CalPERS Chooses Five Hedge Fund Managers

Brennan Succeeds Bolsover at Baring Asset Management Baring Asset Management, a unit of ING Group, has appointed David Brennan chairman and chief executive, effective July 1.Brennan has been with the company for 14 years and has been chief executive of

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Brennan Succeeds Bolsover at Baring Asset Management
Baring Asset Management, a unit of ING Group, has appointed David Brennan chairman and chief executive, effective July 1.Brennan has been with the company for 14 years and has been chief executive of the Investment Management Group for the past five years. He was appointed deputy chairman in 2001, according to Dow Jones.Brennan succeeds John Bolsover who will retire at the end of June.Peter Wolton will replace Brennan as chief executive of the Investment Management Group.3Plansponsor.comUK: Stakeholder Pension Revolution Fails to Ignite
The UK’s stakeholder pension program, touted as the solution to the nation’s savings shortfall, is failing to live up to the government’s expectations, a study has shown.The government had hoped that half of the UK’s five million low-income earners, who have no access to employer sponsored plans, would take advantage of the stakeholder pension plans, which charge lower management fees.However, according to the Association of British Insurers (ABI), only 619 million flowed into the new plans by the end of 2001, nowhere close to the estimated savings shortfall of 27 billion per year. The figures, gathered from the 47 of the 50 stakeholder plan providers, showed that around 750,000 people had bought a stakeholder pension by the end of February, and contributed 81 per month to the plan on average The minimum contribution is 20 a month and the maximum is 3,600 per annum.These numbers are inflated by two factors:retirement savers, who are transferring money from existing plans into stakeholder plans to take advantage of the lower fees workers, who are contributing through an employer-based plan. Small businesses that don’t provide retirement plans to their employees must arrange stakeholder pensions for them.About 320,000 employers were now making stakeholder pensions available to their staff, falling short of the government’s target of 350,000, according to the ABI.The ABI also noted that while limited data was available on the income levels of stakeholder investors, the data that were available showed that most were earning between 10,000 and 30,000 per year. The government had aimed to attract those earning 9,000 and 18,000.The stakeholder pension plan however, has not been a total disaster. After being introduced in a difficult year for investing, it has forced changes in the industry, placing downward pressure on management fees and forcing consolidation. There is also the expectation that the government may make employers’ contributions to stakeholder plans compulsory.3Plansponsor.comEnron Lawyers Baulk at State Street Fees
A much ballyhooed agreement brokered by the US Department (DoL) to install new management over Enron’s retirement plans is apparently unravelling. According to a Houston Chronicle report, Enron lawyers complained to US Bankruptcy Judge Arthur Gonzalez that the company should not be required to pay $2.7 million yearly to hire State Street Bank and Trust to oversee its three retirement programs. Together, the plans have about $1 billion in assets.Enron attorney Brian Rosen said the company didn’t want to be “taxed” by being responsible for State Street’s fees. Gonzalez ruled that the plan members should foot State Street’s bill (see Judge Overrides DOL, State Street Agreement on Enron) and that the Boston-based State Street should continue managing the plans until the issue is resolved. State Street Ponders ResponseRoseman told Gonzalez that State Street has to decide whether it will stay in the deal if the plans end up paying the company’s fees. Enron’s sudden turnaround comes after the company signed a DoL agreement to bring in State Street to replace Enron’s existing pension committee. For their part, DoL officials urged a swift end to the controversy. DoL lawyer Timothy Hauser said an undue delay would only further hurt Enron employees and former workers who already have lost thousands of dollars in retirement funds when Enron imploded. If Enron sticks to its position of departing the State Street deal, DoL may sue the company to force the appointment of a new pension manager. UBS to Compensate US Pension Fund
UBS PaineWebber will pay $10.3 million to the City of Nashville to settle a dispute over the amount of the firm’s fees as exclusive investment consultant to Nashville’s pension fund.Government officials had also complained that UBS PaineWebber understated the risks of the investments it recommended and misled them about its recommended investment strategies. The fund ended its relationship with PaineWebber in 2000.The cornerstone of the deal – that PaineWebber would be paid based on the number of portfolio trades – became a key part of the dispute. Many in the investment community charge that such a compensation arrangement gives an advisor too great an incentive to advise unnecessarily frequent trades.The lion’s share of the settlement will go to the $1.4 billion fund, which covers city employees. The remainder will pay legal fees.”We felt they were overcompensated, we felt the agreements were not clear, and we thought we could have gotten a better deal,” said Karl Dean, director of law at the legal department of the Metropolitan Government of Nashville and Davidson County, Tennessee. Fund Made Money Nashville officials may have had problems with PaineWebber’s fees and some of its consulting, but the fact remains that the city’s pension fund made money with PaineWebber’s advice. For the five years ended December 1999, for example, the fund had an average annual gain of 18.47%.But a KPMG April 200 audit maintained that PaineWebber’s fee arrangement was poisoned with potential conflicts and built up too many trading commissions. The audit also concluded that PaineWebber had misrepresented the consequences of some of its advice.CriticismBecause of the fund’s unusual fee and commission arrangement, PaineWebber earned excessively high fees on its trades, KPMG concluded. For the year ended June 30, 1999, consulting fees were $788,747, compared with fees for similar public funds of $92,000 to $163,000 in 1998. PaineWebber also kept the pension fund in the dark about its individual managers’ returns and risks in the portfolio, according to the KPMG review.A PaineWebber spokesman said: “The Nashville Metro Board pension fund had an outstanding record of performance while UBS PaineWebber was a consultant to the fund. UBS PaineWebber strongly disagrees with the one-sided criticisms and conclusions in the KPMG report. Although we believe that our compensation was reasonable, we decided to resolve this matter amicably.”3Plansponsor.comBond Funds Lag Equity Funds in First Quarter
US bond funds edged up by 0.28% in the first quarter of the year, lagging behind the 0.36% return of stock funds, as investors digested the early signs of an economic rebound reflected in recent data releases.Fixed income funds, which represent a combined $2.5 trillion, slipped by 0.42% in March on interest rate concerns, trimming gains made in January and February, when funds increased by 0.39% and 0.42% respectively as investors sought refuge from stocks beaten down by the wave of accounting scandals.According to data from Lipper, Inc, the average fund rose 0.28% over the quarter, after rising by 0.93% in the final quarter of 2001.Target Maturity, Treasury, Junk BondsIn March, target maturity funds, which hold longer-dated securities and move in tandem with long-term Treasuries, were the worst performers, receding by 5.01%, after a 1.41% gain in the previous month. Over the quarter, target maturity funds dropped 2.37%.The pattern was the same among US Treasury and government funds, which fell by 2.01% and 3.13% over the month, after increasing by 1.01% and 0.95% in February. Meanwhile high yield, or junk bond funds rebounded in March, increasing by 1.97% gain after dipping 1.38% in February. Over the quarter, they were up 0.99%, a meager gain in comparison to the 5.31% increase posted in the previous quarter. Among fixed income funds, emerging market funds led the pack, ballooning 6.94% over the quarter, after a 8.59% gain in the final quarter of 2001.3Plansponsor.comWM Mercer Becomes Mercer HR
Only cynics will have checked the date on the announcement by consulting firm William M. Mercer that it would be changing its name to Mercer Human Resource Consulting. (It comes a week too late for All Fools’ Day.) But even they will be relieved that the fifty-seven-year-old consulting firm, owned since 1959 by Marsh & McLennnan, has not paid a branding consultancy a six figure sum for an Hellenic-sounding neologism.What the name change really signifies is the commoditisation of what most custodians would name as the core business of the consultant: choosing fund managers on behalf of plan sponsors. In reality, consultants now make their fattest margins advising corporate clients on the full range of employee benefits. Over the past decade, Mercer has extended its consulting capabilities into virtually every area of human resources, largely by acquisition. Over the last twenty years, the firm has devoured Sedgwick Noble Lowndes, Corporate Resources Group, MPA Limited and Duncan C. Fraser & Co. in the United Kingdom, Europe, and Asia; John Eriksen & Partners, Campbell & Cook, and E.S. Knight in Australia and New Zealand; and Meidinger, Inc., A.S. Hansen, Foster Higgins, and SCA Consulting in the US.David Barford, Chairman and Chief Executive of Mercer in the UK – where the firm employs more than 3,700 staff in 17 offices – confirms that the name change is designed to reflect the consequent alteration in the revenue base. “The name Mercer Human Resource Consulting encompasses the full range of resources that we, as a global company, can bring to bear on behalf of our clients,” he says. “Mercer’s strong growth in human resource consulting reflects the increasing recognition that, by investing in their people, organisations can improve performance and profitability.”In conjunction with introducing its new identity, Mercer is launching, a website offering do-it-yourself tools for HR professionals and products that users can purchase online. The investment consulting business, Mercer Investment Consulting, will be relegated to a single section on the new site (’s Turpin Joins Old Mutual
The former manager of Putnam Investments’ defined contribution business, has been named vice president and chief operating officer of the US asset management group of Old Mutual plc.Thomas Turpin, 41, led Putnam’s defined contribution client service, sales, investment servicing, product management, marketing and 401(k) rollover areas until several months ago when the defined contribution area was moved under the aegis of John Brown, who is also responsible for Putnam’s defined benefit business.Turpin had been at Putnam since 1993.Before Putnam, Turpin had held several executive positions with The Boston Company – primarily in the Master Trust and Custody Division – from 1982 to 1993. In addition to Turpin, Old Mutual also tapped Kevin Hunt, formerly of Morgan Stanley, as its executive vice president and director of sales, marketing, and product development.The appointments for the two Boston-based positions were effective Friday.3Plansponsor.comPlan Sponsor Survey Confirms Under-Funding Trend
Slumping markets and looming liabilities combined to put the squeeze on pension plan funding levels last year, according to PLAN SPONSOR’s 2002 Defined Benefit survey.While last year’s data found 57% of plans were overfunded, the latest data show that dipping to 48%. Despite enjoying better market returns, on average, than their larger kin, smaller plans were much more likely to coming up short on the funding side. More than 31% of respondents with less than $10 million in assets are only 80% to 94% funded, while, among larger plans, 75% of those with between $1 billion and $10 billion in assets are overfunded and 80% of those with more than $10 billion. Weak equity markets explain part of the dropoff in funding, but plan sponsors also blame the historically low yields of the 30-year Treasury bond that is used in the funding calculation. The low rates of return translate to artificially high funding requirements. Against respondents’ average long-term actuarial target return of 8.7%, returns for our plan sponsor sample are paltry, particularly when coupled with last year’s meager return of 4.1%. However, sponsors seemed more complacent this year about manager performance, with nearly a quarter reviewing manager performance just once a year, versus 16% conducting annual reviews a year earlier. More sponsors were meeting with managers just once a year, as well-through fewer were content to hold such meetings as necessary. Funding GapsIn total, 50.7% of plan sponsors made contributions to their pension plans within the last year, down from 62% a year ago. Despite the overall gap in funding – or perhaps because of it – smaller plans were more likely to have made a contribution within the last year. More than two-thirds (68.75%) of plans with less than $10 million in assets under management had done so, compared to:37.5% of plans with $500 million to $999 million in assets 36% of plans with $1 billion to $9 billion in assets 40% of plans with more than $10 billion.Future Tense?As for the future, no less than 62% of almost 400 fund officials responding to our survey in January told us that they planned to make contributions to their defined benefit plans within the next 12 months-the same percentage that planned to make such contributions over the course of 2001. Among plans with less than $10 million in assets, three-quarters intend to pour in money this year, up from the 69% who planned to make funding contributions last year.Keeping TrackThe share of respondents who rely on the expertise of investment consultants dipped just slightly to roughly 78% versus 81% a year earlier – and a slim majority (59%) of sponsors require their managers to be AIMR compliant with their performance reporting. Roughly a third of plans with less than $200 million in assets – didn’t know. Still, most pension funds also increasingly measure their performance against their peer universe. Some 79% measure their performance this way, up from 77% in the previous survey. Smaller plans are less likely to do so – only 69% of plans with less than $10 million in assets engage such benchmarks versus 80% of plans with more than $10 billion in assets. 3Plansponsor.comAtriax Defeated in Forex Wars
