Investment Banking: Have the Big Swinging Dicks Swung Their Last?

Zurich Scudder's Mutual Fund Business Moves to Chicago Zurich Scudder Investments plans to cut staff and move its U.S. mutual fund business from Boston to Chicago, according to Bloomberg. The report indicated that some account managers and support operations staff

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Zurich Scudder’s Mutual Fund Business Moves to Chicago
Zurich Scudder Investments plans to cut staff and move its U.S. mutual fund business from Boston to Chicago, according to Bloomberg. The report indicated that some account managers and support/operations staff would remain in Boston.3-Plansponsor.comAIM Small Cap Growth Fund To Close To New Investors
The AIM Small Cap Growth Fund will close to new investors at 3 p.m. CST on Monday, March 18, 2002. The fund was originally closed to new investors from Nov. 8, 1999, until Aug. 20, 2001 – but with the fund’s net assets now above $1 billion, the fund’s managers/directors believe closing the fund will be in the best interest of shareholders.3-Plansponsor.comToronto Firm Launches Multi-Strategy Fund
Arrow Hedge Partners, a Toronto investment firm, announced launch of the Arrow Multi-Strategy Fund. Arrow executives said in a press release that the goal of the new fund is to provide institutional and high net worth investors with a global portfolio of different investment styles, strategies and asset classes that is managed by several managers. The company said the Arrow Multi-Strategy Fund allocates to eight Arrow Single Manager Funds including:Arrow Goodwood Fund, a Canadian equity hedge fund advised by Peter Puccetti of Goodwood Inc., Toronto Arrow Capital Advance Fund, a US equity hedge fund advised by Mark Lelekacs of Capital Advance Investment Management LLC, Tampa, Florida Arrow Eagle & Dominion Fund, a US small and mid-cap equity hedge fund advised by Duncan Byatt and Andrew Trower of Eagle & Dominion Asset Management Ltd., London Arrow White Mountain Fund, a European equity hedge fund, advised by Kevin Doyle and Sarah Caygill of Doyle Caygill Capital SA, Geneva, Switzerland Arrow WF Asia Fund, an Asian equity hedge fund advised by Scobie Ward and Peter Ferry of Ward Ferry Management Ltd., Hong Kong Arrow Ascendant Capital Fund, a market neutral arbitrage fund advised by David Jarvis and Rick Kung of Ascendant Capital Management Inc., Toronto Arrow Milford Capital Fund, a high-yield US bond fund advised by Chris Currie of Milford Capital Management Inc. Arrow Epic Capital Fund, a Canadian equity hedge fund advised by David Fawcett and Tom Schenkel of Epic Capital Management Inc., of Toronto.3-Plansponsor.comHewitt Plans to Get Morningstar Reports
Participants in retirement plans run by Hewitt Associates will soon have access to mutual fund research reports by Morningstar, Inc., Morningstar announced.Morningstar said it would create custom reports on 1,000 funds including privately managed separate accounts, commingled funds, equity and fixed-income funds and company stock funds.The company said each report will include volatility measurements, Morningstar’s proprietary ranking, top 10 holdings, and portfolio characteristics. The reports will be available on Hewitt’s Your Benefits Resource Web site this summer, Morningstar said.3-Plansponsor.comInternal Managers Trump outside Pension Advisors
Pension funds with on-staff advisors end up with better investment results than those who outsource their asset management tasks, a UK study found.The study of 28 internally managed funds managing 158 billion pounds showed that the funds enjoyed lower risks, which resulted in higher average total returns. The study was undertaken by WM Company, a research firm.According to WM, the majority of the internal funds actively manage their UK equities. The funds produced a 0.3% average annual return over rolling three and five-year periods.Similar results apply for North American stocks, while European equities turned in a 0.2% average annual gain, again showing a “significantly lower dispersion of returns”, according to WM. The only area where outside managers triumphed was with Japan equities and UK bonds.The funds held an average 212 UK stocks – much more than the average portfolio managed outside, WM said.Lower Turnover Means Lower CostBut the internal funds’ activity was much lower. Average