Growth Loses Value, Value Grows

Northwest Mutual Funds Eyes Merger Northwest Mutual Funds wants to merge the Northwest Specialty Resource Fund into Northwest Specialty Equity Fund, pending unitholder and regulatory approval.3 Plansponsor.comAFBA 5Star Funds Increases its Family AFBA 5Star Funds has recently added the AFBA

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Northwest Mutual Funds Eyes Merger
Northwest Mutual Funds wants to merge the Northwest Specialty Resource Fund into Northwest Specialty Equity Fund, pending unitholder and regulatory approval.3-Plansponsor.comAFBA 5Star Funds Increases its Family
AFBA 5Star Funds has recently added the AFBA 5Star Small Cap Fund and AFBA 5Star Science & Technology Fund to its family. The funds are sub-advised by Kornitzer Capital Management and are now available for certain retirement plans.3-Plansponsor.comInvestment Company Institute Releases Mutual Fund Review
The Investment Company Institute, the leading authority on the US mutual fund industry, has released its annual review. Surprisingly, it finds that retail investors have remained committed despite weak equity markets, the events of September 11 and the worst returns from mutual fund investing for six years. Mutual funds distributed an estimated $72 billion in capital gains to shareholders in 2001, the lowest level since 1995 and down significantly from an unprecedented $326 billion in 2000 and the generally high distributions of the past decade.Mutual funds actually reported a record net inflow of $504 billion, up from $389 billion in 2000 and the previous record of $477 billion in 1998. Nor did the money flow into money marketor bond funds only. During the year all fund categories-stock, hybrid, bond, and money market-reported inflows. As aresult, despite plunging market values, total mutual fund assets stood at $6.97 trillion at the end of 2001, virtually unchanged from $6.96 trillion as the year began. The record inflows of new cash simply offset negative equity performance throughout much of 2001, the second year in succession of fallling equity prices. However, the pace of new fund formation did slow down in 2001. On balance, fund sponsors created 165 new funds, down from 365 in 2000. Several fund complexes involved in mergers in recent years also continued to streamline their product offerings by combining funds with overlapping investment objectives. The report includes final 2001 year-end data for fund assets and flows, a review of fund industry trends, and an analysis of mutual fund shareholder reaction to last year’s bear market and the events of September 11. The full report is available here.Global Double Crossing – Vulgar Abuse of Management…?
Global Crossing, the network services provider to which SWIFT out-sourced its telecommunications needs last year, may be in Chapter 11 only but the company is already developing the first symptoms of Enronitis: web sites penned by angry investors and/or shareholders. See just how vulgar abuse of management can get by checking out http://www.globaldoublecrossing.comIslamic Conference: Who is Prepared To Brave Shoe-Bombers?
High marks for chutzpah go to Dow Jones for organising a conference on Islamic investment strategies in Dubai between 17 and 19 March. The shopping in the Emirate is famously good, and the organisers are surely right to believe that investing in Islamic countries will make the world a much safer place, but will those fund managers, institutional investors and financial journalists prepared to brave shoe-bombers and other hazards of flying today really want to pay $2,495 to attend a conference in the Gulf on Islamic investment strategies? Financing Islamic terrorism would surely be more topical.
Details in Events CalendarCapital Markets Revolutionary Becomes Promiscuous Investor
Patrick Young, scourge of exchange establishments throughout Europe, is back on the warpath. In 1999 Young published The Capital Markets Revolution, a lively, best-selling and highly influential account of the future of securities and derivatives trading which used the near-death experience of LIFFE (whose failure to switch from open outcry to electronic trading did more to create Eurex – and therefore Deutsche Borse – than any other single factor) as a fable about how not to react to liberalisation and technological change.(“No Small Change”, Global Custodian, Spring 2000)
Now Young has published what he calls a “management report.” But few such documents would hazard as racy a title as the one he has chosen: The Promiscuous Investor: Can Intermediaries Survive the Capital Market Revolution? His target, as before, is the stock exchange and derivatives establishment. And his contempt for their ability to handle change is as acidic as ever. He claims that their plans to carpet the world with liquid electronic marketplaces have omitted to take account of a killer constraint (lack of bandwidth); ignored left-field competitors (especially from the media: a business price discovery mechanisms such as exchanges are also in); and so emphasised technology at the expense of their real business ( attracting liquidity by the quality of their content: prices). Young argues that traditional exchanges can no longer count on the pulling power of their reputations (or what he calls brands) and need to start thinking economically rather than politically (and fast), especially when market participants are tiring of funding competing electronic marketplaces all over the shop. To read a synopsis of this “management report” written by the great man himself, click HERE And if you like that, you will probably also like”MONSTER mash”, Global Custodian, Summer 2000Global Crossing Rearranges Management Deck Chairs