Online foreign exchange trading platform Atriax announced Friday that it would close, citing failed merger negotiations with rival platform FXall. And now Citicorp is expected to join FXall, according to Reuters, citing market sources.3Plansponsor.comGoldman’s Paulson Rejects Insider Trading Allegation
Goldman Sachs could be charged with securities fraud in the wake of its role in releasing information about the US Treausury’s decision to suspend issuance of the 30-year Treasury bond last fall.The news triggered the biggest bond market rally in 14 years as traders scrambled to snap up bonds both before and after the news was made public.According to published reports, the Securities and Exchange Commission (SEC) will send a notice to the investment bank, saying it plans to recommend filing civil charges about the Treasury leak. According to a source familiar with the situation, once the notice is filed, Goldman will have the opportunity to present its case as to why it shouldn’t be charged. Early EditionsThe information release stumbled through a couple of mishaps during its October 31 communication, not the least of which was an electronic glitch that resulted in the publication of the announcement on the Treasury web site 17 minutes before the slated embargo time of 10 a.m. ET. However, even before that an internal Treasury review found a member of its debt advisory panel and a principal at a New Jersey analysis firm had already heard about the news, according to CBSMarketWatch. Realizing the gaffe, Treasury made the official announcement at 9:49 a.m. Additionally, Washington-based consultant Pete Davis, present at an under-wraps press conference, conceded afterward that he had called clients before the end of the embargo, offering them details of the upcoming change in practice. The SEC has also informed Davis that he may be charged, according to Dow Jones, citing people familiar with the matter.Client ‘Tell‘Davis has named a few of the clients who received the information, but while Goldman is a client, they weren’t on Davis’ list. However, Goldman has acknowledged that it received the tip at about 9:30 a.m. that morning, according to Dow Jones. Davis says that while he informed clients, he told them it was embargoed pending the department’s official announcement. But according to Dow Jones, some securities lawyers say if Goldman wasn’t told that the information was embargoed and wasn’t supposed to be trading on it, the firm may not have engaged in improper activity.3Plansponsor.comDeutsche Bank Blow as Investors Group Quits Scudder
Investors Group has served a notice to terminate its agreement with Zurich Scudder Investments as to their sub-advisory role with several funds in the wake of Zurich Scudder’s acquisition by Deutsche Bank. The funds, with combined assets of some $330 million, include IG Scudder U.S. Allocation Fund, IG Scudder Emerging Markets Growth Fund, IG Scudder European Growth Fund and IG Scudder Canadian All Cap Fund. Scudder had been sub-advisor since 1999. Mackenzie Financial Corporation also served notice of termination of its relationship with Zurich Scudder Investments, affecting the subadvisory relationship with 11 Mackenzie funds with approximately $506 million under management.3Plansponsor.com2002 Prime Brokerage Survey Results
The results from Global Custodian’s 2002 Prime Brokerage Survey are in, and as the industry changes, so too do the results of the survey. More and more hedge funds have broadened their relationships to include multiple prime brokers, and thus a greater level of comparability is emerging. In the smaller fund market, ABN AMRO remains very strong, despite ownership changes, winning seven excellence awards. Banc of America, which received the most responses in the survey, improved its showing, and is beginning to be seen among larger plans too – the firm won five excellence awards. Morgan Stanley was notably strong in 2002, particularly in the area of funds over $500 million in assets; Goldman too had a good showing, notably in the international arena, where it won excellence awards in five out of the six categories. In the international space, Barclays Capital remained a standout. Bear Stearns had a solid year, with some slippage but much less than its competitors would have the world believe. Deutsche Bank is now a force to be reckoned with, as is CSFB and Lehman Brothers, particularly in the financing arena. The survey results make clear what is becoming increasingly evident in the field – the world of prime brokerage has become exceptionally competitive, and the differentiator, going forward, will be not so much traditional strengths (in areas like securities lending, for example, there has been a levelling of product offerings), but the ability of firms to reinvest and to customize and provide added-value services to clients.
A poll conducted for last month’s CIO Magazine found that chief technology officers have turned “decidedly positive.” The projected growth of IT budgets for the next 12 months is 7.7 percent- its highest level since March 2001 – with nearly six out of ten companies reporting a significant applications backlog. “While we will be watching for confirmation from future months, this could be the first concrete evidence that corporate IT spending is starting to pickup,” according to Chris Mortenson, Managing Director, Global Equity Research for Deutsche Banc Alex. Brown, co-creators of the survey.The CIO Magazine “Tech Poll” provides technology and business executives, economists, and policymakers with a tool to gauge technology growth trends and to assess their impact on the overall economy. The Poll panellists are asked to answer questions on overall current and projected IT budgets on a monthly basis. Also covered are future spending plans for IT hardware, software, services, and Internet initiatives. The results of March’s Poll, which was conducted from March 14-21, are detailed below.CIO Magazine Technology Growth IndicatorsThe CIO Magazine Tech Poll results are used to construct the CIO Magazine Tech Future Growth Index (TFGI) which projects IT activity over the next 12- months.(1) In March, the TFGI was 2.8, compared to 1.2 in February. This marks the highest expected level of IT activity since August 2001. (Table 1 providing historical data and selected charts is accessible at IT Budget and CostsDuring March 2002, the CIO Magazine Tech Poll panel projected IT budgets will grow by 7.7% over the next 12 months, up substantially from February’s 3.2%, — and its highest level since March 2001. In addition, the panel reports IT budgets grew an average of only 0.8% over the previous 12 months, down slightly from the February estimate of 1.0%, and off sharply from 14% in February 2001.(2).It SectorsWhen asked about spending in eight specific IT categories, the average number of panelists planning to increase spending was flat from the previous month at 39% in March, while those planning to decrease spending fell to 17.4% from 21.2%(3). Security Software continues to be the strongest sector in the poll with nearly 55% of respondents planning to increase spending while only 4% plan to decrease spending.Infrastructure Software. Infrastructure Software experienced the largest increase in expected spending amongst the specific IT categories. Among the panelists, 38.5% plan to spend more compared to 32.4% in February, with only 12.8% planning to cut spending, down from 20.9% a month earlier. (Table 1 at Hardware. Computer Hardware had the greatest decline in anticipated decreased spending. Among the panellists, 78.9% plan to spend the same amount or more compared to 69% in February, with only 21.1% planning to cut spending, down from 30% a month earlier.Compensation Costs and Labor Market Conditions. IT compensation costs (including salaries, benefits, and bonuses excluding stock options) reportedly rose by an average of 2.9% in the 12 months ending in March, up from 2.4% reported in February, and down from 9% a year ago. 9% of respondents reported IT professionals were hard to find and retain, up slightly from 8.0% last month and down from 40% a year ago.Internet Budgets and BusinessInternet Budget Plans. CIO Magazine Tech Poll panellists report that they expect to spend 15.6% of their IT budgets on developing business over the Internet (B2B2C) during the next 12 months. This is up slightly from 15% reported for the previous 12 months. In addition, 36.5% of the panellists plan to increase spending on eBusiness software during the next 12 months versus only 15.4% who plan to cut back.Internet Revenues. Overall, panellists expect to generate 11.4% of their revenues from Internet activity (B2B2C) over the next 12 months, compared to 8.5% during the previous 12 months. This is down from last month’s estimates of 12.1% and 9.1% respectively.Internet Purchases. On average, panellists expect to purchase 18.7% of their materials, supplies and parts over the Internet, up from an estimated 14.8% over the past 12 months.Special QuestionsPrior and Current Quarter Comparison. When asked to compare IT spending during the first quarter of 2002 to the fourth quarter of 2001, adjusting as best as possible for seasonality, 34% said spending in the first quarter would be higher or significantly higher (up from 29% in February), while 27% said it would be lower (down from 30% in February). The remaining 39% have unchanged plans (compared to 41% in February). (Table 2 presents the results of the special questions).Pickup in IT Spending. Among panellists, 37.4% say IT spending either never slowed or already has picked us (vs. 32.2% in February) with 15.7% claiming to have already seen a spending pickup (vs. 10.6% in February). Interestingly, only 51.7% expect to see an IT spending pickup in 2Q02 and beyond down from 59.4% in February.Spending Factors. Weak profits continue to have an adverse impact on tech spending. This was cited by 35.7% of the panellists as the primary factor affecting IT spending plans in 2002. Another 34.2% see “tight financial conditions” as the primary factor adversely affecting IT spending plans, and 20.3% said that spending might be weak because there is sufficient IT capacity.State of Current Application Backlog. When asked how they would characterize their application backlog, 90.6% reported having an application backlog up from 87.3% in December, when the question was last asked. Indeed, 57.8% said the backlog was significant (up from 52.1% in December) a potentially positive indicator of future demand. However, only 13.4% (up from 12.7% in December) said they would increase spending in response.CIO Magazine Tech PollThe CIO Magazine Tech Poll was created by CIO Magazine in August 2000 in association with Deutsche Banc Alex. Brown and Dr. Ed Yardeni. The poll is proving to be an accurate indicator of technology spending trends. The latest poll was opened on Thursday, March 14, and closed on Thursday, March 21. An invitation to respond to the poll was distributed via e-mail to a panel of more than 2000 CIOs and 3,000 randomly selected CIO readers who match the job function criteria “CIO.”Demographics. In the March poll, there were 268 responses with 96% from North America. CIOs comprise 90% of the total, with CEOs, COOs and presidents accounting for 6% and “other” titles accounting for 5%. Very large firms with over 5,000 employees represent 16% of the results. A broad cross-section of industries is represented, including manufacturing (19.1%), finance (10%), technology services (10%), health care (8%), and state or local government (8%).The complete March CIO Magazine Tech Poll can be found at Previous poll results can be found at
(1)The TFGI is calculated by multiplying the projected growth rate of future IT budgets by the average percentage of respondents saying they plan to increase spending on eight unique categories: computer hardware, data networking equipment, telecom equipment, storage systems, outsourced IT services, infrastructure software, and eBusiness software. (2)Averages exclude responses over 100%.(3)Starting in January 2002, Security Software has been added to the group of IT sectors surveyed in the Poll.