portfolio turnover was 31% for internal UK equities, compared with 53% externally. For European equities the ratios were 74% versus 85%. For UK bonds the internal rate of change was at 82% compared with 141% for external. WM said the lower portfolio turnover gives internally managed funds a strong advantage due to their lower cost base, it notes. WM also point out that internal funds have a lower risk profile with an average tracking annual error of 1.6%, which is equivalent to the 75th percentile for external funds. This puts internal funds in the lowest quartile of riskiness. Funds involved in the study represent a quarter of the UK pension market, compared with 46% 15 years ago. In 80% of these funds, six out of 10 members are either inactive workers or pensioners.3-Plansponsor.comWeak Markets Yield Strong Results for Hedge Funds
Soft markets provided fertile ground for hedge fund growth in 2001, according to the Annual Hennessee Hedge Fund Manager Survey.Industry wide, hedge fund assets enjoyed a 38% rate of growth – some $144 billion – last year, and now total $563 billion, according to the report.Hedge funds beat out the still struggling broader equity markets during 2001 with the Hennessee Hedge Fund Index turning in a 3.98% increase, net of fees. On an annualized basis, the index had an 18% return since 1987 compared to 13.6% for the S&P 500 Index, according to a news release from the Hennessee Hedge Fund Advisory Group, which publishes the survey.The latest Hennessee report also showed that:Individuals remained the largest source of capital for hedge funds, contributing 48% or $270 billion of total assets. Almost 40% of hedge fund managers said high net worth individuals and family offers were the fastest growing capital source. Fund-of-funds were the second largest source of capital, contributing 20% of assets. One industry tactic for coping with the bear market was to hold a large amount of cash and to minimize market exposure. The average fund had a 49% net market exposure in 2001. The use of margin in 2001 declined to its lowest level since the survey began in 1994 — the average long exposure decreased 8% to 83%.The 2002 Survey includes 766 hedge funds and over $141 billion in assets, equating to 25% of the assets in the hedge fund industry. The median hedge fund size in this year’s survey was approximately $94 million.3-Plansponsor.comHemisphere: The Buyer is BISYS
Hemisphere announced today that its parent company, Mutual Risk Management Ltd., has agreed to sell the business to BISYS Group, Inc, the acquisitive out-sourcing company which is best known for servicing mutual funds. It is expected that the transaction will close by March 31,2002, subject to regulatory approvals.BISYS, which recently switched its primary listing from NASDAQ to the NYSE (BISYS Completes Move to NYSE)currently services 120 mutual fund complexes in the United States and Europe, with assets under administration of over US$500 billion. In common with other mutual fund service providers such as State Street – which is understood to be close to purchasing IFS, as part of a larger move to provide a combined prime brokerage and fund administration service- BISYS found its clients increasingly expected a hedge fund capability. The institutionalisation of alternative investing, coupled with the repeal of the Ten Commandments, is encouraging fund administrators to consider buying or developing hedge fund administration operations.”Combining Hemisphere’s service offerings with BISYS’ existing fund administration capabilities will yield the broadest array of fund services currently available from a single provider,” says Tom Healy, President and CEO of Hemisphere. “BISYS views the acquisition of Hemisphere as a strategic expansion in the alternative investment arena and is fully committed to the hedge fund industry.” Healy says that the current management team at Hemisphere will continue to manage the business as a separate division within the investment services group of BISYS. Clients -the majority of them clients of the Morgan Stanley prime brokerage operation – will await developments, doubtless concerned as to whether a long-only fund administrator has the skills to adapt to their particular needs.BISYS is expected to pay $130 million. It says that by acquiring Bermuda-based Hemisphere – which it describes as the largest