Global Crossing today announced the appointment of Carl Grivner as chief operating officer and Anthony Christie as senior vice president of product management.Grivner, who had been serving as executive vice president of global operations, will oversee sales and marketing for enterprise and carrier customers, product management and global operations. He will continue to report directly to John Legere, chief executive officer of Global Crossing. Christie will be responsible for the development, deployment and on-going management of the company’s product and services suite, reporting to Grivner.”We’re putting Carl into position to help us meet our financial targets while we conserve resources by bringing three key functions – sales and marketing, product management and global operations – under one leader,” Legere said. “Carl will enhance the day-to-day operations for the company, and Anthony will concentrate on the products and services offered over our global fiber optic network, allowing me to drive our overall strategic restructuring and manage crucial communications.”Grivner has many years of operational experience and expertise. He has served as president of Global Crossing Europe, Middle East and Africa and as COO for Global Crossing North America. Prior to joining Global Crossing, Grivner was president and chief executive officer of WorldPort Communications. He is a former chief executive of operations in the Western Hemisphere for Cable & Wireless, and former president and CEO for Advanced Fiber Communications (AFC). Earlier in his career he held various positions with Ameritech and IBM. Grivner has a B.A. from Lycoming College.Christie joined Global Crossing as senior vice president of global strategy and business integration from Asia Global Crossing after a successful two years during which he supported the initial public offering (IPO) and shaped and drove strategy and business development activities as well as spearheading all of the joint venture, alliance relationships and partner capacity purchases in Asia.Christie has a rich background in telecommunications general management. Before he came to Asia Global Crossing, he spent 16 years at AT&T. He held multiple positions including general manager and network vice president at AT&T Solutions, sales vice president of business markets, regional managing director of international operations for Asia, and numerous other assignments in product management, marketing and sales. His education includes a B.S. from Drexel University, M.B.A. from the University of New Haven and an M.S. from M.I.T.Global Crossing Revenue Estimates for Q4 and 2001
Meanwhile, Global Crossing disclosed preliminary unaudited revenue estimates for the fourth quarter and whole of 2001. The net loss applicable to shareholders, says the company, is “expected to be significantly increased by write-off of all of Global Crossing’s remaining goodwill and other identifiable intangible assets, in addition to significant write-downs of its tangible assets.” This follows the entry of the company into Chapter 11 on January 28.Angry shareholders will be unamused to learn that the revenue estimates are subject to the final review of (yes, you guessed it) Arthur Andersen, auditors to Global Crossing as well as Enron. Global Crossing added that it is still evaluating the appropriate write-down of certain of its tangible assets. In addition, the accounting treatment of certain of its capacity transactions is under investigation by an independent committee of its board of directors, the U.S. Securities and Exchange Commission and the U. S. Attorney’s Office for the Central District of California.For Continuing Operations in the fourth quarter of 2001, Global Crossing expects to report Revenue of approximately $804 million, which includes Service Revenue of approximately $764 million. For the full year 2001, Global Crossing expects to report Revenue from Continuing Operations of approximately $3.2 billion, including approximately $3.1 billion in Service Revenue.Global Crossing also announced that it expects to report a significant Net Loss Applicable to Common Shareholders for the fourth quarter and the full year 2001. The 2001 loss will reflect items previously reported during the first three quarters, including restructuring charges of $294 million, $545 million related to the impairment of goodwill associated with its Global Marine unit, and $2,084 million due to the write down of Global Crossing’s equity investment portfolio, including its investment in Exodus Communications. In addition, Global Crossing’s net loss for both the fourth quarter and the full year are expected to reflect the write-off of Global Crossing’s remaining goodwill and other identifiable intangible assets (approximately $8 billion) as well as a multi-billion dollar write-down of its tangible assets. The write-off of goodwill and other identifiable intangible assets and write-down of tangible assets will be non-cash charges. These pending write-downs were previously discussed in Global Crossing’s September 30, 2001 Quarterly Report on Form 10-Q.Commenting on the quarter’s performance, John Legere, CEO of Global Crossing said, “You can take a company’s measure by how it responds to adversity. I’m proud of the way Global Crossing employees have maintained outstanding service to our customers as we restructure and work through the Chapter 11 process. In the fourth quarter, we overcame a number of challenges to show strength in Service Revenue, which is the vast majority of our revenue mix and the expected source of our growth for the future. We’re pleased that customers have continued to choose our network over many others, demonstrating the appeal of our service offerings to our targeted customers — global enterprises and carriers. As we look forward to successfully emerging from Chapter 11, we’ll maintain our focus on serving customers.”Global Crossing reported that it holds approximately $1,520 million of cash in its bank accounts on a consolidated basis as of February 25, 2002. Included in that amount is approximately $492 million of cash in Asia Global Crossing bank accounts and approximately $327 million in other bank accounts that are restricted. These amounts do not represent Generally Accepted Accounting Principles (GAAP) cash balances as of February 25, 2002.