FXall Celebrates Victory in Battle of FX Platforms
Following the withdrawal from the marketplace of Atriax ( Atriax Defeated in Forex Wars) FXall, the electronic foreign exchange trading platform, announced today that Citibank, Deutsche Bank and JPMorgan Chase – all founders of rival platform Atriax – have joined the trading platform as liquidity providers. Citibank had taken an equity stake in the company, bringing the total number of equity backers to 17. “We are delighted with this development. It consolidates the top foreign exchange providers into a single portal,” says Carolyn Blight, Managing Director, Investment Management at Pareto Partners. “This will be of clear benefit to clients and is exactly what we wanted. At Pareto Partners we have already traded with one of the new liquidity providers.””With the active participation of the three largest banks in foreign exchange, FXall will further accelerate customer adoption,” adds Jim Turley, Global Head of Foreign Exchange at Deutsche Bank. “We are very excited at the prospect of driving developments through our participation in FXall.”David Puth, Managing Director, Head of North American Rates at JPMorgan Chase agrees. “This is what the market has been looking for: broad and deep liquidity from all major liquidity providers in a fully automated solution. Customers are the clear winners in today’s announcement,” he says.”Over recent months clients have indicated a clear preference to access their major providers of FX in one place. In keeping with a long held commitment to respond to customer needs, Citibank is delighted to provide liquidity on the FXall platform, thus satisfying clients’ express wishes,” concludes Richard Moore, Head of Global Foreign Exchange at Citibank. “We are looking forward to working with our new partners to shape the ongoing electronic evolution of the FX market.”Phil Weisberg, CEO of FXall, said: “We are very pleased to welcome our new liquidity providers. This is great news for customers, and for the industry as a whole. We will now further accelerate our work with providers, partners and customers to extend the benefits of full automation to all market participants.”Monks on Corporate Governance After Enron and Global Crossing
In an address at the Stern School of Business in New York on March 26, 2002 Alan Greenspan, not for the first and hopefully not for the last time, gave the American people a clear and sensible analysis of an important and pressing problem. He was addressing the need to restore public trust in the governance of corporations in the aftermath of Enron and Global Crossing. He suggested that the basis for a reliable system of corporate governance is either, “the current CEO-dominant paradigm” or “the only credible alternative is for large- primarily institutional – shareholders to exert far more control over corporate affairs than they appear to be willing to exercise.” He chooses the “benevolent despot” – “[I]t seems clear that, if the CEO chooses to govern in the interests of shareholders, he or she can, by example and through oversight, induce corporate colleagues and outside auditors to behave in ways that produce de facto governance that matches the de jure shareholder-led model.” Greenspan is in a unique position. In his seventy-seventh year, the Federal Reserve Board Chairman is seeking no favor from anyone. He is largely immune to the subtle and not so subtle influences of the corpocracy that is Washington, D.C. today. It is hard to name another leader with comparable credibility in matters financial. So it falls on him to expose the convenient lie of governance based on “independent” board members. This fiction has been convenient to everyone – the government can pretend that there is a functional system, until a crisis like Enron shrieks that the Emperor has no clothes. Individual directors are glad to be overpaid and over valued. CEOs are thrilled to be able to function as dictators while having available the myth of accountability to an “independent” board. As Chairman Greenspan puts it from an economist’s perspective, the system has survived – “For the most part, despite providing limited incentives for board members to safeguard shareholder interests, this paradigm has worked well.” The limited incentives have resulted in the board members functioning as creatures of the CEO, so Greenspan prefers to base the public interest on the familiar hope – the “benevolent dictator”. It is ironic that Americans have overwhelmingly rejected this hope in providing a legitimate base of our political systems. If only men were angels. How many splendid creations have been developed from this premise? But, men are not angels, nor are CEOs any exception. Greenspan appears to take the unwillingness of institutions to inform and involve themselves more in corporate affairs as a controlling premise. Why, one might ask, should trustees, of all legal owners, be permitted by simple fiat to purge themselves of tiresome responsibility? Do we allow individuals, flesh and blood owners, unilaterally to disaffirm any responsibility for the impact of their possessions on society as a whole? As Adolph Berle said in addressing this problem some sixty five years ago, “If a horse dies, does not its owner have the obligation to bury it?” Further, it is clear that this disinterest of institutions to act as owner of the companies whose shares are held in trust portfolios is largely based on their conflicts of interest. The institutional owners are preponderantly financial conglomerates whose financing interests with corporations are apparently of greater value than functioning as trustee for their pension plans. And yet the law of trusts is clear beyond dispute. Any conflict of interest must be resolved in favor of the beneficiary. Government at all levels in the UK and the US has failed to enforce this plain requirement of basic law. The arrangements by which the majority ownership of America and Britain’s publicly traded corporations is held by trust institution was not an ineluctable product of history. The government in its interests in providing retirement income and safety in investing in mutual funds created these institutions. This government characterized the institutions as trusts and, thereby, gave assurance to beneficiaries that they could be confident their assets would be protected by, among other things, freedom from trustee conflict of interests. The unintended consequences of well-intended government action have resulted in the neutering of the majority owners of America’s publicly traded corporations. The “market” of ownership has, thus, been corrupted. Even the most rabid libertarian would not quarrel with the appropriateness of government acting to undo consequences created uniquely by government act. Simply, trust responsibilities must be enforced. The United Kingdom has faced up to this problem through adoption by the Labor Government of the recommendations of the Myners Report. Happily, Chairman Greenspan’s remarks were delivered only days following publication of SEC Chairman Harvey Pitt’s assurance that from his perspective the law would henceforth be enforced. “…[T] he head of the Securities and Exchange Commission has asserted that money managers should view their corporate proxy votes as a fiduciary duty.”[1] In as much as the Department of Labor has long since opined (1985 or 1994, from speech to formal ruling) that Employee Benefit Plan Trustees have an identical obligation, we now have formal government assurance that the institutional reluctance so far as it obtains to pension plans and mutual funds to which Chairman Greenspan pays such deference will no longer be tolerated.The importance and value of shareholder involvement has been demonstrated dramatically in recent times in the cases of Solomon Brothers and Waste Management. In the first case, “owner” Warren Buffett took direct personal control of the enterprise, successfully negotiated with the government the continued ‘parole” of the company, and ultimately realized substantial profits for all shareholders. In the latter case, “owner” Ralph Whitworth of Relational Investors took on the Chairmanship in order to direct the recovery from the massive accounting frauds that have resulted in huge tort recoveries from Arthur Anderson and SEC initiated criminal proceedings against the principal officers. The continuing shareholders of WMX have profited. Contrast the situation characterized by governance based in “active owners” with the total losses for outsiders in Enron and Global Crossing. Chairman Greenspan has identified the real alternatives. He has politely but firmly repudiated the conventional governance wisdom of the past twenty years. He has given us much to think about. [1] Lublin, Joann S., Proxy Voting is a Fiduciary Duty, SEC Chief Says in Letter to Group, Wall Street Journal, March 21, 2002Robert MonksEmail: ragmonks@ragm.comWeb Site:http://www.ragm.comCapital Resource Reacts to Loss of BARRA RogersCasey Staffers
Reacting to the defection of key staffers after its purchase of BARRA RogersCasey (BRC), Capital Resource Advisors (CRA) points out that most of the consultancy’s staff and business in fact stayed put. In a formal statement released to, CRA said that the loss of some employees was inevitable: “There is always attrition in deals like this but better than 85% of the original BARRA RogersCasey staff remains in place, along with virtually 100% of the business.”Last week, reported on the defection of 16 senior BRC personnel. The ex-staffers were led by Ron Pellish, chief executive, and included a number of the firm’s senior consultants and research and analytics staff. CRA said in the statement that it ‘strongly encourages’ former BARRA RogersCasey employees not to violate the terms of their non-competes. Indeed, one of the ways it is ‘encouraging’ these employees is to sue them, according to sources; late last week a number of the defecting executives found themselves on the receiving end of individual law suits from CRA, sources say. As of press time, neither CRA nor former BRC executives would comment on this.CRA purchased Darien-Connecticut-based BRC from BARRA for $14 million. It was common knowledge that a group of the firm’s senior consultants had desired to strike out on their own through a management buyout from BARRA. “Looking to the future, we already see signs that our business will be highly successful,” CRA further said in its statement. “Our combined team stands stronger than ever, ready to provide our clients with a depth and breadth of services unmatched in the industry.”3Plansponsor.comHedge Funds Lag Long-Only Investors in March
Preliminary data from Van Hedge Fund Advisors shows that the average hedge fund rose 2.3% in March, somewhat behind major US equity indexes. According to Van Hedge, in March hedge funds appear to have been hurt by short selling – a technique that has boosted their returns in times when equity markets were struggling. Van Hedge said that the average hedge fund fell 1.1% in February.3Plansponsor.comPcW Study Confirms Institutionalisation of Share Ownership
An average of 61% of the total shares of most large, multinationals are owned by institutional investors, a PricewaterhouseCoopers Management Barometer finds. In addition, the survey found that:
  • the top 10 investors typically own 26.9% of all shares
  • the top five hold 19.3%
  • the largest own 8.6%.
Retail investors own the remaining 39% of shares. Respondents said they would like to retain essentially the same ownership mix, 62% institutional, and 38% retail, over the next year or so. Who Owns WhatOf all shares in the companies surveyed:
  • institutions that are value and growth investors own a total of 48.5%
  • institutional shareholders tracking an index own 7%
  • those with an income focus hold an additional 5.5%.
Results show that executives believe that institutional value and growth investors have a better understanding of their companies than institutions focused on income or various stock indices, whose charter does not require them to follow companies as closely.Keeping informedOverall, 88% of the sample rated institutional investors as well informed about their company’s strategy, with only 9% viewing them as not well informed.In particular:
  • 77% saw value investors as well informed
  • 63% of growth investors were seen as well informed
  • only 38% of income investors and 32% of index investors where so deemed.
Furthermore, respondents said 72% of value investors, and 69% of growth investors have sophisticated financial models, versus only 35% of both income and index investors. Exerting InfluenceDespite this significant concentration of ownership, survey respondents believe institutions have limited influence over company strategy. In fact:
  • only 37% of surveyed executives said institutional investors exert strategic influence
  • while 26% said institutions have no impact on corporate direction
  • 34% rated them neutral.
According to surveyed executives, big institutional investors are:
  • majority shareholders in 64% of their US-based multinational companies
  • minority investors in another 22%
  • the remaining 14% are either privately held or foreign owned.
