later, at ¥937, citing automobile-components and Corp. from neutral to outper- the sector by an impressive overcapacity for the Tokyo- flat-panel TV businesses and form, at ¥1,265, on rallying 26.9 percentage points. Last based manufacturer’s LCD improved its balance sheet. By international demand for its April, when Nippon Mining TVs and cell phones. Since late February 2011 the stock printers, scanners, projectors Holdings and Nippon Oil then the stock price slipped to had advanced a crackling 68.9 and quartz clocks, among other Corp. merged to create JX ¥885, through February, for a percent, to ¥495, and trounced products. Shares of the Nagano- Holdings, Ito initiated cover- 5.5 percent loss that trailed the sector by a whopping 62.4 based manufacturer catapulted age on the new company with the sector by 9.8 percentage percentage points. “He is very as high as ¥1,534 in January, a a buy recommendation, at points. Nakane, 43, earned a strong at heavy electronic com- 21.3 percent increase, before ¥465, making the case that panies, and his recommenda- slipping to ¥1,367 by the end of the Tokyo-based conglomer- tion on Hitachi was right on February, for a gain of 8.1 per- ate’s dominant cost position target — that was very helpful,” cent since the upgrade that out- would result in steady earn- NOMURA’S cheers one investor. Also in Jan- performed the sector by 1.8 ings growth. By late February MASAYA uary 2010, Yamasaki upgraded Tokyo’s Mitsubishi Electric percentage points. Kanno, 35, holds a bachelor’s degree in the stock had shot up to ¥573, a gain of 23.2 percent that YAMASAKI “IS Corp. from neutral to buy, at marketing that he earned in outperformed the sector by VERY STRONG ¥707, largely on the strength of its power-conserving equip- 1998 at Harrogate, Tennessee’s Lincoln Memorial University; 9.8 percentage points. “Really great calls on oil refineries AT HEAVY ment and semiconductor pro- he joined Credit Suisse as a such as JX and Idemitsu,” ELECTRONIC duction. The stock had zipped to ¥967 by late February 2011, junior technology analyst in 2001 after serving as a sales rep cheers one grateful portfolio manager, while another buy- COMPANIES.” a gain of 36.8 percent that for a Japanese semiconductor- side supporter insists that Ito bested the sector by 24.4 points. materials supplier. “gets the big picture right.” INSTITUTIONALINVESTOR.COM
  • 67. 0 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 7SDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE INFOBA Mitsubishi Estate had climbed 12 percent, to ¥1,668. During the same period the sector gained 11.3 percent. Okino “has his finger on the pulse for how the Street views a company’s stock,” declares one investor. HEALTH CARE & PHARMACEUTICALS HOUSING & REAL ESTATE MACHINERY Hidemaru Yamaguchi Toshihiko Okino Katsushi Saito Citi UBS Nomura Securities Co. The buy side says: The buy side says: The buy side says: “Overall great client service — “If you want to know how “He is gritty and highly capable.” J notes that are timely and the market is treating valuations, thoughtful, and insightful voice you go to him first.” apanese machinery stocks, mail messages.” like the country’s broad I t’s a solid decade in first place for Hidemaru T oshihiko Okino of UBS rules the roost for an eighth year running. “He has INSURANCE market, have been on a roller coaster lately, plunging 14.2 percent in the first eight Yamaguchi. The Citi analyst, been around a lot and is very Masao Muraki months of 2010, then rallying 45, is appreciated for the qual- experienced — he used to Deutsche Securities 35.6 percent through Febru- ity of his research: “He com- work in the real estate indus- The buy side says: ary 2011. Yet throughout the piles his own earnings models, try — and investors all appre- “He is a talented stock ups and downs, Katsushi rather than letting young ciate the perspective,” one picker who does a good job Saito of Nomura Securities research associates take care money manager explains. keeping in touch.” Co. managed to stay the of them, which shows his in- depth understanding of the companies’ profit structures,” “He’s probably more aware of investor sentiment than any other analyst.” Okino’s best B ack in the top spot after a year in second place is Masao Muraki, who moved course, boost his clients’ returns and retain his hold on the top spot for a second cheers one aficionado. Adds stock picks include December to Deutsche Securities in straight year — and for the another: “It is helpful that his upgrades from neutral to buy September from Daiwa ninth time in 12 years. Among research focuses on stock on two Tokyo-based develop- Securities Group. The the stocks Saito, 45, has stood picking, as opposed to scien- ers, Mitsui Fudosan Co., at 34-year-old analyst published by is Komatsu, first upgraded tific research into the pharma- ¥1,576, and Mitsubishi Estate a comprehensive report in from neutral to buy way back ceuticals sector.” In August, Co., at ¥1,489, on expectations November on the nonlife in June 2009, at ¥1,452, and Yamaguchi upgraded medical that a recovery was imminent insurance subsector, arguing highlighted repeatedly since, supplier Terumo Corp. from in commercial real estate trans- that stocks would fall in the on the Tokyo-based construc- hold to buy, at ¥4,160, largely actions. As of the end of Febru- short term largely as a result of tion and mining equipment on the rapid growth of the ary 2011, both stocks were deteriorating loss ratios in auto provider’s ballooning sales in Tokyo-based outfit’s overseas performing nicely: Mitsui insurance underwriting. Yet he China and other emerging catheter sales. A month later Fudosan was up 10 percent, assigned a buy rating to Tokio markets. By the end of the shares reached ¥4,575 and selling at ¥1,734, and Marine Holdings, at ¥2,318, February 2011, the stock had he downgraded them to hold, on the belief that the Tokyo- skyrocketed 71.8 percent, to on valuation, seizing a 10 per- based insurer’s high volume of ¥2,495, and outstripped the cent run-up; during that overseas business would mean sector by 38.6 percentage period the sector advanced TOSHINORI less exposure to domestic loss- points. Saito’s “broad, pan- just 4.7 percent. By the end of February, Terumo shares ITO OF UBS ratio erosion. The stock had risen to ¥2,679 by the end of Asian knowledge is a key strength,” marvels one had slipped to ¥4,470, a loss HAD “REALLY February, for a gain of 15.6 pleased devotee. “With his of 2.3 percent that trailed the sector by 2.7 percentage points. GREAT CALLS percent that was slightly behind the sector’s 16.2 per- deep knowledge of the Japa- nese machinery industry, he Yamaguchi “is a good source ON OIL cent advance. Muraki “knows covers a wide range of compa- with which we can evaluate the potential of the pipeline at each REFINERIES the strengths and weaknesses of these companies in both a nies in the sector, including small- and midcap stocks, and drug company,” explains one SUCH AS JX.” domestic and global context,” his investment recommenda- portfolio manager. asserts one supporter. tions have been right!” INSTITUTIONALINVESTOR.COM
  • 68. APRIL 2011 INSTITUTIONAL INVESTOR4 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22HINA RESEARCH THE 2011 ALL-JAPAN RESEARCH TEAM FUND OF FUNDS 50 UNCONVENTIONAL WIS ¥96.1 billion; by the end of that carbon-fiber business. The month, the stock had rung up stock took off, rising 31.4 per- gains of 22.9 percent, to cent to end February at ¥619 ¥1,590, and outdistanced the and besting the broad market sector by 9.2 percentage by 16 points. “Her recommen- points. “She views the stock dations helped our perfor- market as if she were a small- mance,” affirms one grateful cap fund manager like me,” portfolio manager. cheers one investor. METALS OTC & SMALL COMPANIES Atsushi Yamaguchi Mariko Watanabe UBS Credit Suisse The buy side says: The buy side says: “Yamaguchi’s wide-ranging “Mariko is an expert analyses are useful to small-cap analyst.” our stock performance.” A tsushi Yamaguchi, who claims the pole position F inishing in first place for a fourth straight year — and for the sixth time in seven years for a ninth consecutive year, — is Mariko Watanabe of PLANT ENGINEERING PAPER & TEXTILES & SHIPBUILDING “has a long career in the stock Credit Suisse. “She is the only market and good relations with small-cap analyst who analyzes Akiko Kuwahara Shigeki Okazaki top managements — this is the overall market, develops a BofA Merrill Lynch Nomura Securities Co. very helpful to me,” asserts coherent investment strategy Global Research The buy side says: one buy-side enthusiast. In and does a lot of company vis- The buy side says: “Okazaki has good knowledge March 2010, when Nippon its,” declares one backer. Neu- “Kuwahara is always ahead of the global market and of the curve.” broad expertise.” Light Metal Co. announced tral on small-company stocks plans to sell its money-losing building-materials business, the 45-year-old UBS analyst in general over the past year, Watanabe did identify some that were likely to outperform. A kiko Kuwahara climbs one rung to finish on top for the first time. A 1996 grad- S higeki Okazaki, 43, lands in the winner’s circle for a sixth straight year. The Nomura upgraded the stock from neu- One example: In September uate of Tokyo’s Keio Univer- Securities Co. analyst upgraded tral to buy, at ¥108, on the the 43-year-old analyst urged sity with a bachelor’s degree in Modec, a Tokyo-based concern belief that the Tokyo-based investors to buy Daiichikosho economics, Kuwahara joined that specializes in offshore oil- aluminum producer’s balance Co., at ¥1,294, on the belief BofA Merrill Lynch Global drilling machinery, from neutral sheet would improve. Good that the Tokyo-based karaoke Research from Morgan Stan- to buy in November, on a price call. By the end of February manufacturer’s product ley Japan in September 2009. dip at ¥1,192. Okazaki believed 2011, the stock had catapulted launches would drive up sales. Soon after, in November 2009, Modec would benefit from rising 62 percent, to ¥175, and blew In February, Daiichikosho the 37-year-old analyst initi- crude oil prices and the Obama past the sector by a whopping announced that sales in the ated coverage of Teijin with a administration’s lifting of the 70.3 percentage points. Less nine months through Decem- buy rating, at ¥248, partly on deep-sea drilling ban in the U.S. spectacular but still applauded ber had risen slightly, from the strength of the Osaka- By the end of February, the stock was last May’s upgrade of ¥95.5 billion ($1.2 million) to based textile producer’s moves had gushed 26.2 percent, to Mitsui Mining & Smelting to cut costs and improve mar- ¥1,504, and blown past the sec- Co. from neutral to buy, at gins. The stock zipped to ¥416 tor by 18 percentage points. Also ¥251, primarily on the Tokyo- in early February 2011, a in November, Okazaki upgraded based outfit’s ballooning earn- MARIKO whopping 67.7 percent gain Kawasaki Heavy Industries from ings. Shares of the lead and copper alloy supplier climbed WATANABE that outperformed the broad market by 57 percentage neutral to buy, at ¥252, on high demand for the Kobe-based 28.7 percent, to ¥323, and OF CREDIT points, and Kuwahara down- industrial-engineering-gear outpaced the sector by an impressive 24 percentage SUISSE graded it to neutral, on valua- tion. By the end of that month, maker’s hydraulic construction equipment, especially in China. points, through February. “His “ANALYZES Teijin’s shares had slipped 5 That stock soared 30.6 percent, massive, deep information flow is valuable for building our THE OVERALL percent, to ¥395. In August she upgraded Tokyo’s Toray to ¥329, through February. “His knowledge has helped my investment strategy,” explains MARKET.” Industries from neutral to buy, performance,” attests one one advocate. at ¥471, on a recovery of its money manager. INSTITUTIONALINVESTOR.COM
  • 69. 2 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 7SDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE INFOBA tral to buy, at ¥343,500, count retailer headquartered because “I appreciated their in Shinjuku, and he has reiter- cash flow stability and cheap ated his recommendation valuation,” he explains. The repeatedly since, citing the following month, Araki down- company’s strong growth graded Japan Excellent from prospects and improving prof- buy to neutral, at ¥406,000, itability, among other factors. on worries about further dete- In the 12 months through rioration of the office-leasing February 2011, the stock business at the real estate surged 26.6 percent, from REITS investment trust, which is RETAILING/CONVENIENCE ¥2,250 to ¥2,849, and beat headquartered in Tokyo. By the sector by an impressive Tomohiro Araki & SPECIALTY STORES Nomura Securities Co. the end of February, Nomura Takahiro Kazahaya 21.5 percentage points. Real Estate’s shares had shot Kazahaya, 35, earned an MBA The buy side says: up 37.1 percent, to ¥471,000 Deutsche Securities at the University of Michigan’s “Araki keeps investors abreast — 17.9 percentage points The buy side says: Stephen M. Ross School of of industry trends.” “He has strong connections ahead of the sector; although to top management of Business in 2007; he joined T omohiro Araki of Nomura Securities Co. shares of Japan Excellent rose to ¥482,500, they lagged the major retailers.” Deutsche in 2009 from Nomura Securities, where he captures the No. 1 spot for a second consecutive year. “He evaluates stocks in a logical sector by 2 percentage points since Araki’s downgrade. “I like how he provides the T akahiro Kazahaya rock- ets from third place, where he debuted last year, to the worked as a retailing analyst. manner, and he has been a whole deal — not just cover- No. 1 spot. “His research is good stock picker,” insists one age on REITs, but he pays vis- based not only on quarterly money manager. Two calls its to other companies of earnings forecasts but also on last summer — one bullish, interest in real estate,” mar- longer-term structural views,” one bearish — proved pre- vels one investor. Adds declares one money manager. scient. In July the 35-year-old another: “Araki-san’s research One example: Way back in analyst upgraded Tokyo- is very deep and very thor- February 2009 the Deutsche based Nomura Real Estate ough, and he offers a unique Securities analyst urged clients Residential Fund from neu- perspective on the sector.” to buy Don Quijote Co., a dis- RETAILING/DEPARTMENT WHAT INVESTORS REALLY WANT & GENERAL MERCHANDISE STORES Buy-side professionals were asked to rate, on a scale of 1 to 10, the sell-side equity research attributes they Kumio Tomonaga deem most important. Earnings estimates was the across-the-board winner, considered the most important Citi attribute by managers of funds both large and small. Industry knowledge came in second, followed by The buy side says: accessibility/responsiveness. “He has a very comprehensive RANK BY JAPANESE EQUITY ASSETS UNDER MANAGEMENT knowledge of the sector and (IN U.S. DOLLARS) is always worth seeing.” $5 BILLION $2.5 BILLION $1 BILLION I OVERALL $15 BILLION TO TO TO LESS THAN RANK ATTRIBUTE OR GREATER $14.9 BILLION $4.9 BILLION $2.49 BILLION $1 BILLION n first place for a third con- secutive year is Kumio 1 Earnings estimates 1 1 1 1 1 Tomonaga, who moved from 2 Industry knowledge 2 2 2 2 2 J.P. Morgan to Citi in August; 3 Accessibility/responsiveness 4 4 3 3 3 the 47-year-old analyst also 4 Stock selection 3 3 6 7 5 was top-ranked from 2003 5 Special services (company 5 5 3 4 8 through 2007 in the predeces- visits,conferences, etc.) sor Retailing sector. A “big- 6 Financial models 6 6 5 6 4 picture thinker,” according 7 Idea generation 7 7 8 8 6 to one buy-side backer, 8 Research delivery (entitlement, 8 9 10 4 7 Tomonaga recommended technology & customization of buy-side needs) Seven & i Holdings Co. to 9 Management access (one-to-one) 10 8 7 9 9 investors in September, at ¥1,954, on the strength of the 10 Integrity/professionalism 9 10 9 10 10 Tokyo-based company’s conve- 11 Written reports 11 11 11 11 11 nience store business; the call 12 Useful/timely calls & visits 12 12 12 12 12 underscored one client’s praise INSTITUTIONALINVESTOR.COM