Asia Global Crossing Revenue Estimates for Q4 and 2001
On 26 February Asia Global Crossing reported the following preliminary information concerning its unaudited financial results for the fourth quarter and year ended December 31, 2001. Final audited results may differ, and are dependent upon completion of an investigation into certain allegations regarding accounting and reporting (see “Financial Overview”) and determinations regarding asset impairments (see “Pacific Crossing Ltd.”). The company expects a material loss for the fourth quarter and for the year. As earnings will depend materially upon the final determination of asset impairments and could be affected by the conclusions of the investigations, no results of operations beyond revenue for the quarter or the full year are presented.break1″This is a critical time in our company’s history,” said Jack Scanlon, acting chief executive officer of Asia Global Crossing. “While most telecommunications companies have found the current business environment to be difficult, we have faced additional challenges specific to our parent company. Our resolve is strong, we see some promising activity, in particular on the recurring services side of our business, and we have taken important steps to grow this area. We have refocused our business strategy, added new members to our management team and retained outside financial advisors to help us through this time of change.” Asia Global Crossing noted that it has engaged external counsel to investigate allegations by a former employee of Global Crossing regarding the accounting for and disclosure of certain transactions of the kind described below under “Reciprocal Transactions.” Among other things, the allegations raise the question whether the company’s disclosures concerning such transactions, which were presented in addition to GAAP financials, created a misleading impression of sales activity. Asia Global Crossing does not expect the audit of its financial statements to be completed until after this investigation has been completed. The final audited results may differ from those presented below. See “Reciprocal Transactions” and “Investigations,” below. The company is also reviewing whether a charge is necessary to reflect impairment of its trans-Pacific cable system. See “Pacific Crossing Ltd.,” below.Revenue was $46.7 million for the fourth quarter compared to $29.2 million for the same quarter last year. Year-on-year revenue comparisons are influenced by the fact that the company discontinued sales-type lease transactions at the beginning of 2001. Sales-type leases recognize revenue up-front rather than amortizing it over the life of the contract. Fourth quarter 2000 revenue included $15.1 million from sales-type leases. Excluding revenue from transactions accounted for as sales-type leases, fourth quarter 2001 revenue was $46.7 million compared to $14.1 million for the same period last year.Asia Global Crossing’s recurring services revenue was $41.6 million in the quarter, showing 43 percent growth over the previous quarter. Included in this amount is $8.1 million related to a reciprocal transaction. Without this reciprocal transaction, recurring services revenues would have been up 15 percent quarter-on-quarter.Revenue was $121.5 million for the year, compared to $166.7 million for year 2000. Year 2000 revenue included $138.3 million from transactions accounted for as sales-type leases. Excluding such revenue, 2001 revenue was $121.5 million compared to $28.4 million for year 2000. This year-on-year growth is primarily attributable to the fact that the company’s network infrastructure and product offerings were at a significantly more developed stage in 2001 than in 2000.Asia Global Crossing expects to record one-time impairment charges of at least $232.6 million, consisting of $146.0 million of capitalized intangibles related to the formation of the company and $86.6 million of goodwill related to the company’s acquisition of IXnet Asia and other minor intangibles. The company anticipates that an additional material impairment charge related Pacific Crossing Ltd. will also be recorded (see “Pacific Crossing Ltd.”, below).Pacific Crossing Ltd. (PCL) is a 64.5 percent-owned joint venture company and as such its results are included in Asia Global Crossing’s consolidated financial statements. The Pacific Crossing 1 trans-Pacific system is owned by PCL, and was financed in part by debt incurred by PCL. This debt is non-recourse to the company, but is secured by the company’s equity holdings in PCL. There is a significant likelihood that the operating cash flow generated by PCL will not be sufficient to service this debt. PCL has begun discussions with its lenders regarding changes in the terms of its obligations. If PCL fails to reach an agreement with its lenders, the lenders will have the right to foreclose on the company’s equity investment in PCL and thereby acquire effective ownership and control the Pacific Crossing system. At the end of 2001, the book value of the company’s equity in PCL was approximately $171 million.The company is currently reviewing the fair value of long-lived assets related to PCL and expects that an additional asset impairment charge will be taken in the final results for the fourth quarter of 2001. At the end of 2001, the carrying value of these assets was approximately $1.2 billion, all or part of which may be subject to such a charge. Under U.S. GAAP, the magnitude of this charge may exceed the company’s net equity in the joint venture.During 2001, Asia Global Crossing entered into a number of transactions in which it provided capacity, services or facilities to other telecommunications carriers and, at approximately the same time, purchased or leased capacity, services or facilities from these same telecommunications carriers. The company refers to such transactions as “reciprocal transactions.” The capacity, services and facilities acquired in these transactions enable Asia Global Crossing to serve certain markets in advance of its own network availability and redundancy on certain routes. The business justifications of these acquisitions and the carrying value of the assets acquired are being reviewed as part of the investigations described under “Investigations,” below.Asia Global Crossing defers the revenue from all such sales. The deferred revenue is amortized into