PricewaterhouseCoopers’ new “Management Barometer” is developed and compiled with assistance from BSI Global Research Inc and comprises the responses of 101 CFOs and managing directors in large multinational businesses.3Plansponsor.comMerrill Rejects Allegations of Research Bias
New York State has ordered Merrill Lynch to disclose conflicts of interest between analysts and investment bankers, alleging Wall Street’s biggest brokerage gave misleading stock picks. New York Attorney General Eliot Spitzer accused the investment firm of giving biased stock recommendations to secure fees for helping companies sell stocks to the public and advising on mergers. Merrill says the conclusions are ‘just plain wrong’ – and says it is ‘outraged’ not to have the opportunity to contest the allegations in court.3Plansponsor.comPutnam Stops Naming Fund Managers
Putnam Investments has stopped identifying the managers of its mutual funds in regulatory filings. According to Bloomberg, by omitting executives’ names from the SEC reports, the company can avoid filing new reports when a manager is fired or hired – action that can draw unwanted attention, according to the report. Putnam says its emphasis is on teams, not individuals.3Plansponsor.comCiti Sells Spanish Businesses to Santander Central Hispano
Santander Central Hispano (SCH), Spain’s largest bank, has agreed to buy the local investment and pension arms of Citigroup. The deal will give SCH nearly 987 million euros ($867 million) in extra pension and investment funds to manage. Santander Central Hispano Asset Management is the largest fund manager in Spain, with some 61 billion euros in funds.3Plansponsor.comCanada Bores On With Preparations for T +1
Despite the further delay to the T +1 timetable in the United States, and mounting skepticism around the world that T +1 is either wise or necessary, the Canadian securities industry continues to work on the assumption that shorter settlement timetables are a good idea. The Canadian Capital Markets Association (CCMA) – a not-for-profit company charged with identifying, analyzing and recommending ways to meet the challenges and opportunities facing the Canadian capital markets – today released a “directional analysis” of the T +1 challenge facing the Canadian financial services industry. It was written by Cap Gemini Ernst & Young (CGE&Y).The CCMA believes the analysis will assist Canadian securities market participants in shortening the securities settlement cycle to T + 1. CGE&Y has developed what the CCMA describes as an “integrated and comprehensive T+1 analysis” encompassing a Project Charter (namely, a risk assessment, risk reduction recommendations, assumptions, constraints, governance proposals and performance indicator measures); a Project Plan (milestones and critical path); and a list of Resource and Skill Requirements (including estimated effort by activity).The CGE & Y analysis is the culmination of 18 months’ work preparing for T+1, in which the CCMA conducted economic analysis; published four white papers (on institutional trade processing, reducing the use of physical certificates, legal and regulatory issues and retail trade processing); mapped out the project; launched a web site (; organized a slew of conferences; drafted a T+1 checklist; and bombarded members with articles and newsletters on the implications of T+1 and the urgent need to start preparations.Yet CIBC Mellon president and CEO, Tom MacMillan, the newly appointed Chair of the Canadian Capital Markets Association, says the industry still has more to do. “While extensive work has already been done, the CCMA Board of Directors believes that the momentum, depth and breadth of the T+1 project must be increased to meet the June 2005 deadline,” he says. MacMillan has urged Canadian firms which have not yet begun their T+1 planning to start immediately, and those which have to step up their efforts. To encourage them, on February 6 the CCMA launched a 90-day plan to accelerate the move to T+1. With have the period now half-run, CCMA says it is on target. Oddly, the real driver (as in so many matters Canadian) is anxiety about losing business to the United States, where anxiety about T + 1 has yielded to other concerns A November 2000 economic study showed that if the Canadian securities settlement cycle is not reduced to T+1 at the same time as the United States, Canada risks losing business south of the border. The CGE&Y analysis is a key component in the CCMA plan to synchronize moving to T+1 with the U.S. and ensure the Canadian capital markets remain competitive. “Reaching T+1 at the same time as the U.S. is critical to ensuring that Canada remains competitive in North America’s capital markets,” says MacMillan. “Having the CGE&Y analysis will help us meet our goal of reaching T+1 by mid-2005.”Banks Tell SunGard Self-Serving Customers Cost Less
Journalists often ask each other why SunGard gives every product and project a silly name – think of Omni IC and IntelliTRACS- rather than telling them what the thing actually is. Dozens must have spurned the survey published by SunGard today simply because it paraded itself under the acronym ePI (which is short for the equally mystifying eProcess Intelligence). As a result, they will have missed some interesting insights into one of the hottest topics in securities services technology: getting the clients to do then work.Of course, that is not the way “customer self-service” is sold by custodian banks, any more than BP sells self-service as saving on labour costs or the Inland Revenue sells self-assessment as out-sourcing its workload to taxpayers and their advisers. Banks prefer to portray themselves as under pressure from clients to enable them to access, query and manipulate data about their own assets and transactions. But, as the 2001 Global Custodian survey of CTOs at custodian banks found, there is a wide spectrum of means by which clients can be given access to data and even greater variety in the nature of the tools they are offered once they are inside the system.To find out what is going on, SunGard ePI commissioned research on the subject amongst the top 500 banks. The research, completed at the beginning of April this year, drew responses from both departmental heads and senior operations professionals, with the eventual sample split more or less equally between users (55 per cent) and inter-bank service providers (45 per cent).The survey found that banks are concerned primarily with driving down costs rather than giving clients real-time access to information. Indeed, most feel daunted by the cost and complexity of the technology needed to provide effective real-time customer access. (SunGard adds, predictably but perhaps rightly, that this reflects ignorance of the quick-and-easy solutions available from vendors.) But the survey authors argue that giving customers access to information on both cash and securities transactions in real-time will not only drive down costs by cutting call centre overhead and speeding up the resolution of exceptions. They say it will also improve customer retention rates via value-added services, and reduce operational risk. The full report is reproduced below.
Pioneer global banks push ahead with Customer Self-Service
Despite perceived technological obstacles amongst service users
Survey Audience-Global top500banksFieldwork-LMRCompletion- April 2002The issue of providing the customer – whether interbank or corporate – with the ability to access and query their own transactions, is emerging as one of the next major developments in global banking technology. Initial interest is concentrated firmly amongst pioneer institutions, often those forward thinkers who were first in the fray of STP in the early 1990s, and who then embraced automated exception processing in the latter part of that decade.In order to reveal current attitudes to the notion of Customer Self-Service, SunGard eProcess Intelligence (SunGard ePI) commissioned LMR to research opinion on the subject amongst the global top 500 banks. The research was completed in April 2002, and respondents were equally drawn from departmental heads and senior operations professionals. Reflecting the balance of the survey audience, our sample is comprised rather equally of users (55%) and interbank service providers (45%).It would appear that the main operations objectives of the global top 500 banks are firmly focused on cost reduction. The global banking community sees much further room for efficiency improvements in back-office operations, no doubt especially with the progress of key standardisation initiatives such as CLS, GSTPA, Omgeo, Bolero, etc. The more rigorously standardised transaction and settlement processes become, the more value STP solutions will deliver. Based on its high ranking among key operations objectives, automated exception processing has now achieved a high awareness, in terms of its advantages for service providers and users alike. The benefits of automated exception processing – reduced operations risk, enhanced reputation, minimised compensation payments – are well recognised.The provision of customer self-service comes in at the lowest position of key operational objectives. However, those with longer memories will recall that automated exception processing occupied exactly this low awareness status in the global banking community some five or six years ago. Continuing the comparison, we believe that despite the fact that there are proven Customer Self-Service solutions already available (and in a number of cases, implemented) on the market, many players are unaware of them. In fact, looking at answers to the following question, it would seem that real-time reporting capabilities – an essential component of effective Customer Self-Service – is perceived by a majority amongst the global top 500 banks as a currently insurmountable technological obstacle. We believe that this perceived technical hurdle has greatly influenced the lowly status afforded by our respondents to Customer Self-Service as a key operations objective.The lower ranking of customer self-service provision as a key operations objective is unlikely to last for much longer, on account of rising demand for such capabilities from the front office. While customer self-service extends the exception processing platform of a transaction service provider to its customers, thus streamlining investigations and exception processing, it also acts as a tool for improved customer service, customer retention, and possible new revenue streams to the front-office. [PERCEIVED TECHNOLOGICAL OBSTACLES – GRAPH 2] obstacles to Customer Self-Service for Interbank Service Providers, we find a level of scepticism about what level of Self-Service can really be delivered today – a scepticism which we have already noted to be unfounded.Respondents did not believe either security issues, or access to statement and transaction data, to be technologically difficult for Self-Service providers to deliver. Sending payment instructions (see “effect real-time payments” above) was also not seen as a difficulty. On the other hand, the “value-added” aspect of Customer Self-Service was perceived to be far more problematic to provide. These “value-added” aspects of Self-Service include: knowing where transactions had a problem (exceptions); understanding how exceptions might be affecting a net figure; knowing what had caused the exception; and being able to access the status of an investigation.In short, our respondents see the more sophisticated (and therefore more useful) side of Customer Self-Service as troubled with technological delivery problems. Despite the fact that there are several Customer Self-Service applications in successful operation in pioneering institutions, the marketplace as a whole is currently unaware of the existence of these powerful end-to-end solutions. As we have previously stated, this technological ‘doubt’ prevalent in the marketplace is reminiscent of attitudes to automated exception processing in the latter part of the 90’s. In some ways, this ‘doubt’ and lack of awareness is understandable. It is not a small task for automated systems to gather all data – statement, transactional, investigations – in a single data mart, so that seamless provision of information for Customer Self-Service is possible. Yet internally, this is precisely what the more sophisticated exception management and processing solutions have been doing for some years. Therefore, the process of extending an operational platform to make that information available to interbank customers, across a secure network, should not be a vast logical or technological leap.[REAL-TIME CUSTOMER SELF-SERVICE – GRAPHS 3 & 4]Given that the settlement window – both in FX and in Securities – is shortening, there is now an increasing urgency to provide customers with information, and indeed interaction, about the current status of their transactions. For the provider, tightening settlement deadlines increase risk. In the case of CLS, for instance, exceptions which are not repaired by the official pay-in schedule deadline will result in charges for expensive and compulsory liquidity provision to rectify short positions. In the T+1 environment for securities, inefficient exception processing can lead to similarly expensive stock borrowing requirements. Hence, the general trend towards better cash and collateral management through automated exception processing and granular position reporting. The more efficient the institution, the better its service provision, the more enhanced its reputation becomes, and the more it is preferred as a service provider. The institution which can provide intra-day statements in real-time and automated investigations tracking and reporting to its customers through a self-service facility gains a competitive advantage over those that cannot.In light of this, answers to our next survey question helped to size the proportion of settlement services providers that can deliver these sophisticated levels of Customer Self-Service. Full transparency and granularity is provided by just 20% of settlement service providers. However, a wider proportion (36% of transaction service providers) provides some level of real-time Customer Self-Service today (although these institutions may only offer net figures), a proportion which is expected to rise to 58% in two years time. This constitutes our current ‘pioneer’ community for true Customer Self-Service provision, and is surprisingly strong at this early stage of Customer Self-Service development; demonstrating that, although awareness amongst the user community is still relatively low, many pioneering institutions have quietly proceeded with their Customer Self-Service developments.[ACCEPTABLE PROTOCOLS – GRAPH 5]Finally, we investigated the communications protocols over which Customer Self-Service might be acceptably provided. Implied by the high vote received for SWIFTNet as an acceptable protocol for interbank services, SWIFT has effectively promoted SWIFTNet as a secure communications network and an attractive option for institutions on which to deploy their third party services, defraying the cost of implementing their own networks.Just as arresting are the growth figures associated with “Other Secure Internet Networks” rising from a respectable 47% today, to a high 83% in five years’ time, showing that respondents have overcome worries about effective security over these secure networks. Perhaps most interesting is the parallel prediction of a negligible fall- off in SWIFTNet usage. Interbank service providers are apparently embracing a dual channel strategy, developing their service solutions for SWIFTNet as well as for other secure Internet networks as options for their customers.Summary and ConclusionAs the Customer Self-Service survey shows, top global financial institutions are predominantly concerned with driving down costs. Although our balanced respondent sample (of transaction service providers and users), agree that real-time information provision is a key element in achieving a competitive edge, the perceived technological obstacles associated with the provision of a complete customer-service solution concerns them. The awareness level and acceptance of customer self-service solutions seems to be maturing slowly, even though there are already service providers in the marketplace with solutions that meet these needs.Analysis of these survey results suggest that a customer self-service solution that provides granular information on both cash and securities transactions in a real-time environment will provide a resolution to the most important of operations objectives: to drive down costs. Not only will customer self-service solutions improve customer retention rates via value-added services and reduce call-center costs and investigations time, it will reduce operational risk for both the transaction service provider and their customers. Exceptions, (which make up 20% of transactions, yet generate 80% of operational costs), will be resolved more quickly and effectively through the extension of the transaction service provider’s exception processing platform to their customers – driving both parties closer to the industry’s holy grail – STP. SunGard/LMR, April 2002MTS Says Its Share of European Repo Is Growing
MTS says its Repo Trading Facility (RTF) is capturing a growing share of the European repo market, hitherto dominated by BrokerTec. Record monthly volume of €766.3 billion was reached on March, up 15 per cent on the previous month. Daily volume also hit a record high of €44.5 billion on 25 March 25 Repo volumes in the first quarter were up 30 per cent on the comparable period in 2001. This growing trend reflects the introduction of anonymous trading since MTS appointed Cassa di Compensazione e Garanzia and Clearnet as CCP providers.(Clearnet Beats LCH to Act as CCP to MTS).