  • 70. APRIL 2011 INSTITUTIONAL INVESTOR6 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24HINA RESEARCH THE 2011 ALL-JAPAN RESEARCH TEAM FUND OF FUNDS 50 UNCONVENTIONAL WIS of Tomonaga’s “strong stock picking skills.” By the end of February, the shares had shot up 16.5 percent, to ¥2,277, and were ahead of the sector by 8.7 percentage points. SOFTWARE/ENTERTAINMENT TELECOMMUNICATIONS TRADING COMPANIES Masashi Morita Daisaku Masuno Yasuhiro Narita Okasan Securities Co. Nomura Securities Co. Nomura Securities Co. The buy side says: The buy side says: The buy side says: “Masashi Morita gets the big “His solid, fundamental “He knows what drives stock picture right.” approach leads to reliable prices, which is sensitivity to recommendations.” commodity prices.” SOFTWARE/BUSINESS Sumito Takeda I n first place for a third year running is Masashi Morita, 39, of Okasan Securi- D aisaku Masuno, 46, of Nomura Securities Co. O n top of the roster for a second consecutive year is UBS ties Co. Throughout the past rules the roost for a third year 36-year-old Yasuhiro Narita. The buy side says: year, Morita has maintained running — and for the fourth Investors appreciate the fact “I greatly appreciate his his bullish stance on Kyoto’s time in five years. “Where some that the Nomura Securities Co. insight on the industry from a Nintendo Co., first recom- analysts trade too much on researcher “knows management long-term point of view.” mended back in 2007 and short-term catalysts, he coura- at all the companies he covers,” S umito Takeda, 35, cap- tures the crown for a sec- ond consecutive year. “His highlighted repeatedly since — most recently in October, at ¥20,850, on the belief that the geously stays with long-term opportunities,” marvels one buy-side enthusiast. For as one buy-side supporter puts it. In June, Narita published “Trading Companies,” a report forecast of the industry’s February 2011 launch of instance, when wireless com- detailing how Japanese con- future is so interesting and Nintendo 3DS in Japan would munications provider NTT glomerates were leveraging rela- exciting — it’s as if I am hear- power higher profits; he pre- DoCoMo’s shares sank to tionships with overseas partners ing the strategy of an expert dicts 3DS will be the most ¥132,600 in October 2009, to gain traction in emerging chess player,” marvels one popular game console in his- on anemic earnings growth, economies. The analyst’s win- portfolio manager. In June the tory. By the end of February, Masuno reiterated his long- ning stock picks include an UBS analyst — “a strong the stock had advanced to standing buy on the Tokyo- April 2010 reiteration of his advocate for Internet struc- ¥23,970, a 15 percent gain based concern, largely on rising long-standing buy on Osaka- tural movements,” in the that was just ahead of the sec- demand for smartphones. The headquartered Itochu Corp., at words of another investor — tor’s 14.2 percent rise. One stock rallied as profits swelled, ¥843, on favorable trends in highlighted his long-standing client credits Morita for his advancing 15.8 percent raw steel prices and on the ele- buy recommendation on ability to “see both business through February 2011, to vation of Masahiro Okafuji to CyberAgent, Japan’s leading and gamer viewpoints,” which ¥153,500, and besting the Itochu’s president and chief online advertising agency adds a “deeper dimension to broad market by 7.2 percent- executive officer. Narita expects (as measured by annual sales), his stock calls.” age points. “I was especially the company, which he says is at ¥139,700, on the strong impressed with Masuno-san’s already strong in China-related growth prospects of the Tokyo- thoughts on smartphone pene- businesses, to “leverage its based company’s popular tration in the Japanese market,” expertise” further and aggres- Ameba virtual world platform; OKASAN explains one supporter. But the sively target consumer-related in March 2010, CyberAgent announced that it was bringing SECURITIES’ analyst’s top pick remained Tokyo’s SoftBank Corp., first businesses in that country: “We have high expectations for the platform to the U.S. market MASASHI recommended in October 2008 Okafuji’s marketing skills,” the via the Facebook social net- working site. The stock had MORITA on higher sales of tablet com- puters. For the 12 months analyst explains. The stock zipped to ¥914 in January but skyrocketed to ¥261,300 by “GETS THE ended February 2011, shares of had retreated to ¥846 by the the end of February, a phe- nomenal 87 percent advance BIG PICTURE the high-speed Internet pro- vider soared 44.2 percent end of February; nonetheless, it outperformed the sector by 3.7 that trounced the sector by 98 RIGHT.” and trumped the sector by percentage points since Narita’s percentage points. 26.5 percentage points. reiteration. INSTITUTIONALINVESTOR.COM
  • 71. 4 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 7SDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE INFOBA  ECONOMICS & STRATEGY slow to 7 percent for 2011, down from about 10 percent in 2010. “Economists generally would likely continue to do so. By the end of February, Japan’s broad market had advanced 13.3 have world views that are either percent and its financial services excessively broad or mired in sector had gained 19.7 percent. the minutiae, but Saji-san can combine the two,” observes one portfolio manager. TRANSPORTATION Jun Harada ECONOMICS UBS The buy side says: Nobuyuki Saji “Harada-san provides solid, Mitsubishi UFJ Morgan Stanley value-driven arguments Securities Co. that rise above the noise of QUANTITATIVE RESEARCH short-term trade ideas.” The buy side says: “He is very knowledgeable about Takaaki Yoshino Asia, especially China, and I t’s ten straight years at No. 1 for Jun Harada, 40, of UBS. “My discussions with him very good at explaining it with numbers and examples.” EQUITY STRATEGY Hajime Kitano Daiwa Securities Group The buy side says: “He produces a prodigious always prove useful,” insists one client. In June, Harada raised I n first place for a tenth straight year is Nobuyuki J.P. Morgan The buy side says: amount of work and is available for individual consultation.” Nippon Yusen K.K. from neu- tral to buy, at ¥326, making the case that higher shipping rates Saji of Mitsubishi UFJ Morgan Stanley Securities Co. In October the 52-year-old “He uses a combination of technical and fundamental analysis and is always logical F or a sixth consecutive year — and for the seventh time in eight years — Takaaki and persuasive.” would bolster the Tokyo-based economist published a report Yoshino of Daiwa Securities freight and passenger cruiser’s bottom line. Boy, was he right: In the nine months through on the Lewisian Turning Point — the time in which industrial wages shoot up as the supply of C limbing one rung to finish on top for the first time since 2007 is Hajime Kitano of Group claims the throne. The 45-year-old analyst’s reports are “interesting, unique and useful” December, net profit catapulted surplus labor slows — in J.P. Morgan. “His way of think- and cover a “wide variety of to ¥71.2 billion ($86.8 million) nations throughout the region; ing is always based on funda- themes,” clients say. One theme from a loss of ¥26.7 billion in Saji predicted that China mental logic, and he frequently that Yoshino addressed in a the same period one year earlier. would reach the turning point provides a contrarian view,” series of three reports last year In January, with the stock up in 2010, but the countries in explains one buy-side loyalist. was the relationship between 12.9 percent, to ¥368, and the Association of Southeast Case in point: In November the individual stocks’ risks and mar- ahead of the sector by 16.3 Asian Nations were still nearly 51-year-old strategist published ket risk. Building on work by percentage points, Harada a decade away. Thus, “we see a report, “Japanese Stocks Still academics Fousseni Chabi-Yo downgraded it to neutral, tell- the risk of a slowing down of Have Pent-up Energy,” in which and Jun Yang on idiosyncratic ing clients that higher fuel Chinese economic growth and he argued against the consensus coskewness (ICSK) — a mea- prices would undermine prof- higher potential of Asean coun- view that a recent rally in domes- sure of the comovement of indi- itability. By the end of Febru- tries,” he told clients. In Janu- tic equities was fueled by quanti- vidual stock variance and ary, the shares had dipped 2.2 ary the Asian Development tative easing measures in the market returns — with regard to percent, to ¥360; during the Bank revised its outlook to U.S. Kitano pointed out that “if U.S. equities, Yoshino con- same period the sector inched project that real gross domestic capital were flowing into Japan, firmed that their finding regard- up 1.4 percent. “Great call on product growth for Asean the yen ought to have appreci- ing anomalously low returns for Nippon Yusen — he discov- countries would be 8.6 percent ated, while it has in fact depreci- distressed stocks applied as well ered improving fundamentals for 2010, not the 8.2 percent ated” and that the rally was to the Japanese market. Portfo- and an attractive valuation ear- predicted in September (which driven by securities and com- lio managers should consider lier than most other analysts,” itself was a revision of the modities futures trading, fol- not only the mean and standard recalls one grateful investor. ADB’s original forecast of 7.3 lowed by robust investor interest deviation, but also ICSK, to Concurs another: “The proba- percent; it has not revised its in bank shares. In short, he told determine changes in investor bility of Harada getting his buy 2011 forecast of 7.3 percent clients, “the financial sector has expectations and market behav- and sell recommendations growth). In February the Chi- boosted Japanese stocks” and ior, Yoshino concluded. •• right is higher than other sell- nese government announced side analysts’.” that it expects GDP growth to COMMENT? GO TO RESEARCH AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 72. APRIL 2011 INSTITUTIONAL INVESTOR8 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26EAM RESEARCH FUND OF FUNDS 50 UNCONVENTIONAL WISDOM THE FUTURIST THE CHARTIST CO THE 2011 FUND OF FUNDS 50 of-hedge-fund assets shrank based head of global prime Firms Adapt to from $825.9 billion in mid-2008 finance sales and capital intro- to $571 billion at the end of duction at Deutsche Bank. As Survive Change 2009. Although the hedge fund Carter explains, increased direct industry overall is nearly back to investment and fund-of-funds its asset total before the financial growth can coexist as long as crisis, fund-of-funds assets had new investors keep coming in, To win institutional investors, multimanager hedge fund firms must prove their mettle. recovered to only $646 billion because they often start with when this year began. funds of hedge funds. BY IMOGEN ROSE-SMITH Much of the reason for the less London-based HSBC Alter- robust growth of funds of funds is native Investments Ltd, No. 1 in that the bulk of the new assets this year’s ranking, with I n their nearly four years man- aging absolute-return invest- ments for the $140.6 billion responding to the transformative trends dominating the fund-of- hedge-funds industry today and flowing into hedge funds is from institutions. A March Deutsche Bank survey of more than 500 $36.8 billion in assets, illustrates how the fund-of-hedge-funds industry is changing. Started 16 New York State Common are working against the increas- hedge fund investors represent- years ago and housed within its Retirement Fund, Peter Carey ing tendency among institutional ing $1.3 trillion in hedge fund parent’s private bank, HAIL’s and his team completely rebuilt investors — like New York assets found that 80 percent of fund-of-funds business has prin- the third-largest U.S. public pen- Common — to invest directly in foundations and endowments, cipally catered to high-net-worth sion plan’s hedge fund portfolio, a basket of hedge funds they cre- 83 percent of pension funds and individuals and family offices, moving from a strategy that ate themselves. sovereign wealth funds and an often based in Europe. But in depended on funds of hedge “At New York Common we astonishing 96 percent of insur- 2005, HAIL began making a funds to a much more elaborate realized that we had basically ance companies increased their concerted effort to build up its one that focuses on direct invest- built a fund of hedge funds in- allocations to hedge funds last institutional business, says ing, portfolio construction and house,” says Carey. year. But 62 percent of these Timothy Gascoigne, HAIL’s manager selection. By last sum- The firms constituting this same investors said that none of global head of portfolio manage- mer, Carey thought that other year’s Fund of Funds 50 run a their new allocations will be ment. He estimates that today investors could benefit from the combined $525 billion, up made to funds of hedge funds. these investors make up 40 per- insights and expertise his group 4.4 percent from the $503 bil- Institutional investors are cent of its fund-of-funds clients had developed overseeing the lion that the 50 biggest firms increasingly balking at the extra and the bulk of the new money $4 billion absolute-return port- managed when 2010 began but set of fees that multimanager flowing into its funds. folio, which was invested in 28 40.1 percent less than the firms impose. The standard Because HAIL has been in hedge funds. But New York $877 billion they had as of mid- fund of funds adds a 1 percent the fund-of-funds business for Common is prohibited from 2008. The vast majority of the management fee and 10 per- so long, it is invested in some of managing outside money, so in money is invested with the very cent performance fee to the the top-performing, hard-to- November, Carey and his dep- largest firms. The five biggest access hedge fund companies, uty, Robert Mazurek, announced managers collectively control like Tudor Investment Corp. that they had joined SkyBridge 27.5 percent of the assets, as “THE TERM and Moore Capital Manage- Capital II and would launch a new institutional business, top-ranked HSBC Alternative Investments Ltd and No. 2 ‘FUND OF ment. Gascoigne estimates that one third of the managers with SkyBridge Direct. Blackstone Alternative Asset FUNDS’ which its main fund has SkyBridge, No. 27 on the Fund of Funds 50 — Institutional Management each saw its assets under management jump by IMPLIES A invested are closed to additional capital or new investors. During Investor’s annual ranking of the more than $6 billion last year. STATIC the crisis, when some closed world’s biggest multimanager hedge fund firms, determined by The economic collapse that began in late 2007 and acceler- APPROACH.” funds opened, in some cases for the first time in decades, HAIL assets under management as of ated when U.S. investment was able to increase its alloca- January 3, 2011 — didn’t have a bank Lehman Brothers typical 2 percent and 20 per- tions to those managers because traditional fund of hedge funds Holdings filed for bankruptcy cent that single-manager hedge it had cash on hand. until last spring, when it bought in September 2008 hit hedge funds charge. To survive, fund- It is hard to beat New York– Citi Alternative Investment’s funds hard. Overall hedge fund of-funds firms are having to based Blackstone Group for hedge fund business. SkyBridge assets under management fell adapt and prove their worth. name recognition among is one of many multimanager from a second-quarter 2008 “Funds of funds are partner- U.S. asset owners. Founded in hedge fund firms seeking to high of more $1.93 trillion to ing with institutions, and as they 1985 as a private equity firm, diversify their capital bases and $1.4 trillion at the end of 2009, do that they are helping educate running money for traditional attract more institutional money. according to Chicago-based these investors in alternatives,” institutional investors such as In doing so these firms are Hedge Fund Research. Fund- says Scott Carter, New York– U.S. public pension funds, INSTITUTIONALINVESTOR.COM