revenue on a straight-line basis as earned over the terms of the sales agreements. Capacity, services and facilities the company acquired are recorded as “Property and equipment,” “Other long-term assets” or “Other current assets,” based upon the type of the assets and the terms of purchase agreements. “Other current assets” and “Other long-term assets” primarily relate to prepayments for capacity leases, telecommunications services and charges for operations, administration and maintenance. These “Other assets” are expensed over the terms of the purchase agreements to “Cost of access and maintenance” in the company’s statement of operations. “Property and equipment” is depreciated over the term of the purchase agreements.The company completed two principal reciprocal transactions in the fourth quarter. The first, for $23.3 million, was the second step of a two-step transaction under which Asia Global Crossing acquired terrestrial capacity in China and related co-location space and other services and sold capacity from Hong Kong to the west coast of the U.S. for the same amount. The total amount received and spent related to this transaction during 2001 was $68.3 million.The second transaction was a $20 million sale of capacity on the company’s intra-Asia cable system to a carrier from which Asia Global Crossing purchased, for the same amount, capacity on the Japan/Australia cable to provide access to a portion of Asia Global Crossing territory that is not served by the company’s own network.The other principal reciprocal transactions during 2001 totaled $57.5 million. In these transactions Asia Global Crossing acquired capacity for $55.0 million to provide redundancy between Hong Kong and Japan in advance of the ring completion of its own system and to provide connectivity between Hong Kong and Singapore in advance of its own system readiness.A significant number of the company’s sale transactions during 2001 were completed with telecommunications carriers from whom Global Crossing purchased capacity, services or facilities at approximately the same time asthese carriers purchased capacity or services from the company. Asia Global Crossing received cash in these transactions, and did not make any related purchases. The total cash additions to deferred revenue from such transactions during 2001 was $354.8 million, none of which was received during the fourth quarter. Revenue recognized from the amortization of suchamounts was $5.8 million for the full year, of which $2.7 million was recognized in the fourth quarter.On December 20, 2001, Global Crossing announced that it would not honor the $400 million draw request made by the company on the $400 million subordinated credit facilities established in the company’s favor by Global Crossing in October 2000. On January 28, 2002, Global Crossing commenced voluntary bankruptcy proceedings in the U.S. and provisional liquidation proceedings in Bermuda. This liquidity impact is exacerbated by weak demand for IRU sales. As a result, the company no longer has a fully funded business plan. The company is taking a number of actions to address its funding needs, including minimizing discretionary expenditures and seeking to renegotiate the payment terms associated with its principal construction and supply contracts. Successful negotiation of these changes should allow sufficient liquidity for the majority of the current year.Asia Global Crossing is also seeking new capital. Asia Global Crossing has engaged Lazard Freres as its financial advisor in connection with its consideration of alternatives for restructuring and obtaining new funds. It is likely that in their report on the company’s audited financial statements, the company’s auditors will express substantial doubt about the company’s ability to continue as a going concern.”We are working with our vendors to give us time to address the need for new capital. These discussions look promising. As to new capital, we have already received a number of inquiries from potential investors,” added Scanlon.While initial results on vendor talks are encouraging, no assurance can be given that final agreements acceptable to the company will be achievable with such vendors. Similarly, that while inquiries have been received from various parties about possible investment, no assurance can be given that such inquiries will result in a proposal or that any such proposal if made will be acceptable to the company.Asia Global Crossing finished the year with $553.0 million in cash, of which $72.9 million was restricted to use on the Pacific Crossing system.Widespread publicity has been given to allegations by a former employee of Global Crossing that the accounting for and disclosure of reciprocal transactions entered into by Global Crossing or Asia Global Crossing have been improper. The audit committee of the Asia Global Crossing board of directors has engaged external counsel for the purpose of investigating issues raised by these allegations so far as they concern Asia Global Crossing. Asia Global Crossing understands that investigations of these matters have also been undertaken by the Securities and Exchange Commission and by the Federal Bureau of Investigation, and that Global Crossing has been contacted in this matter. At this time, Asia Global Crossing has not been contacted in connection with either of such investigations.Stanley Young Quits Accenture for CapCo
Stanley Young, one of the biggest names in securities market clearing and settlement systems development and delivery, is joining CapCo. Young joins from Accenture, where he was a partner in the Global Financial Services group, specialising in STP initiatives and infrastructural consolidation. More importantly, at Accenture Young played a pivotal role in the development of Encompys (“An All-Encompysing Solution”, Global Custodian, Summer 2001), a global STP out-sourcing solution for fund managers which the consultancy developed with Bank of New York, Advent Software, Compaq and Microsoft. “Capco has demonstrated growth that is indicative of its future potential and industry leadership,” says Young. “In just three years, it has become an industry leader in the financial services sector. I was attracted to the company by the quality and expertise of its people, its expansive business model and clear thought leadership.” But in reality Young is more of a catch for