MTS has also added Spanish government securities to its repo service, using Buy/Sell Back agreements. The platform adds that it is now the only platform to offer participants overnight repos in Italian as well as Spanish government debt. The securities available on RTF include Austrian, Belgian, Dutch, French, German, Italian, Spanish, Pfandbriefe and quasi-government bonds of Freddie Mac and European Investment Bank (EIB). Floating rate repos based on the EONIA rate will be introduced in the second quarter. Pimco To Launch Fixed Income Hedge Fund
As part of its global expansion blueprint, bond fund giant Pimco will launch a fixed income hedge fund to cash in on the dramatic growth of the $500-billion industry, the Financial Times reports.The move is the latest in Pimco’s expansion, which the group initiated after Allianz, the German insurer paid $3.3 billion for a 70% share of the group in 2000. The insurer has moved a large portion of its fixed income capability to Pimco and will provide the new hedge fund with the seed assets necessary.According to company officials, Pimco’s management of a client’s hedge fund over the last three years has allowed it to develop the risk analysis tools necessary for marketing the fund globally.Jim Muzzy, co-founder of Pimco with Bill Gross, Pimco’s chief investment officer, commented, “we’re taking advantage of what we’re doing now, and adding leverage.”Asia RisingAlso in line with the group’s expansion plans, Pimco will increase its Asian operations in Singapore, which previously only had sales and marketing desks, by basing fund managers there.Currently the group’s Asian office manages some $11 billion in assets, including $6 billion in Japan.3Plansponsor.comAtkin Goes as Instinet Feels the Competitive Heat
Instinet, the electronic agency brokerage and trading platform 83 per cent owned by Reuters, has parted company with the man who has long symbolised its success: president and CEO Douglas Atkin. He quit yesterday to pursue other business interests, naming Chief Financial Officer Mark Nienstedt to serve as acting president and CEO and Jean-Marc Bouhelier chief operating officer, replacing Kenneth Marshall, who has decided to retire. The departure of Atkin followed warnings by Instinet that it would make a loss in the first quarter, thanks largely to its price war with Island ECN, which cut prices to enlarge its share of institutional volumes on Nasdaq. Instinet stock is now trading at less than half the flotation price last year.3Plansponsor.comTCA’s John Turner on STP in Mutual Funds: ISO15022 – Doing It The Easy Way11Is ISO15022 An Issue For Fund Managers? Your article “SWIFT Hurries Fund Managers Along”( 26 March 2002) states that SWIFT is campaigning hard to make fund managers take notice of ISO15022. While we agree that SWIFT always promotes its own standards simply because they are its standards, in this case the argument is justified and very strong. Fund Managers should take notice of ISO15022 because it can yield real benefits for them, as we have explained below.ISO15022 – Just A Small Change?It is probably quite well known that the old SWIFT standard securities settlement messages will be replaced in November by the new, ISO15022 standard messages. But the date is unlikely to be marked in red on any asset manager’s calendar, because the impression in the community is that this is not a major issue. All that is needed, it is said, is to replace the old formats with the new ones, so a few weeks work in September / October, or a simple manual workaround, should sort it out. No need to worry yet.This couldn’t be more wrong. Dangerously wrong. Why? Because the switch over to ISO15022 is far more than just a change of message formats. Anyone that continues to think in this way stands the risk of being seriously disadvantaged against their competitors after November. Ah yes, you cry, we’ve heard this all before. Consultants crying warnings of impending disaster if we don’t spend money (on them), sorting out some issue that turns out to be just over hyped. Well, unusually perhaps, this consultant is doing no such thing. The good news is: there is a way out; it won’t cost as much as you think; and you won’t need lots of expensive support to implement it. If you want to know more, please read on.Getting The Priorities RightTo understand the impact of ISO15022 on an asset manager, let’s look first at the three aspects of it, and get our priorities right. ISO15022 provides message support for:
  • Post execution processing and settlement.
  • Reconciliations.
  • Corporate Actions.
Post execution and settlement messages give rise to the highest volume and therefore have the highest risk and impact. ISO15022 can lead to significant improvement in the level of Straight-Through-Processing (STP) in this area, which will give a significant benefit to the efficiency and accuracy of the institution’s operations.Reconciliations come next in terms of volume and labour intensity. The opportunity for greater automation in this area afforded by ISO15022 is of real benefit.Finally, Corporate Actions messages can usually be left until later. Their automation is more complex, requiring the use of specialist software, so the benefits of implementing the corporate actions messages must be offset against the only marginal improvement that can be achieved without the expensive software changes. So, by concentrating resources on the areas with the greatest benefit, we can achieve the most with the least possible effort. IS THE NOVEMBER 2002 DEADLINE A REALITY?It is well known that the deadline for removal of the old format messages is November 2002. It is also widely speculated that this date will be deferred if the broker-dealers are not ready, though SWIFT consistently denies this possibility. A factor that asset managers will be acutely aware of is their own limited power to influence this date.
  • A typical Asset Manager will transmit around one thousand messages per day, against a custodian’s tens of thousands. Only about twelve percent of SWIFT messages originate or end with Asset Managers. Therefore their voice is comparatively small in terms of the disruption they could cause by being unprepared.
  • Asset Managers do not have a single voice. Private Client Asset Managers, Retail Fund Managers, Institutional Fund Managers and Hedge Funds all have their own peer groups, with no overall consolidation or umbrella organisation. As a group, therefore, asset managers lack visibility.
SWIFT has made a public statement recently, reiterating its commitment to the November 2002 deadline. Custodians are mostly already compliant. Broker/dealers have programmes in place to achieve compliance, but if there are issues, they have enough lobbying power to effect a change with SWIFT, should that be necessary. Asset managers will have to follow the crowd, whether they like it or not.However, asset managers must also resist being pushed around. There is a particular example of this in the area of data integrity. To custodians, the ‘place of settlement’ is an important data item. Custodians are seeking to make this field mandatory, which means that asset managers will need to include this information. However, establishing the place of settlement has traditionally been the domain of the custodians, who therefore appear to be trying to push their problems back down the chain to the asset managers. Although from the custodian’s point of view this could seem to solve one of their problems, in reality it could cause them a number of others, as individual asset managers seek to establish the place of settlement in different and incompatible ways. Risk is thus increased through inflexibility.On the whole, therefore, we strongly recommend that asset managers unite to survive. An asset managers’ ISO15022 body would be a realistic aim and, if properly and widely supported, could fight the asset managers’ corner in the months ahead.Is There A Business Case, Or Is It Just A ‘Must Do’?As with any change, there are two groups of reasons for making it:
  • Because we choose to, which usually means for financial reasons (decreased cost, increased revenue, etc.).
  • Because we are forced to, e.g. by regulators, or legal or market practice changes.
In one respect, ISO15022 falls into the latter case. There is a certain minimum that Asset Managers have to do, that being sufficient to be able to receive and generate ISO15022 message formats from November. But beware! Some may be relying on the old manual workaround trick, i.e. printing out incoming messages and manually keying outgoing messages. This is doomed to failure. ISO15022 messages are, to use the technical term, “highly normalized”. That means they are very efficiently processed by a computer but very hard to read by a human. The resulting errors and mis-conversions will introduce delay and could be costly. Manual generation and processing is not a sensible option unless the daily volume is extremely small.Although there does not need to be a proven cost benefit of implementing ISO15022, there are actually benefits to be achieved, and if the correct strategy is followed, suited to the organisation, a positive business case can frequently be made.To consider some examples:
  • Improvements in the level of STP between an asset manager and their custodians can lead to reductions in custody charges, though this is unlikely to provide a full financial justification on its own.
  • As mentioned above, improvements in internal reconciliation reduces operational risk and increases throughput, both of which can yield tangible financial benefits.
Each asset manager must make its own business case for its chosen approach to ISO15022. Be inventive, the benefits may be greater than you first think.Conclusion – Avoiding The Pitfalls Of ISO15022The first step that any asset manager should take is to wake up to ISO15022. There is still time to plan and implement a satisfactory solution, provided action is taken now.The option to completely redesign operations has passed, for all but the smallest organisations (and they wouldn’t get much benefit from doing so anyway). So it is necessary to concentrate on the three priorities outlined above:
  • Post execution processing and settlement.
  • Reconciliations.
  • Corporate Actions (only where appropriate).