  • 73. 6 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 8ONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE INFOBANK RAINMAKERS MARKETS THE BUY S THE 2011 FUND OF FUNDS 50 THE 2011 FUND OF FUNDS 50 FIRM CAPITAL FIRM CAPITAL RANK ($ MILLIONS) RANK ($ MILLIONS) 2011 2010 FIRM 2011 2010 2011 2010 FIRM 2011 2010 1 2 HSBC Alt. Investments Ltd (London, U.K.) $36,800 $30,600 32 32 Banca del Ceresio (Lugano, Switzerland) $6,3002 $5,7903 2 3 Blackstone Alt. Asset Mgmt 34,0611 27,874 33 33 Hall Capital Partners (San Francisco, CA) 6,292 5,6043 (New York, NY) 34 30 Aberdeen Asset Mgmt9 (London, U.K.) 6,284 6,2933 3 1 Alt. and Quantitative Investments, UBS 27,548 32,286 (New York, NY) 35 34 Crestline Investors (Fort Worth, TX) 5,997 5,200 4 4 Grosvenor Capital Mgmt (Chicago, IL) 24,0222 22,5323 36 — AXA Investment Managers 5,700 — (Paris, France) 5 5 Permal Group (New York, NY) 21,600 19,400 37 38 EnTrust Capital (New York, NY) 5,55010 4,57611 6 6 Goldman Sachs Hedge Fund Strategies 20,8002 19,0803 (New York, NY) 38 37 Aetos Alt. Mgmt (New York, NY) 5,475 4,676 7 12 BlackRock Alt. Advisors (Seattle, WA) 18,910 16,100 39 45 Prisma Capital Partners (New York, NY) 5,400 4,090 8 11 Pacific Alt. Asset Mgmt Co. (Irvine, CA) 16,704 16,315 40 — Diversified Global Asset Mgmt Corp. 5,323 2,312 (Toronto, Canada) 9 8 Lyxor Asset Mgmt4 16,133 17,700 (Paris La Defense, France) 41 40 Harcourt Inv. Consulting 4,70012 4,500 (Zurich, Switzerland) 10 7 Union Bancaire Privée 15,000 18,7923 (Geneva, Switzerland) 41 40 LGT Capital Partners 4,700 4,500 (Pfäffikon, Switzerland) 11 9 Man Investments (London, U.K.) 14,7002 17,1003 43 44 Archstone Partnerships13 (New York, NY) 4,6782 4,3533 12 10 GAM (London, U.K.) 14,500 17,0003 44 36 Lighthouse Partners 4,500 4,700 13 15 Mesirow Advanced Strategies 13,628 12,082 (Palm Beach Gardens, FL) (Chicago, IL) 45 — Evanston Capital Mgmt (Evanston, IL) 4,240 — 14 16 Morgan Stanley Alt. Inv. Partners 11,905 11,149 (West Conshohocken, PA) 46 — Brummer & Partners 4,078 — (Stockholm, Sweden) 15 14 Amundi Alt. Investments5 (Paris, France) 10,734 12,800 47 — Schroders NewFinance Capital14 3,9002 2,5003 16 18 Aurora Inv. Mgmt (Chicago, IL) 10,468 9,542 (London, U.K.) 17 13 Credit Suisse Asset Mgmt6 10,400 13,000 48 49 Sciens Capital15 (New York, NY) 3,765 2,800 (New York, NY) 49 17 BNY Mellon Asset Mgmt16 3,746 10,277 18 23 K2 Advisors (Stamford, CT) 9,394 7,986 (New York, NY) 19 20 Financial Risk Mgmt (London, U.K.) 9,277 8,473 50 — NB Alt. Inv. Mgmt (New York, NY) 3,710 — 20 21 Pictet Alt. Investments 8,800 8,347 (Geneva, Switzerland) Unless otherwise specified, 2011 assets are as of January 3, 2011, and 2010 assets are as of January 4, 2010. 21 25 J.P. Morgan Alt. Asset Mgmt 8,600 7,500 1Estimate, unaudited. (New York, NY) 2As of December 31, 2010. 3As of December 31, 2009. 22 31 LCF Edmond de Rothschild Asset Mgmt 8,489 6,200 4Lyxor Asset Management is a subsidiary of Société Générale. (London, U.K.) 5Amundi Alternative Investments is a joint venture of Crédit Agricole and Société Générale. 6Previously listed as Credit Suisse Funds and Alt. Solutions. 23 — BlueCrest Capital Mgmt (London, U.K.) 8,3532 — 7Total fee-earning assets as of December 31, 2010; includes advisory and Gottex Solutions Services assets under management. 24 22 Gottex Fund Mgmt 8,2557 8,130 8Rank and capital last year were for Citi Alternative Investments, which SkyBridge Capital II (Lausanne, Switzerland) acquired in June 2010. 9Royal Bank of Scotland Group sold the Investment Strategies division of RBS Asset Management 25 27 Fauchier Partners (London, U.K.) 7,858 7,200 to Aberdeen Asset Management in January 2010. 26 19 E.I.M. (Nyon, Switzerland) 7,500 8,700 10Estimated as of December 31, 2010. 11As of January 1, 2010. 27 29 SkyBridge Capital II8 (New York, NY) 7,440 6,708 12As of June 30, 2010. 13Previously listed as Archstone Management Co. 28 24 Arden Asset Mgmt (New York, NY) 7,3402 7,943 14Previously listed as NewFinance Capital; NewFinance Capital has been a wholly owned subsidiary of Schroders since 2006, and Schroders changed the name of the subsidiary to 29 34 Rock Creek Group (Washington, D.C.) 7,200 5,2003 Schroders NewFinance Capital in July 2010. 15Previously listed as Sciens Fund of Funds Management. 30 25 Notz, Stucki & Cie (Geneva, Switzerland) 7,000 7,500 16EACM Advisors is the sole BNY Mellon Asset Management fund-of-hedge-funds business. 31 28 Silver Creek Capital Mgmt (Seattle, WA) 6,774 7,192 Blackstone entered the fund-of- mands a massive $34 billion in Hill. “The term ‘fund of BAAM might be among the hedge-funds business in 1990 fund-of-hedge-funds assets, up funds’ implies a static best at the customized and advi- when it launched Blackstone 22.2 percent in the past year approach to investing in hedge sory business, but the firm is far Alternative Asset Management. and nearly threefold since 2006. funds utilizing a finite menu from alone. Most of the largest Led by former investment “For about eight years now, of existing products, whereas fund-of-funds managers offer a banker and Lehman Brothers our clients have looked to us our business is focused on bespoke approach. The reason co-CEO J. Tomilson Hill, to provide investment solu- customized products using a is simple: To justify their fees, No. 2–ranked BAAM com- tions using hedge funds,” says dynamic process.” fund-of-funds firms need to INSTITUTIONALINVESTOR.COM
  • 74. APRIL 2011 INSTITUTIONAL INVESTOR0 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28EAM RESEARCH FUND OF FUNDS 50 UNCONVENTIONAL WISDOM THE FUTURIST THE CHARTIST CO offer institutions something get around this in part by oper- others gave him money, includ- fund-of-funds group with a more than what those investors ating seeding businesses. ing some of the best-known strong track record and signifi- can do on their own. The bifurcation in the market firms in the industry. For a time cant institutional business, An institutional quality really challenges the fund-of- they reaped the rewards. including separate accounts and fund-of-funds manager can funds managers in the middle — In mid-2008, Geneva-based advisory clients. make a real difference, says those that are too big to invest Union Bancaire Privée was the “There is a tendency to think Kent Clark, New York–based easily in managers with only a largest fund-of-hedge-funds of funds of funds as a separate CIO of Goldman Sachs Asset couple hundred million dollars manager in the world, with and distinct business,” says Management’s hedge fund in assets but lack the resources $56.9 billion in assets. Today it Raymond Nolte, SkyBridge’s strategies group, No. 6, with of the very largest firms. ranks No. 10, with $15 billion, CIO, who headed the fund-of- $20.8 billion in assets. “Having a At No. 25 on our list, with an incredible 74 percent drop in funds group at Citi. “Our vision research process that you can $7.9 billion in assets, London- assets. UBP was the eighth- was to create one continuum in track over time, which means based Fauchier Partners is just largest investor in Madoff. the alternatives space to deliver that performance is documented starting an aggressive marketing Although the firm has taken access to hedge funds in what- and standards are kept, is a huge push into the U.S. Unlike many steps to improve its due dili- ever form the client wants.” He advantage,” he explains. “It is of its European brethren, gence process, and is starting to anticipates that institutional about accountability.” Fauchier’s business is almost raise new assets, it is having a investors will realize the value of Smaller fund-of-funds man- entirely institutional. “There difficult time winning the confi- such a full-service business. agers, especially those below the isn’t any secret to being a suc- dence of institutional investors. SkyBridge will have to con- $3.7 billion cutoff to make this cessful fund of hedge funds,” Madoff proved too much for tend with investors like the year’s Fund of Funds 50, often another investor — Ivy Asset $12 billion West Virginia Invest- are not in a position to custom- Management Corp., which in ment Management Board, ize. But they too want institu- “THERE ISN’T 2002, with $6.2 billion in assets, which chose the direct route tional dollars. They argue that size matters — reasoning that ANY SECRET was the seventh-largest firm in the first Fund of Funds 50. Ivy when it first invested in hedge funds a few years ago. “Given the sheer amount of money the TO BEING A was shut down last year by its the long-term rate of return we very largest firms have to put to work hurts their ability to pro- SUCCESSFUL parent, BNY Mellon Asset Management. With that, BNY expect and the role hedge funds play in our portfolio, they start duce alpha. Managers with FUND OF Mellon has plummeted to to lose their attraction if we have fewer assets can adapt more quickly and can invest with FUNDS.” No. 49 from No. 17 on the list, losing 64 percent of its assets. to pay the extra 1 percent or so to invest through a fund of small hedge funds, whose per- Last spring, as the fate of Ivy funds,” says executive director formance can be better than says Fauchier Partners CEO was being decided, one of its Craig Slaughter. those of well-known large hedge Clark Fenton. “Conceptually, it partners reached out to the No one knows better than funds accessible to everyone. is very simple, but it is very hard founder of New York–based SkyBridge’s Carey how hard “One of the things I prefer to execute. It is about picking SkyBridge, Anthony Scaramucci, running a direct investment about our portfolios is that we the right managers, doing the to see if he would acquire what portfolio can be, particularly at run the gamut of managers,” operational due diligence to remained of the business and the a budget-strapped public fund. says Jill Schurtz, CEO of New make sure there is no fraud and team. Scaramucci started Sky- The difficulty involves not only York–based Robeco-Sage, a the investment terms are just Bridge as a hedge fund seeding manager selection, but also con- $1.3 billion fund-of-funds firm and true, then putting the man- firm in 2005. His phenomenal stant monitoring and back- started by three former Gold- agers in the right combination networking skills notwithstand- office and due diligence work. man Sachs partners in 1993 and sizing up the ones that will ing, New York–based SkyBridge Additionally, public funds often and now owned by Dutch firm do well. The final building block managed less than $2 billion cannot make the kind of quick Robeco Investment Manage- is risk management.” when 2010 began, almost all of allocation decisions that a fund ment. Robeco-Sage, which But for a long time, unwary which came from family offices of hedge funds can. offers customized accounts, investors had trouble differenti- and high-net-worth individuals. “Investors are going to realize invests in larger hedge fund ating among funds of hedge To grow the business, that you have to manage these firms, but it also finds opportu- funds — in part because of Scaramucci knew he needed to portfolios,” says Carey. nities with funds managing Bernard Madoff. In December do something big. So although What SkyBridge and other $500 million or less. Big funds 2008, Madoff admitted that the he passed on Ivy last April, he fund-of-funds managers are of funds have difficulty giving fund he had been running for announced that his firm was hoping is that, after trying the money to such small managers, more than 40 years was, in fact, acquiring $6.1 billion in funds direct approach, some institu- because the investments are a massive Ponzi scheme. of hedge funds from Citigroup. tions will discover that the pro- unlikely to have a meaningful Although plenty of fund-of- The deal gave SkyBridge a fessionals do it better.•• impact on their results. Some funds managers saw enough red large multimanager firms can flags to avoid Madoff, many COMMENT? GO TO RESEARCH AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 75. APRIL 2011 INSTITUTIONAL INVESTOR72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 COVER STORY creates key indicators such as forward rates, she observes. “‘Know what you own’ has volatility, skew, swap rates and yield curves always been important, but it is even more to track attractive entry points and executes important now, particularly when you think with Staley’s final approval. about allocations.” The notion of accessing a few top man- During the financial crisis Crecelius agers in an asset class and then filling in the called all her private investment managers rest of the portfolio with synthetic instru- and made a list of all those who would be ments is not new. However, Case Western going out over the next 24 months for new Reserve’s strategy has a different twist. The funds, and how much could be budgeted for approach combines funds and managers these investments. Another risk-mitigating with option-based strategies transacted and factor at Hopkins’s endowment is opera- managed in-house with the purpose of “con- tional due diligence: Crecelius built the continued from page 39 management access trolling investment outcome” to meet the investment office with the notion that the — capable of performing in-house asset allo- endowment’s liability to the university, Staley operations team would be as important as cation studies. As the markets began their explains. Controlling outcome may mean the investment staff. descent in the summer of 2008, Hussain and watching for brief market dislocations that While schools like Johns Hopkins, Staley realized that report generation was not open the door for low- or zero-cost tail-risk Harvard, Notre Dame and the Univer- going to suffice as the sole risk management hedges or assembling an option structure with sity of Michigan have billion-dollar risks tool, because there were too many unknowns an asymmetric return profile — that is, more to wrangle, small endowments have to to feed into the system. upside potential than downside — or creating contend with a somewhat different set of “This is a bigger thing than you think it an exposure to the Russell 3000 index using a problems. Many have spent years trying to is,” says Hussain, who had previously been combination of active, sector-specialist man- achieve the performance of the big guys. an investment analyst at nearby Oberlin agers plus options to plug any sector gaps and “People get so complicated in what they do College. “Endowments see risk manage- provide downside protection. and want to mirror bigger funds,” Notre ment as a backward-looking function, a Endowment chiefs have to find ways to Dame’s Malpass worries. “But they don’t reporting function to some extent. To us, manage risk that fit their schools’ cultures, have the proper oversight and management.” risk is much more than that.” their staffs’ abilities and their own comfort Malpass is particularly critical of investment Soon after building Carma, Hussain levels. Crecelius, who was hired from MIT vehicles like funds of funds that charge high began to model spending and policy distri- to set up Johns Hopkins’s first investment fees, which eat up most of the performance. bution from the endowment. In 2008, while office in October 2005, manages portfolio Small schools have historically been looking at asset manager exposures, he saw risk without a risk officer or computerized unable to match the returns of their larger benchmark risk and correlations increasing. system. Instead, she thinks a lot about con- brethren. Endowments with $100 million “The volatility was punishing us,’” recalls tingency planning and works closely with the to $500 million in assets lost 4.4 percent a Staley, who earlier in her career had been school’s treasurer and CFO. At the height of year, on average, for the three years ended a senior consultant at Pricewaterhouse- the crisis, Johns Hopkins issued taxable debt. June 30, 2010, while schools with more than Coopers and an investment director at the “We did it because the world was very uncer- $1 billion in assets fell 3.5 percent. In a Janu- State of Wisconsin Investment Board. “We tain,” says Crecelius, who holds a Ph.D. in ary 2011 report on the financial prospects asked, Isn’t there a way we could learn to use French from Yale University, and taught the for U.S. higher education, Moody’s Inves- it to our advantage?” That was the beginning language at MIT before entering the finan- tor Services announced it is maintaining a of a new idea: active risk management that cial world in the late 1980s. Hopkins’s bank “negative outlook … for the large majority eliminates much of the external manage- lines of credit were ending in a year, and there of rated universities.” The report raises fun- ment across the domestic, international and was concern that the borrowing window damental questions about the long-term emerging markets equity portfolios. would close. Crecelius saw at the time that economic viability of many colleges, espe- Staley and Hussain believe in managing the appetite for university paper was stronger cially smaller ones. It found that except for exposures and risks so there is capital to than for U.S. corporations. “It was a vote of the market-leading colleges and universities, deploy when it is most attractive to do so. As confidence for us but a measure of how leery less-diversified schools continue to be more part of the process, Hussain lays out near- people were of everything else,” she adds. directly challenged by tuition pricing, weak and longer-term tail risks that could impact Crecelius views risk from the top down. fundraising and state-funding threats. the portfolio — inflation, deflation, hyper- She looks at the total university to gauge As the largest schools continue to beef up inflation, the European debt crisis, China its financial strengths, including sources their risk management with new hires and slowdown, food inflation, dollar strength or of income; number of applicants who new approaches, small schools are taking weakness. Next he tries to quantify the exist- can pay full tuition; dependence on gov- another route. The smallest endowments, ing hedges already held in the portfolio via ernment financing and risk of losing it; the with under $100 million in assets, have often manager positions and option holdings, and school’s debt burden, taxable and non- depended on local banks to manage their then identify what additional hedges would taxable; and what is needed to preserve its assets. The lack of coordination among the be required to mitigate the various risks. He bond rating. “It’s devilishly complicated,” banks and a school’s administration often INSTITUTIONALINVESTOR.COM