CapCo than CapCo is for him. The firm is building a number of profitable bridgeheads into the global STP and T + 1 budgets of major banks, broker-dealers and fund managers, and he knows everybody and everything that matters in terms of implementation. Prior to joining Accenture, Young spent twelve years at the London Stock Exchange, where he managed the development of the Sequal cross-border electronic trade confirmation (ETC) tool the Exchange later sold to Thomson (where it has since become part of the Omgeo joint venture with DTCC). CapCo says Young will continue to be based in London, from where he will mastermind the zany consultancy’s market infrastructure practice in Europe and the emerging markets.Capco has also appointed Bill Irving as president and Michael Enthoven as vice-Chairman. Based in New York, Irving he will be responsible for “directing the company’s overall business strategy and growth through solutions development and client relations.” Irving was formerly global leader of the Capital Markets practice at PricewaterhouseCoopers (PwC), where he sold and implemented STP services and technology to banks, broker-dealers and fund managers. Enthoven will also play a business development role, schmoozing banking clients in particular in both Europe and North America.Prior to joining PwC, Irving held management positions with the Irving Trust Company, Marine Midland Bank and Peat, Marwick Mitchell & Co. Before joining CapCo, Enthoven spent 22 years at J.P. Morgan, where he was Head of the Global Markets group and Co-Head of European Corporate Finance, with responsibility for marketing all banking and capital markets products (including swaps) in London and on the continent. He was Head of Global Technology and Operations and Chief Information Officer from 1992. Enthoven has also served as Chairman of the Operating Risk Committee and as member of the New York Clearing House Association and the Federal Reserve Bank Payments Risk Committee. After leaving Morgan in 1998, he ran his own firm, M. Enthoven and Sons LLC.Rob Heyvaert, Chairman and Chief Executive Officer, said: ‘We are delighted to have such experienced and respected senior industry leaders at Capco. The company continues to be focused on pragmatic client solutions and innovation. The arrival of Stanley and Bill expands the scope of the Capco leadership team.’Eurofanatical Financiers Seek Favours in Barcelona
Anybody or organisation who suspects that the case for a single European capital market is not as sound as it looks would not ask a European think tank to investigate the possibility for them. Which may explain why the European Financial Services Round Table (EFR) – a group of pro-European chairmen and CEOs of European banks and insurers such as Claude Bbar of AXA and Michel Pbereau of BNP Paribas – asked two think tanks rather than one to quantify the benefits of allowing them to sell their profucts and services without hindrance throughout western Europe. This is Euro-fanatacism with belt and braces on.The results of the research carried out by the Institut fur Europaische Politik (IEP) and the Zentrum fur Europaische Wirtschaftsforschung (ZEW)were published today as a contribution by the EFR to the preparations for the Barcelona summit. To the surprise of nobody, they confirm that the completion of the single market for financial services in Europe would create substantial benefits for consumers across Europe and boost economic growth. Exactly the same arguments were advanced in the Cecchini Report way back in 1988, which assured readers that a single market in financial services would boost the GDP of eight European countries by a collective total Ecu (remember them?) 22 billion as costs and prices plunged and cross-border competition spurred greater efficiency and productivity.Today, the ERF-sponsored research says Europeans can now expect a single capital market to boost annual GDP by 0.5 per cent a year, or Euros 43 billion per annum as costs and prices plunge, yielding annual cost savings of Euros 5 billion in the European mutual fund industry alone. As in 1988, increased competition will of course sustain the effects indefinitely.Investors will obtain a better balance between risk and return by building up pan European portfolios. A single capital market will cheapen the cost of capital to corporate Europe, and slash transaction costs. But the research also includes the usual sop to consumers, just in case the politicians at Barcelona start to wonder what it is in it for the voters or mistake a single European capital market for a stitch-up by Big Business. It shows, for example, that if banks had cut interest as quickly as competition would have forced them to in the second half of the 1990s, the average European household would have saved Euros 800-2,500 a year in lower interest payments on mortgages.The question is: what does anybody still think the politicians will ever do anything about the tax, regulatory, legal and other barriers which cause these prices and costs to be higher than necessary? They have persisted precisely because of the horse-trading which goes on at European summits, where the European clerisy swap favours for the voters and vested interests who fund their lifestyles. The average European summit is not a place where disinterested Philosopher Kings read research papers but a runaway gravy train loaded with pork barrels. Ironically, the report says as much: it identifies what it calls “policy-induced obstacles to the completion of a single market, for example discriminatory tax practices and the wide variations between Member States in the national rules governing pension provision and consumer protection.” It is the job of businessmen to find way round these obstacles, or of arbitraging them into well-deserved absurdity. Unfortunately, too many senior European bankers, fund managers and insurance chiefs prefer to hob-nob with politicians. Commissioning a report telling everybody what they knew already merely secures an invitation to the party. Nobody seriously expects anything to change. Indeed, these reports are rapidly becoming a part of the problem rather than the solution. The full text of the report, together with supporting academic papers, is available at The European Financial Services Round Table website can be found at www.efsrt.orgIs Tri-Party the Solution to the Coming Credit Crunch?