hedge fund administrator in Europe and the third largest globally – BISYS will expand its services into a rapidly growing market: hedge funds. BISYS is banking on the market growing in size from $500 billion of assets today to $1.7 trillion by 2008. But the company may have bought into the business at the top of the market, in the United States if not in Europe, and without the projected growth BISYS may find the margins on hedge fund administration too thin to support without volume. Hemisphere currently services funds with approximately $50 billion in assets under management from service centers in Bermuda, Boston, and Dublin. BISYS operates mutual fund services – fund administration, fund accounting, transfer agency – from London, Luxembourg, Guernsey and the Cayman Islands as well as Dublin and New York.”The hedge fund industry represents a major growth opportunity and strategy for BISYS,” says Lynn Mangum, chairman and chief executive officer of BISYS. “Acquiring Hemisphere positions BISYS as a market leader in this dynamic segment of the financial services industry, and provides a high-growth platform proven to support the requirements of some of the largest global asset managers. Combining Hemisphere’s service offerings with BISYS’ existing mutual fund administration capabilities will generate the broadest array of fund services currently available from a single provider, and will enhance BISYS’ position as the leading third-party service provider to the investment services industry.”Tom Healy, Hemisphere’s chief executive officer, added, “We have recognized BISYS as a leading provider of sophisticated fund services and a technology innovator, and we have monitored BISYS’ growth in terms of its client base, product and service offerings, and global presence. We welcome the opportunity to become a strategic component of this dynamic organization. We are excited about enhancing the services we provide to our existing clients by leveraging BISYS’ resources and industry experience, and about the significant opportunities to cross-sell additional services to our respective client bases.”Morningstar Product IDs Like Mutual Funds
Investors looking for a substitute mutual fund choice for one that’s closed to new customers or carries hefty fees may find some relief in a new online tool from Morningstar, the company said.Similar Funds, available free at Morningstar’s Web site ( helps locate another fund in the same investing style and with the same characteristics as the unavailable or undesirable one, Morningstar said. The company said Similar Funds’ screening includes an analysis of the fund’s most recent portfolio and a review of the fund’s performance for the past three years. The program develops an overall similarity score on a one to ten scale with ten being the closest match.Investors can ask for funds with a specific initial investment limit and restrict the search to only no-load options, Morningstar said. 3-Plansponsor.comAverage US Hedge Fund Dips in February
The Average U.S. Hedge Fund posted a mild -0.7% net loss in February, based on preliminary figures received by Van Hedge Fund Advisors International, Inc. After a small gain in January, the Average U.S. Hedge Fund returned an estimated -0.2% net over the first two months of 2002. By comparison, except for the blue-chip Dow Jones Industrial Index, all the major stock averages were negative for both February and the year to date. Final February and year-to-date results for the Van Hedge Fund Indices, detailing the average performance for US, Offshore, and Global hedge funds by strategy, are scheduled for release later this month.Hedge fund returns are net of fees and performance allocations.3-Plansponsor.comMorningstar Introduces New On-line Mutual Fund Research Tool