  • 76. 3 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 9 meant that portfolio diversification was not learned to integrate their operations with the to start his own hedge fund. Another Brit, possible. Over time schools have chosen to rest of the school. “The crisis inspired a con- Michael Abbott, former head of the invest- outsource their portfolios to one specialist versation that extended from boards of trust- ment committee at fund-of-hedge-funds manager that can oversee their portfolio risk. ees to administrations to the endowments firm Robeco-Sage, arrived last November For years the endowment at Central that I haven’t seen in 25 years,” observes to replace Walsh. Connecticut State University wasn’t much John Walda, Nacubo president and CEO. Cornell has instituted other changes. more than a “letterhead foundation,” It’s very important to have cross- First, because of Moody’s new require- says Nicholas Pettinico Jr., the senior vice disciplinary committees to manage the overall ment for schools to report how much of president for advancement. Although it was risk of institutions, says Verne Sedlacek, CEO their investments can be liquidated within founded in 1971, the now–$25 million fund of Commonfund, a Wilton, Connecticut– a month, Cornell has developed an internal remained in the hands of the same man- based firm that manages over $25 billion for report that is more of a management tool. agers until Pettinico was assigned to ratio- more than 1,500 schools and foundations. He The university also now looks not just at its nalize it in 2008. Following a request for believes that endowments should take a page variable rate debt risk and swaps contracts, proposal, the CCSU Foundation selected from the pension investors’ playbook and but at all financial components holistically. Oaks, Pennsylvania–based SEI as manager. manage their assets and liabilities. The third and perhaps most important Central Connecticut has already seen a pay- In the past the annual distribution from change, says DeStefano, is that Cornell off: Its endowment put up a 15.2 percent most endowments was flexibly struc- created a new trustee advisory committee return for fiscal year 2010, well above the tured based on the pool of assets; as values to focus on finance, particularly treasury, 11 percent average for funds of its size. increased at a substantially greater rate than debt strategies and swaps. The commit- Experiences like Central Connecticut’s inflation, some schools with larger endow- tee includes the chairs of the finance and are giving Tom Heck, CIO at the Ball State ments received close to 50 percent of their investment committees, an emeritus trustee, University Foundation, food for thought. operating budget from the endowment, DeStefano, the CIO and treasurer. “We all The last two years have been difficult for the although most institutions receive about come from different perspectives trying to Muncie, Indiana–based endowment, as the 10 percent. Now that endowment distribu- solve problems,” she explains. once–$200 million fund lost a full quarter tions have become a very volatile revenue Similarly, at Harvard, president Drew of its value, now standing at about $150 mil- stream — correlated to market movements, Faust in 2009 created a financial man- lion. The portfolio earned 6.9 percent in as well as to the amount of distributions, agement committee to integrate risk and 2010, well below the 11.9 percent Nacubo tuition and scholarships — Sedlacek believes financial management across Harvard average for schools its size. A good part of the schools should detach them from the value Management Co. and the university. Mem- problem, says Heck, was his inability to move of their assets. Distributions should instead bers include HMC head Mendillo, treasurer quickly when changes were needed. The grow with the rate of inflation, or the cost James Rothenberg, chief risk officer Neil CIO, who saw the fund grow from $30 mil- value of providing an education. That would Mason, senior administrative officer Kath- erine Lapp, CFO Daniel Shore and several faculty members and alumni with financial expertise. The committee meets monthly to “We still believe in the endowment model. discuss the university’s spending policy, the It’s the execution that we need to examine.” interaction of the risks held by the endow- — Tom Heck, Ball State University Foundation ment portfolio and the rest of Harvard’s financial resources, and the right level of emergency cash that the school should col- lion over 19 years, aspires to the endowment result in a far less volatile — and risky — rev- lectively have on hand. model of 50 percent in alternative invest- enue stream than the current system. He sug- “The risk tolerance of the university is a ments and is now considering outsourcing. gests a distribution based 80 percent on the key component in our portfolio construc- Heck does not want to relinquish total con- inflation rate and 20 percent on asset value. tion,” says Mendillo. Harvard depends on its trol of the assets and is looking to become Schools that had not formally integrated endowment to cover 35 percent of its oper- an active partner with the outsourced firm, their financial offices before the crisis with ating budget. More than 60 percent of its participating in investment strategy discus- their endowments began to do so in the wake undergraduates receive need-based scholar- sions, with the ability to monitor and track of the crisis. Prior to 2009, Cornell University ships totaling $158 million, a sum expected managers. “We still believe in the endow- CFO Joanne DeStefano attended invest- to increase about 7 percent in fiscal 2011. ment model,” Heck says. “It’s the execution ment committee meetings, but then-CIO Soon after Mendillo arrived at HMC, that we need to examine.” James Walsh did not return the favor. After she began to revamp risk management. She the endowment lost 26 percent of its value in hired Mason, who has a background in both ENDOWMENT OFFICERS LEARNED the 2008–’09 academic year, things changed. trading and external manager oversight, as an important lesson in the 2008–’09 aca- Walsh began attending DeStefano’s meet- chief risk officer in March 2010 and assigned demic year: Their mission is critical to ings before returning to the United King- two staff members to work with him. Mason supporting their institutions. They’ve also dom at the end of the 2010 academic year is one of five members of the HMC manage- INSTITUTIONALINVESTOR.COM
  • 77. APRIL 2011 INSTITUTIONAL INVESTOR74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 COVER STORY ment committee that meets every Monday the appropriate amount of risk, and how Edleson is building a risk management afternoon to discuss strategy, risks, opportu- to identify if the risk implied in the policy framework from the top down, beginning nities and long-term plans for the portfolio portfolio — the asset allocation agreed to by with governance procedures, the risk com- and the organization. He also runs a Tuesday the investment committee and HMC execu- mittee and initiatives like building an exten- morning risk review meeting. Mason inter- tives — is being well managed. sive factor model to manage the risk in the acts with HMC’s internal portfolio manag- Geopolitical risk is very much on the portfolio. Edleson defines total equity risk ers on a daily basis to evaluate changes in minds of the brain trust at HMC, which has exposure across the entire endowment. With the risks in their holdings and reports any allocated 11 percent of the endowment to input from Que Nguyen, whom Schmid significant findings to Mendillo in real time. emerging markets. Harvard looks at total hired to fill a new position as chief strategy He regularly spends time assessing risk at exposure to India, Brazil and China across officer, he built a framework for determining each of HMC’s four internal trading desks. all asset classes, weighing that against what’s the amount of global equity in the endow- When a new strategy is adopted, the risk going on in various regions of the world to ment on both a qualitative and quantitative team studies how it could affect other posi- create the right balance in the portfolio. basis, and reduced the allocation by 10 per- tions and strategies in the portfolio. “Everyone here understands the stakes are centage points, from 85 to 75 percent. (The Mason, Mendillo and other members quite real and that this can’t become rou- excess assets went into credit investments of the investment team regularly meet with tine,” Mendillo says. temporarily.) By June, Schmid expects to external managers to evaluate the strength When the opportunity to hire a risk have a new liquidity budget in place, tot- of their risk management systems and to management expert to head its endowment ting up how much liquidity the endowment flag any weaknesses or concerns. Harvard arose in 2009, the University of Chicago fund should have across the total portfolio. He then plans to move on to the asset class level, identifying how much of the returns “The minority of organizations spend of its private equity, hedge fund and real the resources on a dedicated CRO role. asset investments comes from the market, or beta, as opposed to from manager outper- That’s a huge mistake.” formance, or alpha. — Mark Schmid, CIO, University of Chicago Schmid is at the vanguard of a new move- ment to match assets and liabilities much the has beefed up its ongoing due diligence with grabbed it. After former CIO Peter Stein way pension funds and corporate finance external managers’ operations, risk man- left to join Irvine, California–based Pacific offices do: “I think the endowment should agement and legal departments, looking at Alternative Asset Management Co., be managed in the context of the total entity, things like how a manager is handling due University of Chicago president Robert not just from an investment perspective.” diligence with its own counterparties. Zimmer and the investment committee Schmid spent a lot of time defining the “We’re being more granular with our selected Mark Schmid, a veteran corpo- need-based liabilities of the university as external managers and internal platforms rate pension plan executive, to oversee the well as the university’s medical center and and how those changes in risk would overlap now–$6 billion portfolio. pension fund, whose roughly $700 million with or interact with other risks in the port- Schmid arrived at the endowment office in assets he also oversees. Since the finan- folio,” Mendillo explains. in July 2009, bringing a new perspective on cial crisis, the school holds biweekly finan- Mendillo and Mason look at how risk is risk management built over two decades cial coordination meetings with the CFO, changing in the portfolio and how they might at the helm of the defined-benefit plans at treasurer and the endowment COO, to talk want to adjust it. They continually review and Chrysler Corp. (later DaimlerChrysler) and about functions like debt raising, audits and revise the analytic functions HMC uses to Boeing, both of which had chief risk officers. upcoming financial planning with the board. measure and control risks. HMC’s scenario In April 2010 he hired Michael Edleson, the Schmid also attends a financial strategy analysis, for example, now includes larger former head of risk for all equity divisions meeting chaired by the university provost at downdrafts that go further out on the time at Morgan Stanley in New York, to be the least once a month. spectrum — modeling how HMC’s portfolio university’s first chief risk officer. Schmid The work being done by Schmid and would react to severe corrections that con- then established a risk committee, headed others is encouraging. The depth of the last tinue for several years — and higher correla- by Edleson, a West Point graduate who has financial crisis and the time it will take to tions between asset classes, a newer area for a Ph.D. in economics and finance from MIT, build back lost assets seem to ensure that Harvard and other schools, Mendillo says. and Joanna Rupp, the chief operating officer, schools will actually stick to their new resolve HMC has also developed contingency who joined the endowment in 2001 as man- to oversee their assets with a fresh perspec- plans for problems that could arise and the ager of public equities. tive on risk management. They will have to if degrees of freedom it has to deal with them: “The minority of organizations spend the the U.S. higher education system is to retain where to go for liquidity or extra market resources on a dedicated CRO role,” Schmid its ranking as the best in the world. •• exposure or reduced market exposure, how observes. “I think that’s a huge mistake. The to verify that the risks identified are what role is as important as my role, and the talent COMMENT? GO TO PENSIONS & ENDOWMENTS they appear to be and that the portfolio has is hard to find.” AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 78. APRIL 2011 INSTITUTIONAL INVESTOR73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 CAPITAL MARKETS very active purchasers as well, with nearly That month a fourth player said it was join- 20 percent of the completed transactions.” ing the fray. Gate Technologies announced that it had received $3.6 million in fund- IN 2009, THOMAS FOLEY, A SOME- ing from a group of private investors. Gate times entrepreneur and investment banker, plans to use the capital to expand its market met with venture capitalist Tim Draper, one infrastructure for providing an end-to-end of Silicon Valley’s most prolific early-stage solution buying and selling illiquid and alter- investors, to tackle what he saw as the grow- native assets. “This additional capital is also ing problem that companies were having a validation of interest in the electronic trad- raising capital. With Draper and several ing of illiquid and alternative assets,” Gate angel investors, Foley put together a $3 mil- co-founder and CEO Vincent Molinari said lion financing to create Xpert Financial, a at the time. “This successful raise provides continued from page 43 To develop the new enterprise to provide liquidity to pri- us with the tools to respond to a high level of technology, which took almost a year to build, vately held venture-backed companies and demand from the market.” Silbert and partner Bradford Monks, a lawyer, their shareholders. Draper’s brother, Adam, These are not the only players buying and raised $350,000 from friends and angel inves- is a co-founder of Xpert Financial and runs selling restricted private equities. Small and tors. In early 2004 they launched Restricted its business development. relatively unknown groups such as San Fran- Stock Partners, an electronic trading platform “I was worried about what was happening cisco–based EB Exchange Funds, New York’s that would allow buyers and sellers to conduct to entrepreneurial companies,” says Foley, Felix Investments, J.P.Turner & Co. in Atlanta transactions with total anonymity. Silbert was who is CEO of Xpert Financial. In the 1980s and New York–based GreenCrest Capital are quick to recognize the need to create a market companies that went public were on average among those buying shares of Facebook on for restricted securities in nonpublic compa- six years old and had revenue of $20 million, these private market platforms and repackag- nies, which were sitting with tens of billions he explains. In the 1990s the numbers had ing them as funds. EB, for example, requires of dollars in private investments. In previous changed to ten years and $60 million. By investors to pony up a minimum of $100,000 decades companies such as these would gain the time the 2000s came around, they had to join its fund. In return, it charges a 5 percent liquidity through IPOs and acquisitions. But increased to 12 years and $200 million. participation fee and another 5 percent when in the mid-2000s the IPO window was shut “The nature of the liquidity event changed the shares are liquid and distributed. (The tight and the rate of small company acquisi- drastically,” Foley says. In the 1980s, IPOs SEC is reportedly investigating these special- tions had slowed. Moreover, many employ- accounted for almost half the exits. By the ized funds as well.) ees in these companies were desperate to sell 2000s, IPOs accounted for only 10 percent SecondMarket and SharesPost have shares as well. of all exits. And although mergers are just as like-minded business models. They offer In 2007, Restricted Stock Partners raised effective in creating liquidity, they also tend similar platforms and almost identical $3.8 million in venture capital from New to alter the business and its management. trading formats. And because they trade York’s FirstMark Capital to fund its expan- Says Foley, “We needed to transform the in restricted stock — shares that cannot be sion. (That year also marked the passing of landscape and come up with a way that com- sold without cooperation from the issuing Monks, who died of cancer.) In 2008 the com- panies could get liquidity without disrupting company — they have to work closely with pany changed its name to SecondMarket and their businesses.” the companies themselves. Both market- was operating multiple illiquid asset platforms, The falloff in IPOs wasn’t just a prob- places say their strongest pitch is to CFOs. including the private market exchange.As the lem for companies; it was also a problem They are not only providing liquidity to market in restricted shares boomed, Second- for shareholders. Foley says he talked to these companies, their shareholders and Market added investors in Southeast Asia. In entrepreneurs, venture capitalists, hedge employees but also giving them a means to February 2010 it raised another $15 million fund managers and institutional investors, decide who can own their shares. — at a postfinancing valuation of $150 million. and they all were loaded down with shares To trade shares on SharesPost and Being the first private equity marketplace of companies waiting to go public that they SecondMarket, buyers have to meet accred- has been good for SecondMarket. Last year couldn’t sell. Foley’s solution: an automated itation requirements as laid down by the it did more than $500 million in trades in pri- trading exchange to trade private shares of SEC: $200,000 a year in reported income vate companies, led by activity in Facebook. prepublic companies. or $1 million or more in investable assets. In the fourth quarter it reported total trades It took more than a year and a half for Xpert (For institutional investors, which now are of $178 million, with Facebook account- Financial to satisfy regulators’ concerns that an increasing presence on these platforms, ing for 39 percent of the completed trades. its alternative trading system would be in meeting the accreditation criteria is a cinch.) “Venture funds represented a plurality of the compliance with the rules governing trades Sellers don’t have to meet the financial buyers (more than 40 percent of completed in shares of nonpublic companies. Finally, accreditation requirements but still have to trades), but hedge funds, mutual funds, asset in January of this year, the SEC approved register and have the suitability of the shares managers and secondary direct funds con- Xpert ATS, an online trading exchange that they plan to sell vetted. tinued to be active buyers,” SecondMarket resembles Nasdaq but deals only in restricted At SharesPost, once potential sellers reg- reported. “High-net-worth individuals were shares and accredited investors. ister and indicate what they want to sell, they INSTITUTIONALINVESTOR.COM