Remember also to draw up an implementation plan that allows ample time for testing. As the November deadline draws near, the opportunity to test the new messages before the go-live date will disappear. The custodians and broker/dealers will have already planned their inter-operability testing and the bare fact is that there will not be enough remaining ‘landing slots’ for all the asset managers to fully test with either of them. Book now to avoid disappointment later.It is not too late for the various asset manager organisations to join together on this issue. That would give the asset management community a valuable voice on this issue, and could be the start of a longer term collaboration on future issues of common concern.And finally, although ISO15022 is a ‘must do’, it is worth considering the business case for taking forward some of the opportunities it holds. For example by implementing a corporate actions solution that enables the full benefits of this aspect of ISO15022 to be realised. Do the maths – there may well be a business case in there.Asset managers have no choice whether to participate in the change to ISO15022. What is at issue is whether they will move forward, preferably together, and embrace the opportunities it offers, or just be dragged into it on the tails of their settlement and execution counterparts.About The Author: Since 1997 John Turner has been a principal consultant for TCA Consulting, having over 22 years experience in financial services consultancy.John specialises in providing business and systems strategy advice to clients across the range of financial service disciplines. He has particular interests in e-commerce, operational efficiency and business continuity planning. He speaks for TCA Consulting at conferences discussing issues related to the financial services industry and is often quoted in the press and industry journals. John is a Certified Management Consultant and a Fellow of the Institute of Management Consultancy. He is 43 years old and married to Catherine. They live near St. Albans in Hertfordshire and have two children, Andrew (4) and Harry (2).Forget Efficiency and Performance: Woo the Clients, Says Mercer
Good news for out-sourcing providers. The operational side of the fund management business does nothing to retain business for fund managers. What counts, it seems, is having enormously well-paid staff who devote most of them time to schmoozing clients (and consultants) and tying them in with red-hot web sites and regular e-mails. Or so say the authors of a study of ten top-rated fund managers by Mercer Manager Advisory Services (part of newly re-branded Mercer Investment Consulting). These tricks, they say, are “controllable” in away that market performance (“hardly a constant”) is not. In detail, they are:
1.Relationship Manager on Point. While no one servicing model is right for every manager, the most successful managers employ a relationship manager as the key contact in a mix of professionals servicing the client. This individual is knowledgeable, empowered, and, what is critically important, proactive in their communication and contact with clients. Other individuals who may be involved in the servicing model include the portfolio manager, a product manager or specialist, account support, and, at times, a salesperson. In all scenarios, the relationship manager is the point person.2.Added Incentives. Those responsible for the relationship need adequate compensation and incentives. Key servicing contacts are compensated with incentive bonuses in addition to salaries, and are often rewarded for client retention and cross sales. Compensation also varies by market-size and is particularly higher in firms that focus on the $1 billion-plus segment.3.Dedication to Consultants. As consultants remain a critical audience for managers’ communication efforts, the “best” firms have a separate, dedicated group for servicing them and their specific needs.4.Web Sites with Everything. Web sites are key in the servicing efforts of the most successful servicing managers. “While the investment management industry has generally been ‘behind the curve’ when it comes to the Internet, this is changing rapidly,” explains Kristen Pawlak, senior consultant with Mercer Manager Advisory Services. Client access to specific account and other information is a norm for the “best” managers. Not only is this medium used for reporting information, but also for soft marketing and organization-related communication. Precious “face time” can then be saved for other value-added interface and client-specific issues.5.E-mail as a Tool. The use of e-mail by the best managers is frequent and effective. These firms communicate, on average, with at least half of their clients via e-mail, most using it in conjunction with other methods such as mail, telephone calls, and in-person visits. Further, roughly two in three clients prefer to receive communication related to investment events, processes, changes, and the firm itself, via e-mail.6.Satisfaction Measurement. These top managers measure their clients’ satisfaction by using an objective third party to do so. By evaluating satisfaction, managers gain the insight they need to make informed decisions about products and services. And, they show a true commitment to meeting their clients’ needs and preferences. “This finding was the least surprising to Mercer Manager Advisory – we’ve conducted client satisfaction studies for many of the ‘best’ managers for more than 13 years,” comments Ms. Pawlak.7.A Servicing Culture. The best managers also make servicing commitment and goals a part of their culture. Most have servicing goals in their mission statements, and some even share these with their clients. More of the larger firms are going a step further by designating a “quality officer” in their organization to promote service quality and define and enforce processes that promote quality.
The managers studied are all firms in the top quartile of Mercer Manager Advisory’s Strategic Client Satisfaction Universe and/or top-rated managers on the element of “service” in Mercer Manager Advisory’s 2001 Traditional Institutional Markets Positioning Research. The positioning research was conducted among retirement plan sponsors with assets of at least $10 million, and is available for purchase by contacting Mercer Manager Advisory Services.Siemens Study Unwittingly Highlights Opportunity for Tri-Party Agents
Tri-party agents have argued for at least a decade that corporates ought to be providing liquidity to the securities financing markets. Not many have. So what makes them think that corporates will be interested in extracting liquidity from the markets instead? Necessity is the obvious answer. BASF may be able to dispense with the banks altogether and sell $1 billion of commercial paper (CP) through over the last six weeks, but it has a AA rating. An awful lot of companies cannot tap the CP even with the assistance of an issuing bank. (Is Tri-Party the Solution to the Coming Credit Crunch?).
In this market, a willingness to put up as collateral some of the debt securities held in the corporate treasury may be the difference between access to liquidity and running out of cash. Since the average corporate treasury consists of a man, a woman and a PC, it makes perfect sense to out-source the collateral management to a tri-party agent, such as those Benelux-based ICSDs that are working belatedly but hard to improve the operational environment in the Euro CP market. (“Squeaky Wheels, Global Custodian, Fall 2001”).
That is the theory, anyway. But where is the evidence that corporate borrowers have the need, let alone the inclination, to tap the securities financing markets? Oddly enough, one intriguing piece comes from a little noticed survey of corporate financing habits in Germany commissioned by Siemens Financial Services (SFS). The Munich-based SFS, itself the treasury and financing arm of a major industrial company, asked researchers at the University of Augsburg to poll German businesses turning over more than Euros 50 million on how they financed their activities now and how they expected to finance them in future. The Augsburgers contacted 690 German companies, and made an astonishing discovery. “Liquidity procurement” was at the top of the agenda for 77.8 per cent of the companies surveyed. Better still, 80 per cent of them were actively considering a source other than their house bank. Of course, predictions of a change in the structure of corporate financing in Germany make Matilda look like a model of prudence and foresight, and this survey is unexceptional in the size of the gap between expectation and reality: it found that long-term bank loans still account for 46.7 per cent of the debt financing of the average company surveyed and short term loans (51.1 per cent) for most of the rest. On this evidence, the title of the survey – Silent Revolution – is not merely unoriginal, but inapposite as well. But the authors of the study insist a variety of factors have conspired to put corporate Germany – by which they mean mainly the Mittelstand of medium-sized and family-owned companies, giants such as Siemens and BASF having long since discovered the international capital markets – on the cusp of a epoch-making change in their sources of liquidity. The factors cited are familiar. They include the adoption of international accounting standards necessitating an Anglo-Saxon-style financial structure; the balance sheet constraints imposed on banks by the forthcoming Basle II capital adequacy rules; the rising popularity of IPOs, venture capital, private equity and, indeed, equity financing in general as the solution to succession issues in small companies; and the fear of excessive dependence, at a time of considerable financial pressure, on a single source of liquidity. But familiarity does not mean these factors are not influential. If they have accepted the case for equity financing, it is not surprising that German companies are interested in new sources of debt finance as well. “In the future,” conclude the authors of the SFS study, “finance directors will not only have to maintain relations with their company’s bank but will also have to liase with and understand the products of many other financial services providers.” Indeed, according to the SFS survey, 36.4 per cent of the companies surveyed said leasing is either important or very important today, and 42.8 per cent thought it would be so in the future. Similarly, factoring (17.2 to 21.3 per cent) and asset-backed securities (16.7 percent to 26.6 percent) are also expected to rise in importance as time passes. This means asset-backed financing is likely to be the fastest growing form of corporate financing in Germany. And it does not require a huge leap of the imagination to add collateralisation with securities to the spectrum of asset-backed finance. So those alternative “financial services providers” ought to include not only non-house and even foreign banks, cash-rich fellow-corporates and fund managers, but tri-party agents as well. Euroclear-Clearstream Bridge Feud Approaching Denouement
At its next meeting in Vienna on 14 May, the European Repo Council will take delivery of a report commissioned at it previous gathering in Madrid in January. Coyly described in the minutes as “a document relating to structural market issues,” it actually aims to identify a means of resolving an increasingly acrimonious aspect of one of the longest-running sores in the long history of antagonism between Euroclear and Clearstream: the alleged competitive handicaps the workings of the Bridge between the two ICSDs imposes on the Luxembourg-based clearing house. As revealed by on 1 February (Clearstream-Euroclear Repo Feud Goes Public), Clearstream is unhappy about the asymmetrical treatment of deliveries of securities from Germany (its biggest market) over the Bridge. It argues that its German clients are consistently and unfairly penalised for late delivery of securities to counter-parties in Euroclear, prompting them to switch their business to the Brussels-based ICSD rather than run the risk of incurring additional costs.In recent weeks a number of meetings have taken place between Euroclear and Clearstream officials, and both the European Central Bank and German banks active in the European repo markets have become involved. Both third parties are apparently supportive of the Clearstream case. It is at present unclear whether Euroclear will be prepared to alter its modus operandi to accommodate the complaints in time for a solution to be announced at the ERC meeting in Vienna on 14 May. Hedge Funds End Tricky 2001 Up Nearly 4 per cent Says Hennessee
Eight and a half out of ten hedge fund investors were satisfied by the performance of their funds last year. They must have been: in 2001 assets under management climbed by more than a third and the benchmark was up while the S & P 500 was down. Or so says the fifth annual survey of the industry by the Hennessee Hedge Fund Advisory Group, a global hedge fund investment, the US-based hedge fund advisory group which looks after over $1 billion spread across 125 funds.Hennesse says the hedge funds it follows performed well in difficult equity markets – though doubtless benefiting from the accompanying volatility – with the Hennessee Hedge Fund Index finishing the year up by 3.98 per cent compared to an 11.89 per cent fall in the S & P 500. Funds met or exceeded expectations for 85 per cent of hedge fund investors, and assets under management rose by 38 per cent, proving their value in terms of downside protection as well as diversification, says Hennessee.”The performance of hedge funds in 2000 and 2001 has made it increasingly prudent to consider hedge funds as an investment alongside stocks and bonds,” says Elizabeth Lee Hennessee, Chairman and Founder of Hennessee Group LLC. Charles Gradante, President and CEO, adds:”In fact, someday, it will be considered imprudent not to include hedge funds within a stock and bond allocation,”Key findings of the 2002 Hennessee Hedge Fund Investor Survey include:
  • The largest investors in hedge funds continue to be individuals andfamily offices, with 56 per cent of the capital in the industry.
  • The largest increase in hedge fund investments came from fund-of-funds, with a jump from 3 per cent in the 2001 survey to 15 per cent in the 2002 survey.
  • The total amount of assets investors have in hedge funds is steadily on the rise, reaching 41 per cent in the 2002 survey, up from 37 per cent in 2001 and 33 per cent in 2000.
  • 54 per cent of investors surveyed said they plan to increase their hedge fund allocation in the coming year, up from 45 per cent in the 2001 survey.
  • 40 per cent of respondents intend to increase their fund-of-funds allocation in 2002.