Morningstar, the Chicago-based mutual fund investment research firm, has introduced an on-line tool to help investors identify similar funds to the one they want to buy. Finding the perfect fund, only to discover it is closed to new investors or requires a large minimum sum or extracts hefty charges, is an increasing problem for retail investors. The new tool, which is available free on, helps investors quickly find and research possible substitutes for such funds.”Similar Funds is more than a screening or scoring tool,” said Mark Wright, director of online tools for “It makes full use of our portfolio information resources as well as our performance and fund operations databases to highlight the similarities of funds. Essentially, it helps investors find a suitable fund that doesn’t have purchase constraints or undesirable costs or fees.”The Morningstar Similar Funds tool matches one fund to others in its investment category (such as large-cap growth or small-cap value). The scoring is based on comparisons of both portfolio and performance characteristics. The portfolio similarity score compares the attributes of the funds’ most recent portfolios, and the performance similarity score reviews monthly returns for the past three years. The two scores are combined to create an overall similarity score on a scale of one to 10, with 10 being the closest possible match. Investors can specify the maximum initial purchase amount and also opt for no-load funds, those open to new investment, and those with lower-than-average expenses.For example, Janus Worldwide has one of the best long-term records in its category, but it is closed to new investors. By simply typing “JAWWX” into the Enter Ticker box and marking the “open to new investors” box, an investor can quickly find a number of possible substitute funds, including two with similarity scores of more than 9.0. Investors can then conduct further research into which fund or funds would be a better fit by using the Morningstar Fund Compare tool, which provides a thorough, side-by-side assessment of the funds.To use the Morningstar Similar Funds tool, go to: Offers Mutual Fund Rating Prediction Tool
Morningstar, the mutual fund research firm, has improved one of the tools on its Morningstar DataLab research platform, RatingT Analysis. Now the tool will allow fund managers and consultants to perform “what if” calculations to determine how expenses, new share classes, and projected performance will the Morningstar Rating of a particular mutual fund.The Morningstar RatingT for funds, first introduced in 1985, represents historical return, risk, and cost, and describes how a fund compares with its peers. Ratings are calculated for three, five, and ten-year periods and combined and weighted to arrive at an overall rating. The Morningstar Rating is displayed as one to five stars, with five being the best.”The Morningstar Rating for funds is a starting point to help investors choose well-performing funds from thousands of alternatives within broad asset classes,” said Don Phillips, Morningstar managing director. “Now, fund companies can determine whether its four-star fund is on the cusp of becoming a three-star or five-star fund. Our new Morningstar Rating Analysis module is especially useful when anticipating a future rating for a newer fund that does not have a three-year track record or for projecting the full 10-year weighting for a nine-year-old fund.”The Morningstar RatingT Analysis Module also presents “what if” scenarios regarding the impact of expenses and loads on a mutual fund’s current Morningstar Rating for all relevant time periods. And, if a fund company creates a new share class, their analysts can input alternative front and deferred loads and redemption fees to project a hypothetical Morningstar Rating.The Morningstar RatingT Analysis module will also export the results to a portable document format (PDF) or into an ExcelT file for further analysis. Morningstar DataLab, which was launched in December 2001, offers mutual fund companies and other institutions unprecedented access to and management of Morningstar’s historical database. DataLab is the only Morningstar product that allows firms to analyze thousands of discrete data points. The application will screen and identify trends using a searchable and exportable historical database of performance, including custom time-period calculations, investment style, and portfolio information, such as complete holdings, stock statistics, and regional exposure. Morningstar DataLab is available 24 hours a day via any high-speed Internet connection in the world. Data sets are refreshed daily or monthly as appropriate, and DataLab’ s global interface will accommodate multinational data universes in the future.For more information about Morningstar DataLab and the new Rating Analysis module, visit http://datalab.morningstar.comInvestment Banking: Have the Big Swinging Dicks Swung Their Last?