  • 79. APRIL 2011 INSTITUTIONAL INVESTOR76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 CAPITAL MARKETS are contacted by a general license broker who Valley’s investment trendsetter eclipsed by But Simkin also believes that private makes sure that the post is accurate. Only the likes of newcomer Andreessen Horowitz, market exchanges are helping to delay the then is the seller’s intent to sell posted. When it decided to crash the party. Beginning in public offerings of companies that are wor- buyers and sellers agree on terms, they sign a 2008, Kleiner Perkins started investing in the ried about the cost of doing an IPO — which stock-purchase agreement and a third-party later rounds of Groupon and Twitter even at is estimated at $5 million for smaller compa- escrow agent — in SharesPost’s case U.S. their lofty multibillion-dollar valuations. In nies — as well as the cost of staying public. In Bank & Trust — informs the issuer of the February it finally invested in Facebook— particular, companies grouse about having shares. The company, under the right of first buying shares on the secondary market at a to follow the arcane rules of Sarbanes-Oxley refusal, can buy back the shares or agree to post-money valuation of $52 billion. and deal with zealous prosecutors who are the transaction. In January, Russia’s Digital Sky Technolo- forever on the prowl for securities violations. The process of buying and selling shares gies, together with Goldman Sachs, invested “Private market exchanges are a short- on SharesPost and SecondMarket isn’t like a in Facebook at a $50 billion valuation. DST term fix, not a long-term investment solu- regular public stock transaction — it’s time- already had led a $135 million funding tion,” says Joseph Cohen, the former head consuming and bureaucratic. Nonetheless, round of Groupon in April 2010, giving the of investment bank Cowen & Co. Even if it served the needs of Greg Parsons, a former two-year-old digital-coupon company an investors provide short-term liquidity to software engineer at Kayak, a travel search estimated valuation of $1.35 billion. DST these companies, they still need to be public, web site that has been toying with the idea of owns 5.1 percent of Groupon, as well as 1.5 Cohen argues, adding that the infrastructure going public. Parsons had signed a standard percent of Zynga, the San Francisco–based to sustain a broad public market for emerg- four-year option agreement in 2004 when he social gaming company. As of March 15, ing growth companies simply doesn’t exist. began to work at Kayak. Parsons left in 2009 DST’s combined stake in Facebook, Grou- But investors are believers in the longer but kept his options. All that time Kayak was pon and Zynga had an imputed value of term. The venture capitalists and angels that in play – a possible IPO, a potential acquisi- more than $1.7 billion. have stepped up to finance the development tion target. But when Google announced last The secondary market also has its day of private market exchanges say that the summer that it was acquiring Cambridge, traders — those who want to own a piece of firms they are bankrolling are just the first Massachusetts–based ITA Software, which private companies before they go public or step in changing the capital-raising process. has built a rival shopping and pricing engine to simply profit from the ride. A JPMorgan Barring major structural and regulatory for the travel industry, Parsons was con- private wealth manager says she bought changes, they predict that the new multi- vinced he should sell. The process took sev- shares in Facebook at a valuation of about tiered marketplace — with both public and eral months, he says, but eventually he was $4 billion or so — because her clients wanted private trading venues — will provide the able to sell his shares at a price that valued in — and then quickly sold at approximately necessary liquidity for shareholders and use Kayak at $700 million. a 60 percent gain. Another investor says he different regulatory provisions for different In addition to helping engineers such as went to a Chicago broker to buy shares in sets of players with different sets of needs. Parsons sell their private shares, SharesPost Pandora, a digital-music provider, because SharesPost’s Weir believes that creating also has begun to create online sealed-bid auc- he heard it would go public and wanted to get liquidity for start-ups is only part of his firm’s tions for Facebook, Twitter and LinkedIn. In in before the IPO.“I’m just taking a flier,” the mission. Its real business is in helping later- December, for example, it offered 165,000 New York investor says. “But I know it will be stage venture-backed companies raise capi- shares of Facebook to its members with a a hot offering.” tal. Over the past five years or so, an average reserve price of $23 a share. If the bids fell When it comes to public market offer- of $21 billion has been raised annually by below $23, the seller could withdraw its shares. ings, the SEC has focused on issues of venture-backed companies. Organizing this The auction, which took place over a week, disclosure and transparency. In the past, activity is both necessary and profitable, Weir was oversubscribed, says Weir. Ultimately, the companies have had to postpone their offer- contends. Selling secondary shares together shares were sold at $25 each, raising more than ings because regulators felt that too much with raising capital can be a sizable business, $4 million for the seller and putting a value of information was public — and that they were he explains, especially in an environment nearly $57 billion on Facebook. unfairly promoting the issuances. Hence in which there are no specialized bankers For the moment, both SharesPost and the quiet period, during which companies and the population of public buyers of small SecondMarket are trading platforms. They are required not to disclose their financials technology companies is sparse. do not buy or sell the shares; they simply offer or their business prospects. Keeping quiet Indeed, with tens of billions of dollars in them for sale. In return, they receive a fee of is a dilemma that the SEC now faces with venture capital being invested by institutional 5 to 7 percent of the value of the transaction. social media companies — businesses that investors and angels, companies are not wor- Everyone wants to get in on the private are interacting with their customers, inves- ried about capital. “Shareholders want reli- market action — even legendary venture tors and competitors on a daily basis. able liquidity,” Weir says. “They just want to capital firm Kleiner Perkins. In 2003 the “What you are seeing is a new reality,” know that there is a window in which they can firm invested in Friendster, a social network says Morris Simkin, an attorney with Snow periodically sell their shares.” •• business that went nowhere. Subsequently, Becker Krauss in New York who has been it refused to invest in Facebook. So, when involved in securities laws since the mid- COMMENT? GO TO BANKING & CAPITAL MARKETS in recent years it found its image as Silicon 1950s. “People want liquidity.” AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 80. APRIL 2011 INSTITUTIONAL INVESTOR75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 ASSET MANAGEMENT phia, Nutt had created the first institutional After presenting an 11-page business money market fund. Asset management plan to TA that fall, Nutt got $25 million would go on to become the largest of Boston in backing and, also using some of his own Co.’s fee-based businesses. Nutt was also capital, formed AMG. In December 1994 tasked with dismantling a failed collection of he made his first investment: J.M. Hartwell, 16 investment counseling firms that Boston a New York–based growth investor founded Co. had previously assembled. in 1961 whose clients include large founda- At the same time, Healey was building tions and wealthy individuals. his credentials. After finishing high school in For the first couple of years, AMG was San Diego, he went on to Harvard College, just Nutt and his secretary. In 1995, Nutt was where he graduated in 1983 with a degree looking to expand and at the suggestion of TA in American history and literature. He partner Andy McLane, he contacted Healey, continued from page 47 management ana- then earned a Rotary scholarship to the then a managing director in Goldman’s presti- lyst at New York–based brokerage Sandler University College Dublin in Ireland, where gious financial institutions group, focusing on O’Neill + Partners. “You take a revenue he obtained a master’s degree in philosophy asset management. AMG had already closed share and let underlying affiliates control and met his wife, Kerry, a Florida native who its first transaction and had enough of a track their own P&L.” AMG founder Nutt agrees, had also attended Harvard. (She doesn’t record to lure Healey, who joined in March but he believes competitors have little chance remember meeting him there, however.) 1995. That same year, Nutt raised a second to chip away at his firm’s dominance: “When After returning to the U.S., Healey entered round of capital from TA, ITT Hartford and you can have the real Coca-Cola, why take Harvard Law School, believing he would one NationsBank (now Bank of America Corp.) some imposter?” day be a law professor. Other staffers quickly followed. Dalton — Healey never ended up practicing law. who had met Healey when they worked on BILL NUTT WASN’T THE FIRST TO TRY While at Harvard he met a Goldman Sachs the reverse merger of Pacific Investment to combine the performance edge of invest- M&A banker with a similar law background Management Co. and four other investment ment boutiques with the operational and landed a summer job at the firm. In 1987, managers owned by then-parent Pacific advantages of a large asset management following his graduation from Harvard, he Mutual Life Insurance Co. and Thomson organization. In 1980, Norton Reamer, joined Goldman as an associate in M&A. Advisory Group — came on board in 1996. former CEO of Putnam Investments in “From day one at Harvard, Sean exhib- Although the two men interact with the ease Boston, got the entrepreneurial itch and ited a cool confidence where he was never of people who have spent decades work- started United Asset Management Corp. fazed, never anxious,” says John Copeland, ing together, Dalton’s slightly rumpled His idea was to buy up small independent an executive director in private wealth man- demeanor is in stark contrast to Healey’s institutional asset management shops, agement at Morgan Stanley, who attended well-groomed and careful appearance. In 1997, AMG acquired a stake in Tweedy, Browne Co., which gave the “We wanted to run our business ourselves, company the critical mass it needed to go didn’t want to sell to a bank and be flushed public. Tweedy Browne’s value approach through its distribution systems.” harks back to the late Benjamin Graham, co-author of the investment classic Security — William Browne, Tweedy, Browne Co. Analysis. William Browne, one of four man- aging directors at the firm, says the partners unlock their value and increase their effi- law school with Healey. “With Goldman, it at Tweedy were evaluating a number of ciency by putting them under one roof. It was the first time the firm had ever hired a options at the time, but determined AMG took Reamer three years to persuade the law student as a summer intern.” was a good fit: “We wanted to run our busi- first manager to sell: Denver-based Nelson, In the fall of 1992, Shearson needed to ness ourselves, didn’t want to sell to a bank Benson & Zellmer. By 1986, UAM had raise capital and decided to sell off Boston and be flushed through its distribution done several deals and assembled enough Co. By this time, Nutt was CEO and chair- systems, and we wanted cash for part of assets under management, $13 billion, to man of all the operating businesses. Mellon the business.” do an initial public offering. Bank bought the firm, and Nutt, who already AMG hired Crate, who was a managing By then, big banks and brokerage firms had come up with the idea for AMG, didn’t director in the financial institutions group were also getting into the asset management want to stick around working for a Pittsburgh at then–Chase Manhattan Corp., right business. In 1983, two years after Shearson bank. In the summer of 1993, he talked to after the firm went public. In 2007, Healey Lehman Brothers bought Boston Co., his friend Kendrick Wilson III, a banker hired Horgen, whom he had originally got- Sanford Weill, then president, and Jeffrey at Lazard Frères & Co., who referred him ten to know in 1993 when the former Yale Lane, COO at the time, asked Nutt to build to C. Kevin Landry at TA Associates, the University baseball pitcher joined the FIG a mutual fund business. A corporate secu- only private equity firm at the time that had M&A team at Goldman. Horgen went on to rities lawyer at Ballard Spahr in Philadel- invested in asset management. become a star banker at the firm; AMG was INSTITUTIONALINVESTOR.COM
  • 81. APRIL 2011 INSTITUTIONAL INVESTOR78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 ASSET MANAGEMENT one of his clients. Horgen later joined Merrill plines. They built a database using public and titative style of investing — using computers Lynch & Co. under Gregory Fleming, now proprietary information and screened for to find anomalies in the markets — briefly president of global wealth management at managers they should get to know. Even if a stopped working, sending tremors through Morgan Stanley. deal was far in the future, the principals made AMG. Beginning that month certain quant AMG started racking up deals after going it their business to learn about the managers. strategies that historically had posted steady public. Nutt and Healey bought majority In 2005, Healey became president and returns started failing for no apparent rea- stakes in Norwalk, Connecticut–based CEO. Nutt, who turned 59 that year, felt that son. It turns out that many quants were using Managers Investment Group (then called if AMG was going to advise affiliates on their similar approaches and mathematical algo- the Managers Funds) in 1999; in Boston’s succession planning, he needed to mimic the rithms to trade many of the same stocks. As Frontier Capital Management Co., a growth same philosophy at the firm. a result, the decision by one large manager to and relative-value equity manager, in 2000; The previous year, AMG made its first sell to cover margin calls stemming from the and in Friess Associates in 2001. minority investment, buying a 20 percent broadening subprime crisis began a down- Friess represents the ideal AMG target: an stake in hedge fund firm AQR, which had ward cascade, driving down prices on these investment firm with a great long-term track been founded in 1988. David Kabiller, same stocks and triggering more sell orders record and founders who want an exit strat- head of client strategies at AQR, says that he at the quant shops. egy but still have plenty of time left to con- and his three fellow co-founders, including Between late July and early August 2007, tinue to grow their companies. Foster Friess, Asness, had financed the entire firm them- AQR’s quantitative strategies lost 13 per- after talking to scores of money managers, selves and wanted to diversify. cent. Rumors flew through the market that banks and insurance companies that wanted “We were a young business with a lot of investors were requesting redemptions, and to do a deal with him, signed an agreement ambition to innovate,” he notes. “We had AMG was hit along with its affiliate. AMG with AMG in July 2001, impressed by its financed 100 percent of our business, so cut its full-year earnings outlook because hands-off approach with its affiliates. Friess we wanted to diversify a small amount of of the turmoil. But AQR bounced back by managed about $6.9 billion, but by the time our personal holdings. We had heard that the end of the month, and Healey remained the deal closed three months later, its assets