  • With the growth in the industry, more investors are turning to consultants for advice. 41 per cent indicated they use a consultant, up from 29 per cent in the 2001 survey.
  • The 2002 survey shows that managers effectively addressed the concerns of investors. Only 17 percent of investors desire better risk management versus 45 per cent last year and only 16 percent of investors desire better performance versus 29 per cent last year.
  • Convertible arbitrage and merger arbitrage constituted the largest share of assets in the industry, with 16 per cent, versus the 2001 survey, where event-driven and distressed comprised 16 percent of the industry.
Fortis Launches Performance Measurement JV
Performance measurement rivals securities lending as the aboriginal value-added custodial service. In fact, every global custodian can now produce at least monthly portfolio performance figures. So why should anyone care that Fortis Bank has today announced a joint venture designed to deliver performance measurement and attribution analytics to Benelux pension funds? After all, even the joint venture route was pioneered years ago by Mellon and Frank Russell. But Fortis claims that its 50:50 joint venture with Strategic Asset Management Systems (SAMS) is genuinely novel. For a start, SAMS is not a consultant but a privately held software house – it has less than a hundred staff servicing sales of around GBP 10 million from offices in London and Zurich – founded as recently as 1994, and which made its reputation building systems for major European fund managers: Allianz, HSBC, Legal & General, Scottish Widows and Threadneedle. Its founders learnt their trade at UBS, the first trillion dollar fund manager, which was forced by the dearth of fund management systems vendors in the late 1980s and early 1990s to build a number of pioneering systems of its own. (It is a measure of the size of the opportunity UBS stumbled upon that even today SAMS ranks its main competitors as SunGard and DST.) SAMS still specializes in building performance and risk measurement and reporting tools for large fund managers with multiple portfolios and high transaction volumes. And it is that systems expertise which Fortis is now seeking to apply to the mountains of data in its custody systems. The timing is not hard to grasp. If custodians have talked about performance measurement for a decade or more, for most of that time it was a nice-to-have rather than a necessity. Some were nervous of alienating fund managers, even though they were appointed by the underlying client, but these days fund managers are themselves fearful of performance-related litigation. “The Unilever-Merrill Lynch fiasco occurred because neither party was really knowledgeable about what was going on with that particular portfolio,” says SAMS founder and managing director Mike Harriman. “If they had the transparency of information which we can provide, the GBP 70 million that went from one side to the other may not have happened.” Better-performing fund managers will dare to hope that better-informed clients will give them more business. But those clients are anxious to obtain detailed performance measurement figures for other reasons too: in bear market conditions, corporate pension plan sponsors and trustees are increasingly worried about under-funding of long term obligations. In the United Kingdom, the Myners report may have codified the longstanding obligation of pension fund trustees to understand and monitor the investments being made on their behalf by fund managers, but similar pressures are now being felt in Continental Europe. Indeed, the Fortis-SAMS joint venture is aimed initially at a large segment of the second biggest institutional market in Europe: the middle-sized Dutch pension funds, among which Fortis has a large following already, and which tend to use a single custodian. “Below the biggest funds such as ABP, there is a herd of pension funds with similar problems and similar sleepless nights,” says Clayton Heijman of the international prime brokerage group at Fortis Bank in Lodon. “This is not simply because the consultants ensure that what happens in the United States and the United Kingdom tends to be followed closely by the Benelux countries as a group and the Netherlands in particular. What we hear from our relationship managers is that the pressure on pension fund managers, trustees and administrators to deliver the performance necessary to fulfill pension contracts stretching out twenty or thirty years is increasing tremendously throughout the Benelux countries. The risk-free rate on the Continent is even lower than it is in the United Kingdom, so they have a very serious challenge on their hands to achieve the 4-5 per cent annual returns they need. They need better tools to analyse and monitor performance.” The challenge for Fortis Bank was to find those tools for its institutional custody clients. Until the deal with SAMS, the bank had simply supplied raw data to third parties, who conducted the performance analysis on behalf of its clients. But with relationship managers reporting that clients wanted more and better information, Fortis had a potentially serious competitive disadvantage. Obviously, it had one piece of the puzzle – the portfolio information generated by its custody activities – but nothing with which to analyse and monitor it. Building a performance measurement and attribution tool of its own was ruled out as too slow. But rather than simply buy a solution from a vendor, Fortis decided to establish a joint venture with SAMS, whose Socrates performance measurement and attribution software application had already impressed the asset managers at the Benelux bank. Socrates calculates performance at every level (from the total portfolio down to the individual security) and attributes it in equal detail (from asset allocation to stock selection). Importantly, it is also tried, tested and adaptable enough to meet the needs funds of the size and type Fortis services. In fact, Harriman reckons that by blending Socrates software with Fortis data the joint venture will provide a performance measurement and attribution service which is not only the most sophisticated on the market today but one flexible enough (and cheap enough) to suit pension funds and insurance companies of all shapes and sizes. “There is a gap in the market for quality information to middle-sized pension funds, insurance funds and fund managers,” he says. “They cannot afford to have a group of performance analysts sitting on site tapping data into Excel spreadsheets or complex financial models. They are the audience which this particular joint venture is addressing. And the key thing that we are looking to offer with this service is reporting at different levels for different types of client. What we might provide at board level may be extremely high level but we can also provide individual trustees accountable for particular parts of a portfolio with highly detailed reports, right down to individual allocations of stock by individual fund managers. The level of detail can be varied according to the needs of the individual user of the information.”Therein lies the rationale for SAMS to enter a joint venture with Fortis. The custodial accounting systems of the bank are crammed with information of the kind Socrates is designed to filter, process, analyse and disseminate. “Up to now, custodian banks such as Fortis have run transaction processing engines, and they have binned or otherwise got rid of information as soon as they could,” explains Harriman. “What we are looking to do with this exercise is turn that wealth of position-keeping data into useful management information.” The joint venture certainly fits with the Information Banking concept which Fortis now applies to its custody, clearing, securities lending and prime banking activities, and which had the singular advantage of ensuring that all data within the bank was already in consistent and easily accessible formats. Data can already be delivered electronically as well as in hard copy, and by the end of the year the joint venture expects to make information available daily (though not in real-time) through an inter-active web site. In the meantime, Fortis and SAMS are also working on the application of human intelligence to the information Socrates generates. Since September last year, SAMS consultants have occupied Fortis office space in Amsterdam, training bank staff not only in how to use the application to turn client data into information, but mix it intelligently with in-house research and third party benchmarking information to provide clients with customized portfolio performance and attribution reports. “Socrates will take care of the number crunching, but we do not want to limit ourselves to that,” says Eric Daubresse, senior sales manager at Fortis, and managing director of the joint venture company, Fortis-SAMS Analytical Services. “We are looking to go beyond the pure performance calculation and add advice and research and commentaries to the information.” Adding other Fortis services to the custody data and the Socrates technology will allow the joint venture to set a variety of price points, according to the complexity of the portfolio and the analytical and reporting requirements of the clients, rather than adopt the usual ad valorem fee. “There are a lot of tools out there which provide performance measurement information on a very superficial basis,” concludes Heijman. “With our tool, you get a lot more information for a comparable amount of money.” The test now for Fortis is to find out if its Dutch clients agree. “This all looks very good on paper,” admits Heijman. “We now have to show it works in a real, live market.” If it does, Fortis could have found a useful lever to prise open institutional markets in Europe which lie beyond its Benelux heartlands.
***********************************************************************************************************************11Simon Strong, TCA Consulting, commented:The article about the joint venture between Fortis Bank and SAMS makes interesting reading. The major challenge facing custodians who seek to provide a performance reporting service to pension fund trustees is not a technological one. Software to perform the number crunching involved in performance analytics and attribution has been readily available for several years. The value-added skill lies in explaining the meaning of the numbers in terms that relate to the client’s interests and concerns.Absolute performance figures, no matter how detailed, do not answer the key questions for pension fund trustees, which are “Which factors are driving fund performance?” and “Which of these factors are under my control or my fund managers’ control?”. An under-performing fund manager will always argue that their poor performance is due to market conditions, or exchange rates, or the investment guidelines that constrain them. The pension fund trustee is looking for an independent evaluation of these claims. This has been traditionally provided by performance attribution and by comparing their performance against a universe of similar funds. Both of these techniques require some interpretation of the results.You quote Eric Daubresse as saying “We are looking to go beyond the pure performance calculation and add advice and research and commentaries to the information.” The major challenge for Fortis Bank will lie in convincing its target market that it can provide commentary that is relevant, comprehensive and independent.Hemscott Launches Broker Forecast Alert
Hemscott plc, the investor information provider, announced today the launch of a new on line research and alerting tool. Guru Broker Estimates, which is aimed at the professional and business communities, will alert users electronically to changes in market forecasts for individual companies across their portfolios, potential target stocks and stocks of interest. The service provides:
  • Emailed alerts of broker forecast changes from 60 leading brokers on UK and Irish listed companies
  • A graphical illustration of the progression of consensus expectations
  • Key valuation data such as forecast earnings per share and dividend andwidely used ratios such as EV/EBITDA and cash flow per share
  • Tracked progression in forecasts from a specific broker for an individualcompany
“We are delighted to announce this powerful addition to our business information product suite,” says Rosalyn Wilton, CEO of Hemscott. “Guru Broker Estimates has been developed in direct response to customer requests for consensus and individual broker forecasts delivered directly to their desktops. The need for immediate access to this information, and the daily updates and alerting functionality offered make this the most timely service of its kind in the market place today.”Euroclear-Clearstream: Crunch Bridge Meeting Set for Wednesday