Could Enronitis, like a benign infection, be the making of tri-party repo? The question arises because the evaporation of liquidity in the US commercial paper (CP) market is forcing corporate treasurers to draw down bank lines backing their CP programmes. Earlier this week, the Financial Times suggested that the inadequate fees received for providing these lines was exacerbating the post-Enron difficulties of JP Morgan, which underwrites nearly half the CP-backing right-to-borrow programmes for US companies. Certainly, outstanding CP issues in the United States have shrunk by $200 billion from a peak of over $1.6 trillion in the autumn of 2000, and the corporate CP market (as opposed to its financial equivalent) is close to being closed for all but the highest credits. To the extent that they can tap it at all, dodgier-looking borrowers are having to pay much higher spreads. The European commercial paper market, which is anyway far smaller, has yet to succumb to the same anxieties about the quality of corporate debt. But it is unlikely to remain immune for long to a gathering global crisis of confidence in corporate credit.Which is precisely why corporate treasurers ought to be thinking about borrowing on a collateralised basis: in the current environment it would certainly be easier and ought to be cheaper. Being secured, repo rates ought to cost less than bank lines and commercial paper because they enhance the creditworthiness of corporate borrowers. For corporates able to post securities which have gone special, the cost of borrowing could be spectacularly cheap. Companies can even back a borrowing in one currency with securities denominated in another. Unfortunately, collateralised lending does not yet trade through the alternatives in Europe, where banks have yet to wise up to the attractions of collateralised lending. Indeed, fans of collateralised borrowing will be hoping that Enronitis will at last expose the absurdity of banks being prepared to lend unsecured at cheaper rates than they could lend secured. One problem is whether the repo market – and especially the international repo market – can offer the volume to meet the borrowing needs of major corporates, especially when they may be short of appropriate collateral. Total outstandings in the European repo market were estimated recently by ISMA at Euros 2.3 trillion. (ISMA Publishes The Second Part Of Repo Market Survey)In Europe, where the commercial paper market is growing rather than shrinking, issues have increased in size up to $1.5 billion and a recent report by Barclays Capital suggested the average ticket size (the portion of an issue sold to any single investor) has increased from $25 million in 1999 to $32 million today. But rising scale in European commercial paper is scarcely an argument against testing the appetite of the market for corporate credits, especially since the potential size of the European commercial paper market is limited by investment restrictions placed on its main source of capital: the money market funds. The current (1985) UCITS directive from the EU restricts the share of commercial paper in money market funds (whose assets currently total around $400 billion) to 10 per cent of total assets. Although there are no limits on investing in purely domestic paper by domestic money market funds, and the UCITS III directive will liberalise the current restrictions, neither factor will revolutionise the scale of the market. If European money market funds increased their investment in commercial paper by two fifths of current assets, it would add another $150 billion: rather less than the US market has contracted by in the last eighteen months. Commercial paper will also remain restricted mainly to top-rated companies. Nor will liberalisation happen quickly or evenly. UCITS III is a directive, which is not immediately binding and depends on national secondary legislation for implementation. Countries such as France, where commercial paper market is already heavily regulated, can be expected to try and reserve the domestic market for its national champions.A more significant obstacle to corporate access to the repo market is the tiresome administrative tasks associated with collateralised borrowing: matching instructions, checking the collateral against the eligibility criteria of the lender in terms of credit rating, currency and liquidity; marking collateral to market every day; calling for and collecting margin when required; and monitoring and dealing with corporate actions, such as dividends. But there is a solution to hand already. The tri-party agents – Bank of New York, Clearstream, Euroclear, JP Morgan, Deutsche Bank and others – are already carrying out all of these duties on behalf of the major investment banks which finance their portfolios in the repo market. They would not have to reinvent themselves to offer the same services to corporate borrowers, and are well-placed to put corporate borrowers in touch with lenders who are already familiar with collateralised lending. Indeed, tri-party is the natural means of access by corporates to the repo market aslenders as well as borrowers. Companies ought to be looking at tri-party repo in exactly the same spirit as they have long looked at commercial paper: as a way of lending to each other without paying banks a fortune to intermediate the transaction. In Euroland, where the single currency makes it simple for corporate treasurers to work out their net short-term funding requirements without fretting about currency risk, repo could fill a yawning gap in the overnight to seven-day maturity bracket. European commercial paper programmes tend to mature in two weeks or more, which is far too long for corporates looking to park money safely overnight or for few days. Unlike other money market investments such as bank deposits, Treasury bills or CDs as well, repos allow corporate treasurers to choose maturities which suit their requirements. In Europe this ranges from overnight to three months, and in sizes of €50 million to €1 billion and beyond. Yields are also flexible. While the rate on a term repo – those with a pre-agreed maturity – can be fixed, rates on an open repos can change every day. Open repos do tend to yield less than overnight repos – where borrowers have to bear the cost of moving cash and securities about as well – but then they can be terminated at any time as well, giving investors a degree of flexibility absent in other money market instruments. Unlike ECP, repos do not to be listed somewhere first either. Moreover, it is not as if the European commercial paper market is a model of operational efficiency. In fact, the relatively long maturity of the European commercial paper market is largely a reflection of operational inefficiency. In the US, where trades go through in twenty-four hours, two thirds of the commercial paper issued has a maturity of ten days or fewer. Getting European maturities down to seven to ten days would require a similar turn of speed: in effect, a switch from settlement on T + 2 (or more for cross-border deals) to same-day settlement. The Depository Trust & Clearing