AMG knows how to execute asset manage- committed to alternatives. had shrunk to $6.1 billion, in part because ment transactions without disrupting the The quant crisis turned out to be the of the drop in stocks post-9/11. businesses.” canary in the coal mine for the financial melt- “We tested their hands-off philosophy The AQR investment was Healey’s first down to come. By December 2008 investors right out of the gate,” says D’Alonzo, who big deal as Nutt stepped back from the had walloped the shares of AMG, whose became CEO in 2002 when Friess retired. operation. “Sean has a unique ability to see strategy of investing in equity and alterna- tives was hit hard. In the fourth quarter of 2008, AMG had $223.4 million in revenue, “We’re a global-scale partner that brings a 42 percent decline from the same period in certainty about business stability, 2007. Investors pulled $3.3 billion in assets financial controls and distribution.” from AMG’s affiliates, which had almost no fixed-income or index products to bal- — Sean Healey, Affiliated Managers Group ance outflows. The company’s stock price fell almost 70 percent between September “But they understood our investment phi- what money managers need in terms of inde- 15, when Lehman Brothers Holdings filed losophy and were supportive.” pendence, autonomy,” Kabiller says. “He for bankruptcy, and December 2, 2008. At the same time that AMG was thriving, understands the balance between the need Analysts worried that AMG would have to rival UAM was struggling. Its model of buy- for control and the need to give latitude.” restructure revenue-sharing agreements to ing 100 percent of money managers started In the mid-2000s, Healey and his team leave more cash with the affiliates. to unravel in the late 1990s as performance saw that investors were changing their fizzled, and the company was ultimately portfolios in significant ways, adding IN THE SUMMER OF 2009, HEALEY sold to London-based Old Mutual in 2000. hedge funds and private equity and look- took home top honors, as well as a nearly Healey and Nutt saw the folly in UAM’s ing for growth outside the U.S. In 2005, $1 million cash prize, in the White Marlin approach of fully cashing out managers in a AMG invested in two Canadian bou- Open in Ocean City, Maryland — his first time business whose most valuable asset is people; tiques. In 2007 it expanded further into competing in the world’s largest billfish tour- that’s why at AMG they insist that affiliates alternatives with a minority investment in nament. To win, he wrestled a 93.5-pound maintain stakes in their own firms. BlueMountain Capital Management, a New white marlin for an hour before bringing the Nutt and Healey learned early on that the York–based hedge fund firm specializing in animal on board his boat, which by then had relationships they formed with managers — relative-value credit strategies. That same lost the transmission for one of its engines. before and after a deal — would be a big part year, Healey tapped Horgen, now 40, to run Healey’s Hemingway moment didn’t of their success. They struck out on the road, new investments. stop the slide in AMG’s stock price, which visiting managers and familiarizing them- Healey’s tenure has been anything but a fell from nearly $100 a share in September selves with their styles and investment disci- straight shot. In August 2007, AQR’s quan- 2008 to a low of $19 in November 2009. But INSTITUTIONALINVESTOR.COM
  • 82. 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 despite investors’ fears, AMG’s financials growing reputation as a house that attracts any time soon, Healey, Dalton and Horgen were actually in pretty good shape, thanks and retains the best performers. That brand are intent on increasing the awareness to its revenue-sharing model. has resulted in significant cross-selling. of the brand. In the early years they were Some investors were also concerned dur- Healey says he recently ran into a client in careful to stand somewhat silently behind ing the crisis about the company’s leverage Australia who had hired one of AMG’s affili- affiliates with much bigger names. But the because it has $730 million in long-dated ates as a subadviser in part because it had experience of existing clients choosing to junior convertible trust preferred securities on AMG’s endorsement. hire other AMG affiliates clearly indicates its balance sheet. Though classified as debt, Dalton is also continuing to build out that the brand is valuable. AMG is also well this junior capital is a 28-year obligation of the distribution directly through a formal plat- positioned in a product set — global and business and ultimately converts into equity. form that he launched in 2007. It is now emerging markets and alternatives — that AMG had cash, $375 million, as well as gaining enough critical mass — affiliates is quite different from its public and private a credit facility of $770 million that it could can opt in for distribution — that the com- asset management peers. Healey and com- tap, and as the market stabilized in 2009 it pany has been able to pour more resources pany want that message out there. leapt into action, one of the few buyers in the into it. AMG has an ulterior motive in In the aftermath of the crisis, more bou- market. AMG entered China through a stra- providing distribution: It keeps managers tiques want strong partners. The flip side is tegic partnership with Value Partners and focused on performance. that the business of asset management is now made an investment in New Jersey–based “If a boutique built a global infrastruc- much more transparent. AMG has a great Harding Loevner. The next year it made four ture to access and service clients, that would window into how asset managers weath- new investments, buying stakes in Artemis; change the nature of the firm,” says Dalton. ered the crisis, and their decision making Pantheon; Trilogy; and Aston Investment AMG now has offices in Australia, and performance during the worst markets Management, a Chicago-based firm that had Canada, Hong Kong and London. Though in 100 years. “We’re a global-scale partner unapologetically copied AMG’s model but had done only one transaction. The purchase of Pantheon, at $775 million, was AMG’s larg- “We tested their hands-off philosophy est deal ever. “M&A is my favorite thing, but right out of the gate. But they understood the sleep deprivation involved in that many deals put me in a bad mood from November our philosophy and were supportive.” — William D’Alonzo, Friess Associates 2009 to March 2010,” jokes Horgen. AMG is becoming the go-to firm for midsize investment managers. For one Dalton declines to say how much distribu- that brings certainty about business stability, thing, there’s no competition. Legg Mason tion the platform has brought in, he notes financial controls, compliance controls and and Nuveen, for example, have not made that almost every affiliate uses the system, a the efficiency of having distribution represen- any significant recent investments. Some fact that has a lot to do with the complicated tatives in their same time zones,” says Healey. firms, such as Northern Lights Capital, nature of selling funds overseas. Regardless of the creativity of the struc- are active, but they go after smaller players AMG offers its affiliates compliance and ture of its deals, its distribution muscle or its and don’t compete directly. Boutiques can back-office best practices and access to top ability to stand back and let its affiliates do also seek liquidity from larger private equity lawyers. The company can spread any sav- their thing, AMG’s successful model comes shops or can choose to become public ings — say, advice on the Dodd-Frank Wall down to relationships. Healey pulls out a companies, but these options aren’t always Street Reform and Consumer Protection glass container with a piece of the transat- appealing to founders or the firms’ clients. Act — across its affiliates. lantic cable that first connected Europe Mark Tyndall, co-founder and CEO of Passive investments and exchange- and America. It was a gift from Artemis Artemis, says his firm nixed both private traded funds won’t figure in AMG’s future. co-founder Mark Tyndall when his firm’s equity and a public offering because it had Healey says no to ETFs, even though the deal with AMG closed in March 2010. But already gone through several corporate reor- vehicles have been the fastest-growing asset Tyndall had a confession to make when he ganizations. Artemis had been an autono- management product of the past few years, handed over the trinket: He had bought the mous manager of ABN Amro, then became because they are still largely index products gift, neatly symbolizing both organizations’ part of Fortis in 2007 when the consortium and he doesn’t think that AMG can add cross-border ambitions, in 2008, when the of Fortis, Royal Bank of Scotland Group and value there. Healey’s view of indexing is in firms first started talking. Healey put the Banco Santander took over ABN Amro. “If line with his passionate belief that boutiques discussion on ice when the financial crisis hit. it was at all possible, we were going to sell are better able to produce alpha — returns “I’m very proud of that deal,” Healey says. ourselves to somebody that wouldn’t force above a benchmark — than are large inte- “We were able to preserve that relationship us to sell again or go public,” Tyndall says. grated firms. beyond emotions and through the rough- “There are very few ways to achieve that.” AMG wants to increase its presence and-tumble of the credit crisis.” •• Distribution will be critical to AMG’s suc- among U.S. and European retail investors. cess. The company is providing increased Although investors are not going to find COMMENT? GO TO ASSET MANAGEMENT distribution to its affiliates because of its AMG advertising during the Super Bowl AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 83. APRIL 2011 INSTITUTIONAL INVESTOR80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 CAPITAL MARKETS international bond denominated in Chi- & Housing Corp., Korea Housing Finance nese currency in Hong Kong. The 1.2 billion Corp. and Korea Electric Power Corp. yuan sale carried a ten-year bullet maturity. China, the region’s biggest debt market Those efforts are bearing results, says with more than $3 trillion of bonds out- ADB’s Mitra, especially in the aftermath of standing, faces particular challenges. Over the global financial crisis. Domestic bond the past five years, Beijing has implemented sales regionwide now comprise about 80 per- a series of reforms to jump-start the coun- cent of total issues, according to Dealogic. try’s corporate bond market, and companies Many markets also have widened their inves- now account for about 20 percent of total tor base to increase participation by nonbank issuance. Yet the government still controls financial institutions and offshore investors, most debt issuance, either directly with including Indonesia, where foreigners last the sale of government bonds and central continued from page 52 The Asian Bond month held about 30 percent of tradable bank bills or indirectly through offerings Market Initiative was inaugurated in 2003 government securities. Ongoing access to by government-affiliated agencies and with the participation of finance ministers local-currency debt markets allowed many conglomerates and state-owned banks, from member countries of the Association Asian companies to raise capital that helped says Michael Pettis, a finance professor at of Southeast Asian Nations — Brunei them avoid the worst effects of the liquidity Peking University. The absence of a convert- Darussalam, Cambodia, Indonesia, Laos, squeeze affecting many parts of the interna- ible currency ensures the government can Malaysia, Myanmar, Philippines, Singapore, tional capital markets. maintain control of interest rates. “That Thailand and Vietnam — as well as China, Regulators should do more to foster the means China’s financial markets, including Japan and South Korea. In 2009, ABMI market’s growth, such as improving the its bond markets, are not able to perform issued a new road map aimed at improving depth of secondary market trading, says one of their major functions: estimating the domestic issuance, facilitating demand and Mitra. “There’s a need for greater diversity cost of capital,” Pettis says. “What corporate standardizing bond issuance, trading infra- of investors and traders,” he explains. “Lack bond market is permitted, there’s only par- structure and regulation across the region. of market liquidity not only hinders pricing tial disintermediation since it’s still funded In 2003 a separate grouping of 11 Asian of financial assets, it also inhibits financing through the banking system.” central banks and monetary authori- by central banks and governments.” Under such circumstances, foreign ties launched the Asia Bond Fund, which Investors also want to see banks make direct investment in local currency secu- invested $1 billion in a basket of liquid a greater commitment to market making, rities remains limited to the $20 billion U.S.-dollar bonds of major Asian econo- explains Jeremy Amias, director of Amias allotted under China’s Qualified Foreign mies, excluding Japan, Australia and New Berman & Co., a global fixed-income advi- Institutional Investor program. Zealand, and managed by the Bank for sory and brokerage firm. For Asia’s interna- Establishing healthy capital markets requires “a constellation of factors that can be difficult to assemble,” observes Tom “There’s a need for greater diversity Schiller, head of Asia-Pacific for Standard of investors and traders. Lack of liquidity & Poor’s. “They include a solid trading inhibits financing by central banks platform and dependable market-making and governments.” community, a legal regime that protects creditor rights and a broad base of institu- — Sabyasachi Mitra, Asian Development Bank tional investors and borrowers.” Most of those elements are coming International Settlements. A second fund tional bond market, that has started to change together rapidly in Asia, however. The market was started the following year, with eight with the establishment of dedicated global has reached such a size that companies need separate country-specific subfunds. Asia bond funds. “For many years Asia’s off- to issue between $42 billion and $50 bil- The ADB remains a strong proponent shore bond markets were dogged by the fact lion a year for each of the next five years just of regional financial integration and con- that there was no buyer of last resort,” he says. to refinance maturing bonds, according to tinues to facilitate standardization efforts Local markets, nonetheless, continue to Moody’s estimates. Ample regional liquidity alongside ABMI. The multilateral develop- provide only a small fraction of total domes- and efforts by global institutions to increase ment institution also has acted as a pioneer tic financing throughout the region, while their exposure to Asian debt should ensure bond issuer, selling landmark international corporate bond sales remain closely tied to plenty of demand for those offerings, says debt, along with several benchmark domes- government agencies, state-owned firms and State Street’s Cheung. tic bonds. In 2005, ADB issued the first financial institutions. Even in South Korea, This Asian credit boom, unlike its 1990s so-called Panda bond, a Chinese local- which boasts a $1 trillion domestic bond predecessor, looks set to last. •• currency bond that raised 1 billion yuan market, almost one third of local corporate in a ten-year note. In October 2010 the bonds are issued by special government- COMMENT? GO TO BANKING & CAPITAL MARKETS Manila-based organization sold the first affiliated institutions such as Korea Land AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 84. APRIL 2011 INSTITUTIONAL INVESTOR79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 BANKING banking activities such as the underwrit- of March, has already revamped top manage- ing and trading of securities. With even ment and announced job cuts to ready the the U.S. having rejected a return to Glass- bank for a share sale. The stock prices of both Steagall and Sir John appearing to have banks have been trading below what the gov- ruled it out in January, few observers expect ernment paid, however. Lloyds was trading the commission to propose such a move. late last month at 60 pence a share, below the The narrow-banking option would require government’s purchase price of 63p, while institutions to put their retail banking opera- RBS was trading at 42p, compared with the tions in separately capitalized subsidiar- government’s price of 50p. ies and back consumer deposits with safe, Still, banking industry executives expect liquid assets such as government bonds, the commission to propose some new regu- effectively insulating them from investment latory restraints, most likely in the form of continued from page 57 that the Lloyds- banking activities. Banks contend that such higher capital charges or divestitures of retail HBOS merger left the U.K. with only five a change, known as subsidiarization, would branches. “There won’t be a do-nothing major banks, saying, “we do not have a very saddle them with prohibitively high funding option,” says the BBA’s Chisnall. healthy