On Wednesday this week Clearstream Banking and Euroclear officials and clients of both ICSDs will meet again in Frankfurt in the hope of resolving the difficulties that German clients of Clearstream Banking Frankfurt say they have in delivering securities to Euroclear participants during the daylight settlement cycle. The problem, simply stated, is that Euroclear participants who trade with Clearstream Banking Frankfurt participants would prefer to take delivery of securities during the overnight batch process. However, Clearstream Banking Frankfurt participants – who often source those securities from domestic German institutional investors – are not always in a position to deliver securities to Euroclear participants in the overnight cycle. As a result, they are forced to deliver during the daylight cycle instead. It is then that the problems begin. Euroclear offers its participants a free borrowing in anticipation of securities receipts from Clearstream Banking Frankfurt participants in the daylight cycle. But if Euroclear cannot lay its hands on the right securities to lend, participants who expect to receive securities from Clearstream Banking Frankfurt participants cannot deliver them in the daylight cycle to anybody. This leaves the Euroclear participant with no option but to finance the position with Euroclear Bank. Ideally, the loan would be reversed as soon as the securities arrive from Clearstream Banking Frankfurt. Unfortunately, Euroclear does not operate a real-time securities lending service, so it does not allow borrowers to reimburse loans agreed in the overnight batch cycle when the securities arrive in the day-time cycle. This cost has prompted a number of banks in Germany – unsurprisingly, the biggest market for Clearstream – to switch their business to Euroclear rather than run the risk of losing trading opportunities or incurring additional costs.Though Euroclear clearly gains business from this problem, the Brussels-based ICSD believes its portrayal as the villain of the piece is unfair. The bulk of settlements between Euroclear and Clearstream Banking Frankfurt happen overnight, not least because central counter-parties (CCPs) require it, and Clearstream Banking Frankfurt participants can and do deliver to Euroclear participants in the overnight cycle. Indeed, there is a view in the marketplace that Clearstream Banking Frankfurt could make more deliveries in the overnight cycle, by extending an automatic loan to clients who had difficulty sourcing securities from domestic institutions in time to meet the overnight settlement deadline. So it can be argued that a lasting solution requires both Euroclear and Clearstream Banking Frankfurt to change their habits.Clearstream disagrees. It argues that Euroclear ought to follow its example and allow its participants to reimburse loans, and so save them from paying the overnight borrowing fee that Euroclear charges. (It is the cost of this fee that deters Euroclear participants from accepting securities from Clearstream Banking Frankfurt when they finally arrive.) In fact, Euroclear says that at the meeting on Wednesday it will offer the reimbursement of loans in real-time, to be implemented by the end of 2002. This would solve the problem, by allowing Euroclear participants to return securities they had borrowed to meet their obligations as soon as the securities arrived from Clearstream Banking Frankfurt. Its biggest drawback is timing: it is a solution which will not be in place for another six to nine months, which will try the patience of Clearstream Banking Frankfurt and its German banking clients. That said, it will be in place much sooner than the ultimate solution to this problem: mandatory real-time settlement in Euroclear, Clearstream Banking Luxembourg and Clearstream Banking Frankfurt, which would eliminate both overnight and day-time cycles in favour of a continuous, rolling process. In fact, both ICSDs have agreed to the concept of a real-time Bridge between them. Euroclear says it is still awaiting the agreement of Clearstream to proceed on this proposal, but is ready to start work immediately. One potential obstacle to rapid progress, intimates Euroclear, is that the German domestic market is not yet on the CREATION platform. But Euroclear is also sensitive to the need to offer a solution to a pressing issue before the end of the year, let alone at some unspecified time in future. “At the 17 April meeting, the European Repo Council (ERC) and its members will also be asked to decide if a manual solution for the reimbursement of loans between Euroclear and Clearstream Banking Frankfurt participants is what they would want until an automated solution is put in place,” says a spokesman. Euroclear believes this will be acceptable because the volumes of business across the day-time Bridge are so thin that the present dispute is a “tempest in a teacup.” It adds that the popular perception that the thin volumes reflect the fact that Clearstream participants have either moved their business to Euroclear or been excluded from dealing with Euroclear participants is based on a misconception. After all, says Euroclear, the problem is not caused by the Bridge between Euroclear in Brussels and Clearstream in Luxembourg but by the link between Euroclear in Brussels and Clearstream in Frankfurt. It can nevertheless be argued that focusing on the weakness of the international-domestic link merely distracts attention from the underlying problem: Euroclear participants can refuse deliveries from Clearstream Banking Luxembourg participants. Euroclear says that Clearstream Banking Frankfurt participants are equally free to reject deliveries from its participants, but Clearstream says this does not happen: in short, it does not reject day-time deliveries from Euroclear participants. Indeed, Clearstream adds that it is only a lack of functionality in Euroclear which prevents the Brussels-based ICSD offering the same facility, and which therefore penalizes domestic German banks. “The extra functionality that Clearstream provides has been around for over five years and it is strange that Euroclear is only now thinking of doing it,” says a Clearstream spokesman. As a result of its ability to reimburse loans in the day-time, adds the Luxembourg-based ICSD, one of its broker-dealer clients saves $10,000 a day in financing fees. “This is not for the benefit of Clearstream,” continues the spokesman. “It is to remedy the unfair treatment of domestic German participants versus the international participants. We cannot have two sets of rules in today’s supposedly level playing field in Europe: one for the domestic player and another for the international (or non-German) participants. What is even more unfair is that these deliveries involve primarily German government bonds, the most international and open of all forms of European government debt. Would the market benefit if we made the settlement of German government bonds largely a domestic matter, as is already the case in France and Italy?”All of which suggests that Wednesday will see some heated exchanges. But the meeting is still expected to produce a workable compromise between the two sides. This will be presented to the ERC meeting in Vienna on 14 May, when members will take delivery of a report into the issue commissioned at its previous gathering in Madrid in January. But the Wednesday meeting is the second to have taken place between Euroclear and Clearstream officials on this issue, and any failure to strike a deal is likely to lead to an escalation of the conflict. The European Central Bank (ECB) has already been drawn into the dispute, with Clearstream claiming its officials understand the unfairness of the present situation and Euroclear arguing that the central bankers want a solution that will “serve the market, not Clearstream.” The German banks active in the European repo markets are more partisan: they support the Clearstream position. Euroclear discounts their views as a natural consequence of the vertical merger between Deutsche Borse and Clearstream. This confidence owes something to the fact that the Brussels-based ICSD has gained business from the unresolved dispute. In effect, the defection of important German market participants from Clearstream to Euroclear has turned an international market problem into a German domestic market problem. With the bulk of liquidity in the hands of Euroclear participants, clients of the Brussels-based ICSD have less need to deal with German counter-parties who cannot guarantee to deliver in the overnight cycle. No wonder the temperature is still rising on both sides of this dispute.3Related Stories:› Euroclear-Clearstream Bridge Feud Approaching Denouement1› Clearstream-Euroclear Repo Feud Goes PublicUBS ETFs Adopt Morningstar Indices
UBS Global Asset Management has become the first company to license Morningstar Inc.’s stock indexes, Morningstar announced.The indexes UBS Global Asset Management will use for its US and European exchange traded funds (ETF) are based on what Morningstar said is an enhanced version of its Style Box methodology.In addition to serving as tools for portfolio construction and performance measurement, Morningstar said its indexes would be further licensed to institutions to create investment vehicles including mutual funds, ETFs, and derivative securities. Morningstar’s first index offerings will include seven aggregate indexes:
  • broad Market Index
  • three Capitalization Indexes: Large, Mid, and Small
  • three Style Indexes: Value, Core, and Growth
Morningstar will also include nine Style Box Component Indexes:
  • large capitalization: Value, Core, and Growth
  • mid capitalization: Value, Core, and Growth
  • small capitalization: Value, Core, and Growth
Dow Jones Indexes will be the calculation agent for Morningstar Indexes, Morningstar said. The indexes will be calculated real time in US dollars, and the daily closing values will be available in Euros, British pounds and

Related Stories:› Morningstar Revamps Mutual Fund Style Monitor1› Morningstar Product IDs Like Mutual Funds1Morningstar Offers Mutual Fund Rating Prediction ToolEx-BARRA RogersCasey Staffers Form New Consultancy
Shortly after opting out of newly-formed CRA RogersCasey, 16 former BARRA RogersCasey (BRC) employees have formed their own consulting company in the face of legal threats and a newly named managing director at CRA RogersCasey.The 16 former BRC employees, who left the company after it was taken over by Capital Resource Advisors (CRA), have formed Rocaton Investment Advisors. Like BRC – now CRA RogersCasey – the new firm is based in Darien, Connecticut. Former BRC chief executive Robin Pellish is managing principal. The new firm counts six senior BRC consultants and the research heads of the major asset classes at BRC among its ranks.Like BRC, Rocaton will focus on ‘high quality, high value’ consulting services to institutional investors, said David Katz, a principal with Rocaton. The firm will focus on asset allocation, manager selection and performance measurement, among other disciplines. Complete ShockThe new partners are working to get their new company off the ground after a longstanding desire to acquire BRC from BARRA in a management buy-out. When that didn’t materialize, they quickly considered their options. ‘It was a complete shock to us that this acquisition occurred,’ Katz said. The new company doesn’t have clients yet and is currently ‘responding to calls from institutional investors interested in talking to us,’ according to Katz, who couches his words carefully, presumably mindful of the ongoing legal action on CRA’s part.Over the weekend, CRA served injunction orders to keep the former BRC staffers from talking to former BRC clients and filed lawsuits against each of them over an alleged breach of their contracts with BRC.In commenting on its suit, CRA said its lawyers ‘advised us that the abuse of agreements signed by each of the departed employees has been so egregious that we had no choice but to defend the rights of CRA RogersCasey and the rights of our 170 hard-working employees.”An official speaking on behalf of the departed employees maintained that their employment at BRC was not tied to a non-compete. They had signed a confidentiality agreement, which allows them to compete, as long as they compete ‘fairly,’ this source said, who expressed confidence that the former BRC staffers are not violating the law.On the CaseMeanwhile, CRA RogersCasey announced that it named Steven Case managing director, responsible for client relationships. Case worked as managing director at Rogers Casey in the 1990s. Most recently, he was with AXA Financial as Vice President/Performance Analysis for its $40 billion Variable Life and Annuity Trust. Previously, he worked for the Rockefeller Foundation and Putnam Investments.3Plansponsor.comIs Pension Funding Crisis Easing At Last?
In what could be viewed as the most positive development in the pension industry in two years, asset growth finally outpaced that of liabilities in the first quarter of 2002, according to year-to-date figures from Ryan Labs, Inc.The Ryan Labs Liability Index showed negative growth of -2.8% for the first three months of the year of 2002, while all asset classes boasted positive, though meager, returns over the period.Over the quarter:
  • the S&P 500 index crept up by 0.28%
  • the MSCI International Index increased by 0.57%
  • the Lehman Aggregate rose by 0.09%
  • cash was up by 0.36%.
While, according to the Ryan Labs data:
  • long liabilities are down by around 7.5%
  • intermediate liabilities are suffering in the vicinity of 2%.
While the increase in Ryan’s asset growth measure has been small, at 0.29%, when coupled with the -2.80% fall in liabilities, it translates to a 3.09% growth in assets versus liabilities over the quarter.CalPERS Chooses Five Hedge Fund Managers
Officials at the California Public Employees’ Retirement System (CalPERS) have tapped five hedge-fund managers who will run an initial chunk of $10-million each as part of a $1 billion hedge-fund initiative announced 18 months.The $150-billion fund named:
  • Andor Capital Management
  • Atticus Capital Management
  • Evnine-Vaughan Associate
  • Liberty Square Asset Management
  • Symphony Asset Management
CalPERS’ investment committee is expected to consider the manager appointments at its April 15 meeting. Spokesman Brad Pacheco told Dow Jones that CalPERS’ investment committee doesn’t have to approve these five investments because the pension plan has given it the authority to make allocations of less than $200 million to its hedge fund program.However, he said the money wouldn’t be doled out until CalPERS negotiates the terms of investment contracts with the five hedge funds, a process that typically takes 60 days.”The reason the amounts are small is we are taking a conservative approach, as we told our board we would,” he told Dow Jones. “We’re going to see how the first $10 million works before allocating additional funds.” CalPERS has the option to allocate a total of $50 million each to Andor Capital, Atticus Capital, Evnine-Vaughan Associates and Symphony Asset Management and a total of $40 million to Liberty Square Asset Management.