Corporation (DTCC) and the European ICSDs, Euroclear and Clearstream, are working on this problem. (“Squeaky Wheels”, Global Custodian, Fall 2001) The Euro Pre-Issuance Messaging System (EPIMS) they are launching will communicate details and ISIN codes of new European commercial paper issues to all parties in minutes instead of the hours which preclude the settlement of transactions overnight unless initiated very early in the trading day. Once it works, EPIMS will drawn in many potential investors in commercial paper – such as securities lenders, who can only buy debt shorter than one week in maturity – currently precluded from entering the commercial paper market. Goldman Sachs has predicted it will triple the size of the European commercial paper market (to $750 billion) by drawing in a horde of corporate investors as well as securities lenders re-investing cash collateral. (Unlike money market funds, corporates do not face investment restrictions on buying short-term securities.) But even EPIMS cannot bring same-day settlement to all European commercial paper transactions, especially if issuers and investors use different ICSDs. The electronic bridge between Clearstream and Euroclear means the settlement of transactions between counter-parties either side of it will still take a couple of days. Changing it to accommodate the need for same-day settlement would cost at least $20 million which nobody wants to pay.Though tri-party repo or collateralised borrowings face exactly the same infrastructural limitations in Europe -the unresolved problems caused by a fragmented clearing and settlement infrastructure stretch far beyond the bridge between the ICSDs- they do have advantages over commercial paper which corporate borrowers would be wise to explore. Collateralisation ought (and eventually will) lead to cheaper funding than companies can obtain on an unsecured basis. The commercial paper market in the United States is already drying up, and the contagion could easily spread to Europe. Banks, worried about the extent to which this exposes them to corporates activating back-up credit lines, will trim lending and tighten credit criteria. Debt markets as a whole will become less accommodating to second tier credits. The only alternative to a credit crunch is collateralisation. The agents are in place to administer the loans. All that is required is a willingness to experiment.Read Comments of Securities Financing/Lending Experts:SEI Says Money Market Tool is a Hit With Corporate Treasurers
The securities financing markets long for the day that corporate treasurers treat repo as a money market investment on a par with commercial paper, certificates of deposit and treasury bills. For now, they are pinning hopes on money market funds instead. Ironically, however, many corporate treasurers use these funds to invest in money market instruments. SEI Investments reports today that, its web-based platform for corporate treasurers trading institutional money market funds, had signed up 35 corporate clients. These include 3Com, Exelon Corporation and two Blue Cross/Blue Shield affiliates. The platform finished its first year with an average daily balance of over $2.2 billion.During the year, TreasuryPoint Trading nearly doubled the number of fund families available on the platform to nine, partnering most recently with AMR Investments, Banc of America Capital Management, Banc One Investment Advisors, and JP Morgan Fleming Asset Management. “TreasuryPoint Trading had an excellent debut year,” said Jack May, Senior Vice President, Treasury Solutions at SEI Investments. “The ability to compare dozens of top fund rates and automate transactions and reporting with multiple fund companies is clearly a technology solution that treasurers and institutional investors want. The efficiency benefits plus no usage fees contributed to users’ quick adoption.”SEI says the Optimizer,’s short-term capital management tool that calculates optimal investing or borrowing options for a company’s cash flow, also showed its value in 2001. Clients using the Optimizer showed working capital performance improvement of 5-65 basis points, says SEI. In addition, many clients viewed the tool as a way to improve efficiency and reduce operational risks associated with their daily decision process.”The past year’s economic environment drove higher demand for services that can manage risks and improve financial performance. The Optimizer demonstrates real value in both of these areas,” stated Mr. May.
“SEI tries for the world”, Global Custodian, Fall 2001SEI Says Mandates in 2001 Worth $2.58 billion
SEI Investments, which has a growing manager of managers business it developed on the back of its fund administration technology, says it finished 2001 with new mandates totaling $2.58 billion in institutional assets. The assets came from 52 new clients as well as existing institutional clients around the world. “Two years of disappointing markets and declining interest rates have prompted plan sponsors of all sizes to look at new solutions for managing retirement plans,” says Edward D. Loughlin, Executive Vice President of SEI Investments. “Adoption of our single source, outsourced approach, which combines advice, manager selection and administration, continued its growth in the US and abroad.” SEI Investments is ranked the largest global manager-of-managers by Cerulli Associates.Major mandates in 2001 included:State of North DakotaAhlstrom USAQuebecor WorldMcCormick & Co.Tidewater Jewish FoundationThe Community Foundation of Southern ArizonaChicago PlasterersNapa Valley Health Care FundAES Drax Power Group (UK)Davis Service Group (UK)Murray and Roberts Retirement Fund (South Africa)MAAF Insurance (France)BOC Canada Limited (Canada)
“SEI tries for the world”, Global Custodian, Fall 2001T. Rowe Presents Free Morningstar Tools
Retirement plan participants and other savers now have free access to a portfolio of Morningstar financial-analysis tools from T. Rowe Price. According to a T. Rowe Price press release, the company linked the Morningstar tools so that investors need only input personal financial data once. The new tools on the T. Rowe Price Web site include Morningstar’s: – ClearFuture’s guidance module, which develops a personalized investment plan by mapping existing investments and the funds offered in one’s 401(k) plan, and measures one’s risk tolerance and makes asset allocation suggestions, – Portfolio X-Ray, which analyzes one’s total portfolio, including non-retirement assets, – Style Box diversification, a stock report shows the total combined investment in individual stocks through either direct ownership or within various mutual funds, – Portfolio Tracker, which helps investors monitor their portfolios by presenting a quick reference page of financial data, and – Portfolio Watchlist, which monitors an investor’s portfolio, automatically updating it against user-defined targets such as highs and lows, volume, prices, and price changes in dollars and percentages.3-Plansponsor.comNew Mutual Funds Outperform S&P 500 in 2001