competitive market in financial and administrative costs. RBS recently esti- Sir John has frequently cited capital as services.” Only the fifth member, William mated that the funding and other benefits a chief area of concern, saying in January Winters, a former co-head of investment of its universal banking structure, which that banks needed to increase their “loss- banking at JPMorgan Chase & Co., is the proposal would eliminate, amount to as absorptive capacity.” Those comments sug- clearly identified with the business the much as £4.8 billion a year. “A ring-fenced gest that the commission could recommend commission is seeking to regulate with retail banking unit would face higher fund- raising capital requirements above the 7 its proposals. ing costs, and that in turn would raise the percent minimum level stipulated by the The commission is based in an ornate cost of borrowing for corporates,” says Giles new Basel III accord. Commission mem- beaux arts–style building in central Lon- Williams, a financial services regulatory bers have held talks with regulators in Swit- don that gives a false impression of extrav- partner at accounting firm KPMG. Sir zerland, where authorities have decided to agance. Its offices are suitably sober and John’s recent comments questioning the set a higher core tier-1 ratio of 19 percent austerely furnished, and the five commis- practicality of this option suggest that the — known as the “Swiss finish” — by 2019. sioners are conducting their inquiry with banks are winning the argument. The major U.K. banks already exceed the help of a team of 14 civil servants. The Basel III requirements. At the end of 2010, commission has so far held about 400 meet- EVEN IF THE COMMISSION DOES PRO- Barclays reported a core tier-1 capital ratio ings, mostly on a small scale, with a variety pose structural changes to the industry, most of 10.8 percent of risk-weighted assets, of industry executives and regulators from analysts see little chance that the govern- followed by RBS at 10.7 percent, Lloyds around the world. Although it has not held ment would endorse such measures because at 10.2 percent and HSBC at 10 percent. Those levels were well in excess of the 5 per- cent minimum that the European Banking Authority will require under a new round “A ring-fenced retail banking unit would of stress tests it is conducting on banks this face higher funding costs that would raise spring. In coming years the Basel accord the cost of borrowing for corporates.” will progressively tighten the definition of — Giles Williams, KPMG capital to equity or equitylike instruments, but even so, all of the big U.K. banks insist they will be comfortably above the 7 percent high-profile televised hearings like the the Treasury’s interests as a shareholder are minimum that takes effect in 2019. Financial Crisis Inquiry Commission in the gaining sway. In March, UKFI appointed Banks have already begun lobbying U.S., the U.K. commission represents the Deutsche Bank as an adviser on strategic against any additional capital require- country’s most serious effort to investigate options for Northern Rock; bankers say the ments, arguing that any such move would the root causes of the financial crisis and agency will probably want to conduct a sale defeat efforts to boost bank lending. New propose regulatory remedies. as soon as possible after the banking com- capital charges could also rattle investors In its initial issues paper, published in mission publishes its final recommendations and undermine bank share prices. HSBC’s September 2010, the commission discussed in September. RBS and Lloyds may pose shares tumbled 4.7 percent in February the possibility of adopting a U.K. version of tougher challenges. Both banks are eager to after CEO Stuart Gulliver announced that Glass-Steagall, as well as an alternative pro- exit from government ownership; RBS CEO the bank was lowering its return-on-equity posal for so-called narrow banking. Under Stephen Hester said last year that he would be target to a range of 12 to 15 percent from the first option, a financial institution would disappointed if the divestiture process didn’t 15 to 19 percent because of the new Basel not be able to combine commercial banking, start in 2011, while António Horta-Osório, capital standards. Douglas Flint, the bank’s including deposit-taking, with investment who took over as CEO at Lloyds at the start chairman, said Basel III made it a “near INSTITUTIONALINVESTOR.COM
  • 85. APRIL 2011 INSTITUTIONAL INVESTOR82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 BANKING impossibility for the industry to expand busi- Monetary Fund. “The effect would be to to fail, and the result is lemon socialism, in ness lending at the same time.” lower returns on equity, but investors should which the state ends up holding the lemons.” Many investors and analysts agree. “The accept this in return for lower risk.” As it is, some British banks are already U.K. banks would have to shrink their bal- The commission is also focusing its efforts facing pressure from European regula- ance sheets if they were asked to raise their on competition in retail banking — not sur- tors to reduce their footprints. In 2009 the capital ratios any further,” says Exane BNP prising given Sir John’s antitrust background European Commission, which reviewed all Paribas analyst Gordon. Paul Vrouwes, who and the concentrated nature of the British of the state aid granted to banks, examining manages the €350 million ($495 million) market. The Big Five banks alone have its anticompetitive effects, ordered Lloyds ING (L) Invest Banking and Insurance fund combined assets of 450 percent of GDP, a to shed 600 of its 3,000 retail branches and at ING Investment Management in Amster- dramatic concentration of financial power RBS to unload 318 of its 2,200 branches. dam, says higher capital charges would hurt compared with the 1960s, when the U.K. had Analysts say those banks would be the most U.K. bank stocks. “Swiss banks are less 16 clearing banks with assets totaling 32 per- likely targets of any similar recommenda- attractive now than banks in Germany, cent of GDP, according to research by Credit tions by the U.K. banking commission. where extra capital buffers are not expected, Suisse banking analyst Jonathan Pierce. Lloyds alone will have a 25 percent share of and I expect that U.K. banks would also be Competition is in the eye of the beholder, the U.K. market for current accounts and at a disadvantage if the commission raised of course, and industry executives insist that 23 percent of the market for credit cards and capital requirements,” Vrouwes says. the U.K. market has far more of it than most mortgages even after it complies with the Swiss banks have so far embraced their of Europe. The Herfindahl index, a statisti- European divestiture order. tougher capital regime, if only out of neces- cal measure of industry concentration com- “The commission would like to create sity, undermining the U.K. banks’ com- monly used by regulators, indicates that the a sixth big retail bank in the U.K., but it’s plaints. In February, Credit Suisse CEO U.K. ranks a lowly 23rd in Europe, says the not clear how this could be achieved,” says Brady Dougan boasted about his bank’s BBA’s Chisnall, citing European Central PwC’s Forrest. In recent years only a few new entrants, such as U.S. entrepreneur Vernon Hill’s Metro Bank, have come into the U.K., and analysts see few potential acquirers lurk- “The U.K. banks would have to shrink their ing on the horizon. “The barriers to entry balance sheets if they were asked to raise are very high as the FSA has strict rules on their capital ratios any further.” certainty and security for depositors,” says — Ian Gordon, Exane BNP Paribas KPMG’s Williams. One way to jump-start competition would be to require Lloyds to spin off HBOS, groundbreaking $6.2 billion issue of con- Bank figures. By that measure, U.K. banking undoing its crisis acquisition. The idea has tingent convertible securities, which change concentration exceeds that of Germany and some notable supporters. In a submission into equity under stress situations and count Italy but is lower than France’s and Spain’s. to the banking commission, Sir George as core tier-1 capital under Basel III. “We are The commission has been holding its Mathewson, former CEO and chairman at the forefront of industry developments, cards much closer to its chest on this issue. of RBS, contended that the HBOS acqui- and it underscores our commitment to a In its September 2010 issues paper, the sition was “fundamentally wrong for sev- sustainable business model for the new envi- panel said it was considering “the option of eral reasons — competitive, cultural and ronment,” he said. requiring the U.K.’s largest banks to divest commercial.” Reversing that government- In a January research paper, economist assets with a view to creating a more com- sanctioned deal would be a bold step, how- David Miles, a member of the Bank of Eng- petitive market structure.” It also pointed ever, and so far the commission has offered land’s Monetary Policy Committee, esti- out that the government’s holdings in RBS no hints that it is prepared to go that far with mated that raising core tier-1 ratios to a range and Lloyds provided an opportunity for its recommendations. of 16 to 20 percent would increase funding a “pro-competitive restructuring” of the Meanwhile, doubts about what the costs for U.K. banks by only 0.1 to 0.4 per- banking sector. commission will ultimately propose in its centage point. He also asserted that forcing Increasing competition would probably September report are weighing on bank banks to replace 5 percent of debt securi- appeal to Chancellor of the Exchequer share prices. “It’s a factor holding back the ties with equity every year would triple their Osborne, who expressed concern about rerating of bank shares to precrisis levels,” equity capital in 15 years and enable them to the level of competition in the retail market says Exane BNP Paribas analyst Gordon. increase lending by 7.5 percent a year. before last year’s election. Some economists Cameron and Osborne may not know “Raising capital ratios to Swiss levels say competition can help address the sys- the commission’s endgame, but they have would not be seriously damaging to the temic problem of banks being too big to plenty of reasons to want to end the regulatory banks,” says Simon Johnson, a research fel- fail. “A larger number of smaller and sim- uncertainty surrounding British banks. •• low at the Peter G. Peterson Institute for pler banks is desirable,” says the Peterson International Economics in Washington and Institute’s Johnson. “At the moment, we COMMENT? GO TO BANKING & CAPITAL MARKETS former chief economist at the International have too many banks that are too important AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 86. APRIL 2011 INSTITUTIONAL INVESTOR81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 CHINA are fueling the expansion of the country’s preneurs who are using technology in smart capital markets. Most economists expect ways,” he says. “There are many Chinese the country’s expansion to remain on track, companies taking advantage of technology notwithstanding the risk of monetary tight- disrupters and doing very well. These com- ening to keep control of inflation. The Inter- panies will all be prime IPO candidates in the national Monetary Fund projects that the years to come.” growth rate will ease modestly to 9.6 percent Chinese technology companies — most this year from 10.5 percent in 2010. of them privately held and started by young At the annual meeting of the National entrepreneurs — tend to favor listings in the People’s Congress, or parliament, in Beijing U.S. because they offer richer valuations, last month, Premier Wen Jiabao formally bankers and analyst say. In addition, many unveiled the government’s 12th Five-Year Chinese tech companies have backing from continued from page 61 market sources say. plan, which aims to shift the economy away international private equity firms, and a for- Other foreign companies considering Hong from China’s investment-driven export eign listing offers the quickest avenue for Kong share offerings include the Italian model and focus on generating more domes- these investors to exit from their holdings. luxury-goods maker Prada, the U.S. luggage tic demand. The plan targets seven strategic “Asia represents more than 50 percent of the maker Samsonite Corp. and South African industries — energy-efficient technology, American depositary receipt market, and mining company Lontoh Coal. next-generation information technology, China is a significant portion of that,” says “This trend will continue, with non- biotechnology, alternative energy, hybrid Gregory Roath, Hong Kong–based head of Chinese companies coming to IPO in Asia, vehicles, high-end equipment manufactur- ADR business in Asia at BNY Mellon. Issues especially Hong Kong,” says Tsang of Deloitte ing, new materials — for development. It also of ADRs by Chinese companies made up Touche Tohmatsu. “Many of these global calls for increased spending on health and about 26 percent of U.S. IPOs in the fourth companies are consumer brands that want social security. In addition, policymakers quarter of last year, according to Dealogic. to develop in China or already are develop- recently announced that the government Obtaining an overseas listing is a major ing. Investor appetite would be strong as their would hike the minimum wage by an average step for Chinese companies. Dealing suc- brands are already well recognized.” Paul of 18.3 percent in major cities in an effort to cessfully with foreign investors poses an even Schulte, Hong Kong–based global head of boost consumption, especially among low- bigger challenge. After all, many executives financial strategy and Asia banks research for income workers. gained their experience in a system where listed companies need to pay attention “There are many Chinese companies to only one constituent: the government. taking advantage of technology “From an investor’s point of view, an IPO is the beginning of the process,” says Richard disrupters. These companies will all Constant, London-based CEO of strate- be prime IPO candidates.” gic communications firm Kreab Gavin — Carl Yeung, Sky-mobi Anderson. “Some management doesn’t pay enough attention after the IPO process. CCB International Securities, the Hong Kong The combination of government policy Many Chinese companies have to better securities subsidiary of China Construction and the rise of China’s middle class is fueling manage their investor relations needs.” Bank Corp., also sees strong interest from the growth of consumer-oriented technology Last year Constant’s firm invited 200 outside the region. “We have a good pipeline, companies, and prompting scores of them to Chinese CEOs to London for an IR confer- from all sectors and many countries, including tap the equity market. Consider the mobile- ence. Many of them gasped when they were companies from Japan and Russia,” he says. telephony market. China has 840 million told that executives of London-listed com- Hong Kong Exchanges will face increas- mobile telephone subscribers, including panies spent 25 to 30 days a year on investor ing competition for listings from overseas if 12 million who pay for third-generation data relations, Constant says. “Most thought just the Shanghai Stock Exchange wins approval services, and users are increasingly demand- one day a year would be enough,” he adds. to launch an international board late this ing faster downloads and value-added ser- ChinaCache’s Wang acknowledges his year or early next, a significant step in the vices. “We are looking at fairly explosive company has a steep learning curve but says government’s effort to develop Shanghai growth,” says Carl Yeung, chief financial he is committed to engaging actively with into a global financial center. The board will officer of Hangzhou-based Sky-mobi. “The shareholders. “We realize after the IPO that aim to attract listings from foreign compa- growth is allowing for innovation to be a key investor relations and corporate governance nies with existing investments in China, says driver. There is huge demand for 3G, smart- is extremely important,” Wang says. “We Hu Ruyin, head of research at the exchange. phones and mobile services.” must do both well for the sake of keeping our For now, however, China and its fast- Yeung, 31, is a former banker at Merrill share price high.” •• growing economy are the overwhelming Lynch and consultant for Sequoia Capital driver behind the spate of IPO offerings. who joined Sky-mobi to help ready it for the COMMENT? GO TO HEDGE FUNDS/ALTERNATIVES Rising affluence and a growing middle class IPO.“China has a generation of young entre- AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