Has the great investment banking game been rumbled at last? In London, New York and Tokyo – and, who knows, perhaps even in the bottomless pockets of financial Frankfurt – senior investment bankers are taking time off from plotting against senior colleagues to draw up list of junior colleagues they can fire. Outlying operations are being closed, joint ventures abandoned and all forms of marginal expenditure, from seats in the first class cabin to advertisements in Euromoney, are being slashed. For head-hunters, the environment is bad enough for some firms to consider not only skipping the retainer but a cut in the fons et origo of their enviable lifestyles: the third of first-year salary they have taken since the recruitment business was invented. Within the banks themselves, even successful businesses are subject to hiring freezes. A few months back, one well-known investment bank took the extraordinary decision to invite staff to put themselves forward for the chop. This step was taken not so much in the manner of a death-or-glory commander seeking volunteers for a suicide mission as in the manner of a sometime chairman of National Westminster Bank, who warned the staff of NatWest Markets that unless they made more money soon they would soon be fired. Unsurprisingly, people tend to make alternative arrangements. Botched executions aside, are things as bad as the investment bankers would have us believe? Certainly, the cyclical downturn has cut deep enough and persisted long enough to persuade some investment banks that they can no longer hoard talent against the ever-receding prospect of an upturn. But the true pessimists believe that an entire era of excessive profitability is drawing to a close. Never, they say, will investment bankers wake to glad, confident morning again. But investment bankers tend, as Keynes pointed out, to be more than usually suspect to errors of both optimism and pessimism. This means they pile on the overhead too quickly and lavishly in the good times, and cut it off with a chain saw in the bad times. If anything is certain, it is that the investment banks are cutting back too heavily now, and will struggle as a result to grow their businesses as rapidly as they would like when the upturn finally comes. We have been here before. The coda to Liar’s Poker is an account of the mass sackings which took place at Salomon Brothers in the immediate aftermath of Black Monday in October 1987. It is not only with hindsight that this can be seen as an example of pre-emptive pre-emption, occurring perhaps two years before it was actually necessary, if it was necessary even then. In retrospect, it marked the end of the glory years at Salomon Bothers in a much more lasting way than the Treasury bond scandal – more so even than the way that the publication of the first corporate history invariably does. (If memory serves, Salomon published one in the second half of the 1980s, but readers preferred the Michael Lewis version).Salomon, of course, is now a satrapy of Citigroup. And one reason why this period of panic may prove to be more enduring than the last downswing a decade or more ago is that shareholders in public companies prefer steady profits to the Pharaonic quality of earnings in private held investment banks. Morgan Stanley has not seemed the same since it merged with Dean Witter, let alone went public. CSFB, UBS Warburg and Deutsche Bank all belong to large financial groups where shareholder value is no longer synonymous with partner value or even employee value. (Indeed, the interests of shareholders and employees are now strictly antipathetic throughout investment banking: it is pioneering a new form of capitalism in which the employees use the shareholders’ funds to make themselves rich.) Even Goldman Sachs has now gone public. Only the employees of Lehman Brothers, having passed through the stage of ownership by a rich parent much earlier, answer primarily to themselves rather than others. As a result, the appetite for risk and volatility in investment banking is much lower than it was ten years ago. Which almost certainly means that the amplitude of the investment banking cycle will from now on be depressed.But then investment banking is not a single business. Rather, it is a collection of businesses held together more by a cultural affinity than rational management. (Predictably, and despite repeated efforts to change the structures of remuneration, even the most senior investment bankers have little or no incentive to operate in ways which maximise the return of the firm as a whole rather than their little piece of it.) At each firm, the collection is assembled differently, and the parts operate in different ways in the various financial markets of the world. So generalisation is unwise, for each of the separate businesses – broadly speaking, corporate finance, proprietary trading and fund management – is affected by a different mixture of cyclical and secular factors. The need is to divine which aspects of the current downturn in the fortunes of the investment banking industry are likely to endure, and which are likely to prove ephemeral.The cyclical influences are obvious. Companies are rebuilding their balance sheets, as they recover from an orgy of ill-starred mergers and acquisitions fuelled by excessive debt – most of them arranged by fee-hungry investment bankers. So they are not buying or borrowing – in many cases, could not – leaving M & A departments with nothing to do and new issue teams idle. The equity market has marked prices down so severely that both mergers and IPOs are on hold until stock prices start to climb upwards again. Weak equity markets have had a severe effect on the fund management