Mutual funds that turned one-year-old at the close of 2001 outperformed the market over the year, returning -9.8%, compared to a fall of 11.9% in the S&P 500, according to Standard and Poor’s.The research firm reports that of the 71 funds in the group: – 20 are growth offerings, including six technology funds – six have “value” in their names – eight were fixed-income funds – two were balanced offerings.In contrast, of the 51 funds that ended their first 12 months since inception in December 2000, over three quarters were growth or technology-oriented funds. According to S&P, over 2001, value-oriented funds contributed most to the group’s performance, with three of the top five performing one-year-old funds falling into this category.On the flipside, technology and aggressive funds generally dragged the group down – the five worst performing start-ups were all growth offerings, S&P reports.3-Plansponsor.comBuffalo Equity Fund Changes its Name
The Buffalo Equity Fund is being renamed the Buffalo Large Cap Fund, effective immediately. However, the change will not affect the fund’s investment objectives, principal investment strategy or portfolio management.3-Plansponsor.comMorgan Stanley Rumoured to Have Bought Hemisphere
The long anticipated consolidation in the hedge fund administration sector may be under way at last. There are strong but unconfirmed rumours that Morgan Stanley has acquired Hemisphere, whose insurance company parent is looking to realise the value of non-core assets. State Street, meanwhile, is thought to have bought IFS. The custodian bank, like its competitors, is under pressure to extend its mutual fund administration operations into the hedge fund arena. Another hedge fund administrator understood to be looking for a buyer is GlobeOp, though chairman and CEO Hans Hufschmid strongly denies this. Rumours that Fortis Fund Services is for sale look less plausible, if only because hedge fund administration fits so neatly with its prime brokerage model of offering prime brokerage without the brokerage.The particular difficulties or motives of sellers and buyers aside, the hedge fund administration industry is clearly embarked on a process of rationalisation, by which it intends to grapple with thinning margins, migrate (at least in substance) from offshore to onshore (following the repeal of the Ten Commandments) and become part of the suite of products offered by prime brokers (who see fund administration as a useful way to make hedge fund clients “stickier”).Japanese Regulator Cracks Down on Short Selling
There have not been many ways to make money in the Japanese equity market this last ten years or so. But going short is certainly one of them. And in a country where virtually the only thing propping up the banking system is the value of the equities they hold, this is proving an unpopular investment strategy with the Japanese authorities. Just ten days ago Morgan Stanley was fined and Barclays Capital was censured for short-selling. (Japan: Morgan Stanley Fined, Barclays Censured for Short Selling)Now it is the turn of Bear Stearns, Credit Lyonnais, Deutsche Securities and Nikko Salomon Smith Barney to face the wrath of the regulators for violating short-selling rules. On 13 February Bear Stearns Japan Ltd. was ordered by the Financial Services Agency (FSA) to report on violations of short-selling following an FSA-ordered review by the Japan Securities Dealers Association (JSDA) of compliance with measures taken against the short-selling of stocks on December 21 last year, which in effect prevent dealers shorting stocks at lower prices as the market falls. Bear Stearns was found to violated regulations on short-selling on a on a number of counts, and was ordered by the FSA to stop broking for affiliated companies for a week (to March 6) and trading for a month (to 27 March) while compliance is improved to the satisfaction of the FSA. On 27 February the Tokyo Stock Exchange (TSE) suspended Bear Stearns from trading JGB futures and JGB futures options for the same period. Likewise, Credit Lyonnais Securities in Tokyo was ordered to report to the FSA on 13 February. Two weeks later the French bank was ordered by the FSA to halt proprietary trading and broking for affiliated companies for two weeks (until 13 March) while it improved compliance procedures and reported on them to the FSA. The two-week ban was later endorsed by the TSE.Deutsche Securities and Nikko Salomon Smith Barney were luckier. Their branches were found to have violated short-selling regulations, but were not ordered to suspend trading. Instead, they were told by the FSA to “strengthen its internal control system, secure strict compliance by the directors and staff, take preventive measures against recurrence of … violations, and clarify locus of responsibility … [and] work out concrete measures with a target date to root out short-selling in breach of the law, and to impose stricter internal penalty to a staff and his/her supervisor in the branch.”The FSA is under political pressure to clamp down on short selling, which is widely criticised in government circles for increasing the downward pressure on the Nikkei. Finance minister Masajuro Shiokawa recently complained that financial Japan had become a “gambling den.” These are not good signs: politicians scent they are the victims of an international financial conspiracy (no domestic broker-dealers have been censured or fined) and a regulator is sacrificing its independence under pressure from the political classes, who are in turn fearful of a complete meltdown if the stock market weakens to the point where an already anaemic banking system starts to feel the effects. It cannot be long before the securities lending activities which fuel short selling come under scrutiny. This would be a serious setback for a market where securities lending has finally taken off after years of living in the twilight zone of the offshore sector, following the publication of rules of the game by the Japan Securities Dealers Association in December 1998. (“Japan Warms to Securities Lending”, Global Custodian, Spring 2001)Growth Loses Value, Value Grows
Stock funds continued to suffer negative returns in February, with the average diversified US equity mutual fund falling about 2.9% during the month.That loss, based on preliminary estimates from fund tracker Lipper, came on top of a loss of 1.83% for the average diversified US fund the prior month, according to Reuters. The category lost an average of 10.9% in 2001.Small-cap value funds continued their winning ways – climbing 0.5% in February. The sector soared 16.4% last year.Meanwhile, growth funds continued to stumble, with large-cap growth funds dropping 4.5% in February on top of a 2.3% loss in January. Mid-cap growth funds also fell in February – shedding about 5.5% for the month.Telecommunications funds plunged 11.7% in February and have now racked up a 44.6% loss over the past twelve months.On the other side, gold funds rose 10.4% in February in addition to January’s gain of 11.5%. And, while not that many 401(k) investors will see that opportunity on their fund choices, the sector has earned an impressive 40.7% over the past 12 months.