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  • 88. APRIL 2011 INSTITUTIONAL INVESTOR68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25EAM FUND OF FUNDS 50 UNCONVENTIONAL WISDOM THE FUTURIST THE CHARTIST C Talkin’ ’bout a reach about 10 capable of dealing with this executive search firms, whose Revolution percent of the social revolution, and equip it job it is to selectively dole out planet’s popula- with the people, processes and candidates to the 100-plus tion, or 600 mil- technologies to be proactive as U.S. searches for board mem- The power of social media to lion people), we well as reactive. bers that are being conducted foment unrest will transform the are witnessing • Recruit independent direc- at any given time. Instead, her corporate boardroom. increased tension tors with skills that enhance expertise and brilliance were BY BARRY LIBERT AND between organiza- your organization’s financial, recognized by JetBlue’s lead STEVEN POTTER tions and their international, marketing, investor. The company’s con- customers and product and technology fidence was quickly rewarded employees that is knowledge. Boards will gravi- as Gambale played a critical no more contain- tate away from the politically role in helping JetBlue pull its able than the pro- correct rainbow coalitions technology and reservation tests in Egypt. of the 1980s to a diverse but system into the 21st century, Carl Icahn, take expertise-based approach. creating a significant competi- note: Proxy fights • Increase your compensation tive advantage. in the future will for independent directors to It’s time for CEOs and be fought using reward them for the increased boards to understand how THE SPONTANEOUS social media, and it won’t be just risk and time commitment that powerful customer and outrage of Egyptian investors fighting; customers today’s boards demand. employee social interactions citizens, and the sub- and employees will join the war. • Consider reverse-mentoring truly are, and how they are sequent fall of Hosni Business leaders and corporate for your board members by Mil- accelerated and enabled by Mubarak and his cabi- directors will need to adapt or lennials — the 20-somethings online communications and net, will be the defining pay the price. who are causing the revolution. cloud technologies. For boards moment for the current and The challenge to CEOs and Partner with them to avoid the to succeed, nothing less than next generations of corporate corporate directors did not consequences of not under- a shift from traditional closed leaders and directors in America arise as a result of our recent standing their social media and governance to open and “ — even if they don’t yet know it. recession. Rather, it began to socially aware independent The worst seems to be manifest itself a decade ago directorship is required. behind us in Egypt. It’s tempt- when public trust in companies Social media changed the ing to believe that the uprising is and boards began to erode. face of Egypt. It will do the over, even as it spreads to other That trust continues to dimin- Proxy fights same to corporate boards. So countries, but that is simply ish as a result of rising income will be fought take heed; don’t let what hap- not true. The unrest that was inequality, high unemploy- using social pened to Egypt’s leadership media. ” unleashed is just the beginning ment, spiraling budget deficits happen to your board or senior of government and corporate and a host of other issues. management. It is time to open social reform that will transform Social media are just accel- a dialogue with your custom- all companies and their boards erating and amplifying what ers and employees, including of directors in ways none of us has been festering for a while. citizens and stakeholders, could have ever imagined. Thus, if you want to ensure the mobile capabilities as well as about how your organization The causes are simple prosperity of your organiza- their desire to connect online to can become more transparent, and well documented. The tion in today’s social and open be heard. accountable and engaged. •• past decade has seen a steady world, there are five rules for Virginia Gambale is a great increase in demand by custom- transforming your boards: example of a modern-day Barry Libert is chairman ers and employees for a voice • Implement good succes- board member. Gambale, a and founder of OpenMatters, in their organizations’ strategy, sion planning. You must have recognized technology guru a Boston-based social media direction, product and service a CEO on your board who who sits on the JetBlue Airways advisory firm. Steven Potter is development, and even in their has the technology skills and Corp. board, would not have CEO of Allyon Human Capital equity and debt financing. know-how to deal with today’s shown up in researchers’ data- Solutions, a New York–based As social media are connected society and who can bases or in the bowels of the big executive search firm. LINA CHEN spreading around the world step in during a crisis if need be. (Facebook and Twitter now • Build a situation room COMMENT? GO TO GLOBAL MARKETS AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 89. MORE INSIGHT MORE ANALYSIS MORE MARKET RESEARCH For breaking stories, analysis, and research subscribe to our complimentary eNewsletters.This Week in Institutional Investor ............................................... Every WednesdayAsset Management Channel ...........................................................Every ThursdayHedge Fund/Alternatives Channel .................................................... Every TuesdayResearch & Rankings ............................................................ Pre-Release Previews Sign-up for Institutional Investor e-newsletters at:
  • 90. APRIL 2011 INSTITUTIONAL INVESTOR68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2S 50 UNCONVENTIONAL WISDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER Clouds in the Cloud dollars could be saved by moving Peder Jungck, chief tech- nology officer of Sunnyvale, of its $80 billion IT budget onto the cloud. The latest rage in computing EBay looks to the cloud for deserves a pause for reflection. data and software California–based CloudShield, onto shared utili- a unit of Science Applications excess capacity that it can draw BY JEFFREY KUTLER ties in the cloud, International Corp., says it will on when volume spikes, pay- more than a third of be “some years” before com- ing only for what it consumes. survey respondents panies won’t think twice about David Cullinane, EBay’s chief were concerned putting their most sensitive information security officer, about unauthor- data in the cloud. That attitude said in February at the RSA ized access to, or should ultimately be beneficial, Conference, a data security loss of control of, pushing service providers to industry convention in San their data. deliver on the cloud’s promises. Francisco, that the cloud will A report last In a sense, cloud comput- save EBay $90 million a year in year by the World ing is not new. It has evolved electricity costs alone. Economic Forum from earlier versions of out- From an IT professional’s and consulting sourcing, starting with the standpoint, however, the THE INDUSTRY firm Accenture concluded service bureaus that off-loaded trend is evolutionary, says that ballyhoos its that cloud computing has “tre- corporate data processing as Jose Granado, leader of Ernst innovations the way mendous potential” both eco- early as the 1950s. In the 1990s & Young’s information security others unveil new nomically and through process network, or utility, computing services consulting practice cars or nutritionally improvements such as speedier promised to move personal for the Americas. It may look enhanced yogurts product development. Yet users computers’ intelligence and “more like a revolution,” he has created its latest, are wary that “unauthorized applications onto networks says, “if you are an IT user and highly amplified buzz parties [will] gain access to sen- — in current parlance, clouds it’s available on the Internet, all around cloud computing. A sitive data” in public clouds. — which would free on-site the time, everywhere, and you Microsoft Corp. TV commer- Consider that a victory for systems administrators from no longer have to go to a hard- cial has brought awareness of IT managers who are hesitant the Sisyphean burdens of main- wired PC in the office.” He “the cloud” — portrayed as a to entrust critical operations to tenance, upgrades and patches. believes it will take two to three “ wondrous if amorphous source In 1999, years for half of all companies of limitless programming and introduced its pioneering “soft- to be using the cloud, typically processing potential — to a ware as a service,” which trans- “dipping their toes in” at first. The cloud is mass audience. After a few formed into what the company Hoping and helping to years of buildup, the concept now calls the Sales Cloud and address that overriding issue gained credence last summer not mature the Service Cloud. In the same of security, EBay’s Cullinane when Internet auctioneer for security. vein, Google apps — includ- serves as chairman of the EBay announced it would be — Philip Lieberman ing e-mail, spreadsheets and Cloud Security Alliance, ” one of the first customers of Lieberman Software calendars — are now available formed in 2008 to promote Microsoft’s Windows Azure to enterprises via the cloud. security standards and con- platform for cloud computing., like Microsoft, trols. Ernst & Young recently But in keeping with infor- has positioned itself as a cloud became the first Big Four con- mation technology tradition, networks that need to be shored technology provider. sulting firm to join the alliance. there remains a cloud of hype up against data theft and cyber- It’s hard not to see momen- In March, Lieberman Software to cut through. That may attacks. “People are enamored tum here or to ignore the became its 76th corporate explain why just 23 percent of with the cost benefits,” notes impact of the Obama admin- member. The more critics and corporations have bought into Philip Lieberman, president istration’s chief information skeptics, the better.•• cloud computing, according and CEO of Los Angeles– officer, Vivek Kundra, saying in to an Ernst & Young survey of based IT security company a February report that the fed- Jeffrey Kutler is editor-in-chief 1,600 companies worldwide. Lieberman Software Corp. eral government, in the process of Risk Professional magazine, That’s up from less than 10 But he says auditing and gover- of closing hundreds of data published by the Global Associa- percent in 2008, but the early nance are insufficient, and he centers, could move a quarter tion of Risk Professionals. LINA CHEN adopters are gradual and cau- has concluded that “the cloud tious. Although millions of is not mature for security.” COMMENT? GO TO RISK/TECH/REGULATION AT INSTITUTIONALINVESTOR.COM INSTITUTIONALINVESTOR.COM
  • 91. WHITE PAPERS Custom Research by Institutional Investor The prized objectivity, research skills and industry knowledge at the heart of Institutional Investor’s publications are now at your disposal. Institutional Investor Market Research will perform, analyze and publish White Papers tailored to your needs. Our expertise becomes yours – whether to establish thought leadership, assess market conditions or validate product development – allowing you to conserve internal resources and more economically outsource assignments. COLLABORATIVE MODULAR FOCUSEDChristine Cavolina Europe Asia Caribbean/Latin America OnlineInternational Publisher Lena Mas Doug Mulcock Craig Leon Michael
  • 92. APRIL 2011 INSTITUTIONAL INVESTOR78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26TIONAL WISDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QUESTIONS PEO INDEX OF ADVERTISERS PUBLISHING CEO Jane Wilkinson Alerian . . . . . . . . . . . . . . . . . . 4 Cubist . . . . . . . . . . . . . . . . . . 13 Lotte Hotel . . . . . . . . . . . . . . . 3 MANAGING DIRECTOR David E. Antin Blackrock. . . . . . . . . . . . .31, 77 EnerVest . . . . . . . . . . . . . . . . 29 Metlife. . . . . . . . . . . . . . . . . . .11 PUBLISHER, INTERNATIONAL Christine Cavolina PUBLISHER, ASIA Douglas Mulcock PUBLISHER, ONLINE Michael Feinberg Capital IQ . . . . . . . . . . . . . . . 9 GE . . . . . . . . . . . . . . . . . . . . . .21 Prudential . . . . . . . . . . . . .6, 23 AMERICAS ADVERTISING SALES BANKING/MONEYMANAGEMENT Joy DeSanto(IndustryDirector) Commerzbank . . . . . . . . . .17 Invesco. . . . Cover 2, Cover 4 Mark C. Lee (Financial Accounts Manager) CORPORATE Douglas Campbell (Industry Director) EMERGING MARKETS Lorna Solis (Director for Latin America and Africa), Craig Leon (Director for Latin America) INTERNATIONAL ADVERTISING SALES Craig Leon (Associate Publisher, Northern Europe) Nora Lamoudi (International Sales Director) Elena Mas (Associate Publisher,International) CUSTOM MEDIA GROUP Ernest S. McCrary (Editor and Publisher) Jan Alexander (News Editor) Douglas Campbell (Director of Sales and Marketing) Francis Klaess (Art Director) Powerful Readers, , Powerful Readers PRODUCTION AND TRAFFIC Brian Gill (Production Director) CIRCULATION Hilary Neil (Subscriptions Business Manager) Powerful Edit. Powerful Edit. Denise Best (Circulation Manager) Linda Lam (Senior Marketing Manager) CUSTOMER SERVICE (800) 715-9197; Overseas (212) 224-3745; Fax: (615) 377-0525 SUBSCRIPTION HOTLINE (800) 437-9997; (212) 224-3570; Overseas (44-20) 7779-8999 FINANCE AND OPERATIONS To reach senior management Ben Castle (Finance Manager) Marge Springer (Business Coordinator) and professional investors at REGIONAL OFFICES the largest corporations and financial New York Institutional Investor, 225 Park Avenue South, New York,NY 10003; (212) 224-3300; Cable address: INSINVESYS New York; institutions worldwide, please call Telex: 234988 IISI (RCA),428162 INSINV(ITT); Fax: (212) 224-3368 London Institutional Investor, Nestor House, Playhouse Yard, London David Antin, EC4V 5EX, U.K.; (44-207) 303-1703; Fax: (44-207) 303-1710 Hong Kong Institutional Investor, 27/F, 248 Queen’s Road East,Wan at 212 224 3235, Chai, Hong Kong; (852) 2912-8033; Fax: (852) 2842-7012 REPRINTS For reprints and web links to articles, contact: or Dewey Palmieri (212-224-3675; fax: 224-3563; e-mail: CUSTOMER SERVICE INFORMATION For service on your subscription, including change of address, write to Institutional Investor Customer Service, 225 Park Avenue South, New York, NY 10003. In the U.S. call the subscription hotline, (800) 437-9997. Please enclose your address label from a recent issue with all written inquiries. Fax: (615) 377-0525. E-mail: Institutional Investor (ISSN 0020-3580) is published monthly (except for the July/August and December/January issues, which are bimonthly) for a total of 10 issues per year by Institutional Investor, Inc., 225 Park Avenue South, New York, NY 10003. Periodical postage paid at New York, NY, and at additional mailing offices. Canadian Goods and Services Tax registration number R12500404. SUBSCRIPTION: U.S. and Canada: One year, $445. Other Countries: One year, $485. Single copies, $60 each prepaid, except special issues. Special issues, special handling and bulk rates available upon request. This publication is also available on the LEXIS/NEXIS service, (800) 346-9759, and from UMI CD-ROM, (800) 521-0600, on 105mm microfiche and 16mm or 35mm microfilm. LEXIS and NEXIS are registered trademarks for information products and services of Reed Elsevier. POSTMASTER: Please send address changes to Institutional Investor, 225 Park Avenue South, New York, NY 10003. Attn.: Circulation Dept. INSTITUTIONALINVESTOR.COM
  • 93. APRIL 2011 INSTITUTIONAL INVESTOR68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2VENTIONAL WISDOM THE FUTURIST THE CHARTIST CONTENTS INSIDE II TICKER FIVE QU Tectonic Tilt Temblor’s aftermath will not swamp Japan’s economy. THE JAPANESE YEN AFTER THE KOBE EARTHQUAKE ¥/$ Yen versus dollar THE QUAKE IN JAPAN rocked local markets but shouldn’t pose 82 82 long-term damage to that nation’s economy or growth. Economists say natural disasters rarely change a country’s growth trajectory, notwithstanding a horror scenario in which nuclear plants cracked 86 86 and villages disappeared. “We advise clients to closely ease into the Japanese equity market,” says Chen Zhao, chief global strategist at BCA Research. Consider the 90 90 big Kobe quake of 1995: Although smaller than the March 2011 temblor, it triggered a return of overseas assets as insurance com- panies raced to cover losses at home, boost- ing the strength of the yen. In addition, 94 94 postquake reconstruction should increase KOBE all forms of public and private investment, EARTHQUAKE pumping up GDP while revitalizing job and new business creation. 98 98 — William H. Inman 1995 JAN FEB MAR APR MAY JUN GLOBAL MARKET REACTION TO THE NIKKEI PLUNGE Nikkei 225 index Emerging-markets equities Standard & Poor’s 500 index NIGEL HOLMES 2010 2011 Source: BCA Research ( INSTITUTIONALINVESTOR.COM
  • 94. TARGETED AUDIENCE Americas • Europe • AsiaChief Executive Officers, Chief Financial Officers, Chief Investment Officers, Finance Directors, Treasurers,Directors of Investments, Research Directors, Portfolio Managers, Securities Analysts, Risk Managers,Cash Managers, Commercial and Investment Bankers, Brokers, Insurers, Fund Administrators,Hedge Fund Directors, Pension Plan Sponsors, Investment Officers, Employee Benefits Managers ADVERTISE Christine Cavolina, International Publisher ~ Europe: Lena Mas ~ Asia: Doug Mulcock ~ Caribbean/Latin America: Craig Leon ~ Africa/Latin America: Lorna Solis ~ Online: Michael Feinberg ~
  • 95. THE POWERSHARES DB C O M M OD IT Y IND E X T RA C KING FU NDTo download a copy of the prospectus, visit