businesses of the investment banks as well, since their fees are geared to stock market values. It is also harder to make money trading in a falling equity market, no matter how well the bond markets are doing in response. The one bright spot is the hedge fund industry, which is naturally booming in weak markets. Any investment bank with a prime brokerage business is benefiting heavily from the boom in alternative investing by both high net worth individuals and institutional investors. But this accounts for a piffling proportion of the institutional business on which the investment banking machines of the 1990s grew fat.In fact, the equity business is the one area of investment banking where an unmistakably secular trend is occurring. Twenty or thirty years ago, most Wall Street investment banks were brokers, not principals. Now not only have spreads narrowed, and execution services been commoditized, research is utterly devalued. No fund manager takes research and investment advice from an investment bank seriously any more – as recent efforts by two major investment banks to enhance the independence and integrity of their coverage belatedly recognises. At the top of the bull market, investment banks made the mistake of thinking they were more important than their customers. Nothing signifies this better than the IPO problems at CSFB, where investment banks effectively concluded that any investor to whom they granted access to hot IPOs owed them a favour, rather than vice-versa. (CSFB to Pay $100 million to Settle IPO Actions) While larger customers got stuffed with paper at absurdly inflated prices (based on self-interested research) many smaller customers got forgotten altogether, and will not be going back. Investment bankers were well paid for their trouble. But the question investors large and small are now asking is this: what value did they add for me? This is a more worrying and systemic threat to the prosperity of investment banking than it appears. For the power of the investment banker is illusory: he operates on the cusp between the sources of capital (the institutional investors) and the demand for it (the corporate sector). And there are signs now of a permanent alteration in the appreciation of the profession of investment banking on both sides of this divide. Institutional investors and fund managers are not only unwilling to pay investment banks for research. They are – under economic as well as regulatory and fiduciary pressure – increasingly willing to skip intermediation by investment banks altogether. More importantly, they are able to do so. The shift from price-driven to order-driven trading downgrades the value of the market-maker. Execution-only services abound. Electronic crossing networks threaten disintermediation of investment banks altogether. Even foreign exchange, already troubled by the introduction of the euro, is being reinvented by multi-bank portals such as Fxall and Atriax. It cannot be long before electronic IPO markets become not another bad memory of the Dot Com boom, but a permanent feature of the landscape. In short, investment bankers are losing the informational advantage on which their standard of living depends. As a result, they are losing control of their corporate clients.The growing confidence of institutional investors has repercussions on the other side of the divide as well. The corporate governance movement is bound to call more merger and acquisition strategies into question. Investment bankers rely heavily on managerial ego to outweigh the growing mountain of evidence that mergers destroy rather than enhance shareholder value. Whatever the benefits of hostile takeovers in aligning the interests of managers and shareholders – and they are real – this is a long-term threat to M & A departments everywhere. Moreover, company managements which have long tolerated the exorbitant costs associated with investment banking advice – in much the same way as they commission consultants to confirm their judgments – are already turning to lower cost, independent alternatives. Investment banks are losing the trust of their clients. All of which means that the investment bank of the future must become little more than a glorified hedge fund, earning most of its keep by proprietary trading. Since the more successful sales-traders, fund managers and research analysts are already leaving in droves to set up their own hedge funds, perhaps even that option is gradually being closed. Anybody running an investment bank today would be well-advised to take a long, hard look not just at the top and bottom lines and the expense ratio, but at the corporate culture and individual personalities bred by the investment banking boom of recent years. If that was Hubris, this could be Nemesis.
*******************************************************************************************************************1The article describes the potential extinction of the Anglo Saxon investment banking system and the revival of the good old universal bank providing 360 degree coverage, perhaps less efficiently but definitely in a more agreeable cultural environment. Maybe this is the big chance for those investment banks (whatever they may look like in the future) which are owned by and sitting under the umbrella of the earnings of the giant commercial and retail banks from Continental Europe – UBS Warburg, Deutsche Bank, Dresdner Kleinwort Wasserstein, BNP, ABN AMRO etc – to really shine. Could this also potentially mean that, perhaps ten years from now, the Continental Europeans will so dominate the business that Frankfurt, Paris and Zurich overtake London as the centre of the global investment banking business?Michael Walther