Currencies

Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Banks

RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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Currencies

Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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Banks

Carney: UK is ‘investment banker for Europe’

The governor of the Bank of England has repeated his calls for a “smooth and orderly” UK exit from the EU, saying that a transition out of the bloc will happen, it was just a case of “when and how”. Responding to the BoE’s latest bank stress tests, where lenders overall emerged with more resilient […]

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Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Archive | November, 2016

Prudential CEO must navigate EU rules

Posted on 31 May 2015 by

Mike Wells, Prudential chief executive©HANDOUT

Mike Wells, Prudential chief executive

When Mike Wells takes the hot seat at Prudential on Monday, he will in effect take charge of four FTSE 100 companies.

Under his predecessor Tidjane Thiam, the group’s market value ballooned by about £28bn. Each of its four divisions — insurance arms in Asia, the US and UK, and the asset manager M&G — could be members of the blue-chip index in their own right.

    Given its recent successes, investors are hoping Prudential will continue under the American in much the same way as it did before: capitalising on the rise of the middle classes in Asia as well as focusing on US and UK baby boomers hitting retirement.

    The incoming chief executive, who has worked for Jackson, the Pru’s US business, for 19 years, has already told shareholders to expect him to refrain from making any radical changes — which he calls “our current strategy-plus”.

    Yet his ability to do so will depend in part on whether he can successfully navigate choppy regulatory waters in the coming months.

    The industry is bracing itself for the new EU-wide Solvency II capital requirements, which finally take effect at the start of next year after a gestation that has lasted more than a decade.

    A fund manager at one of Prudential’s largest 20 institutional shareholders said dealing with Solvency II was the “biggest single short-term challenge” for Mr Wells. “It’s got the potential to really screw things up.”

    Although policy makers in Brussels have already laid down the regulations, national regulators have yet to fine tune the requirements for each large insurance company. The details will be crucial.

    Most big UK insurers face uncertainty while the regulator scrutinises their applications before the rules take effect at the start of next year.

    Yet consultants said the stakes were particularly high for Prudential — partly because doubts remain over how its chunky operations in the US and Asia will be treated.

    Moreover, Prudential’s share price could be especially sensitive to a disappointing outcome, given that they trade at a multiple of 3.5 times the company’s book value — a significant premium to UK peers.

    Prudential gave an indication of the scale of the uncertainty over Solvency II in the small print of its annual report.

    As of the end of December, Prudential held surplus capital of £9.7bn. It had an “economic capital ratio” of 218 per cent — meaning it had more than twice the minimum funds required to back the policies it had written.

    But in the annual report, the group said an unfavourable treatment of its Asia growth engine under Solvency II had the potential to reduce this surplus by £1.9bn, or 23 percentage points.

    It is not just Prudential’s overseas divisions that could be punished under the new regime. Like other UK insurers that write annuities, how its domestic business will be treated also remains uncertain — even though the industry secured a series of concessions from Brussels to make Solvency II less burdensome.

    An increase in capital requirements at its UK annuity business could reduce the group’s buffer by £600m. At the same time, the group said that if was granted “transitional relief” — the ability to phase in the new requirements — for its UK annuity operation, it would boost its capital surplus by £1.3bn.

    Prudential said these were “intended to provide examples and should not be considered indicative of the adjustments that the PRA may ultimately require.” Overall, though, the insurer cautioned that Solvency II “will result in a lower [capital] ratio”.

    Investors regard Prudential as among the best capitalised companies in the sector. Before he left, Mr Thiam said Prudential’s “strong capital position means that Solvency II will be manageable for this group.”

    That said, the imposition of more onerous capital requirements could have tangible consequences for Prudential — such as reducing Mr Wells’ leeway to increase dividend payouts.

    Edward Houghton, analyst at Bernstein, said: “In a worst-case scenario . . . then Prudential’s economic capital ratio could suffer materially.

    “That wouldn’t represent a threat to the current dividend, but it could potentially impact on the group’s ability to progress the dividend as fast as it might otherwise have liked.”

    Under Mr Thiam the group had increased its dividend substantially: in four years, according to Eamonn Flanagan at Shore Capital, Prudential lifted its total annual payout from £510m to £900m.

    Nevertheless, the shares yield a relatively low 2.5 per cent. Although this is partly a function of a relatively high valuation, some analysts believe the group should consider paying out a higher proportion of its earnings.

    A top 20 shareholder said: “There’s scope to significantly increase the dividend.”

    Despite the regulatory challenges, Mr Wells — who could collect an annual pay and bonus package of as much as £7.5m if all goes well — is unlikely to allow the new rules to interfere substantially with the company’s plans.

    In its annual report Prudential repeated its threat to uproot its headquarters from the UK as a last resort, although people familiar with the matter said the company was not actively preparing to do so.

    “We regularly review our range of options to maximise the strategic flexibility,” the report said. “This includes consideration of optimising our domicile as a possible response to an adverse outcome on Solvency II.”

    Shadow banks grab record US loans share

    Posted on 31 May 2015 by

    MIAMI - OCTOBER 01: A for sale sign is displayed outside a home on October 1, 2009 in Miami, Florida. Declining home prices, low mortgages rates and government stimulus programs have helped push up the number of pending home sales according to the National Association of Realtors, as they rose by 6.4 per cent in August and were up by 12.4 per cent from a year ago. (Photo by Joe Raedle/Getty Images)©Getty

    Non-bank lenders have overtaken US banks to grab a record slice of government-backed mortgages, after regulatory curbs on risk-taking and billions of dollars in fines forced mainstream providers to retreat from the $9.8tn home loan market.

    So-called shadow banks such as Quicken Loans, PHH and loanDepot.com accounted for 53 per cent of government-backed mortgages originated in April — almost double their share in April 2013.

      The non-banks’ increased share of home loans comes at a time when big lenders such as Wells Fargo, Bank of America and JPMorgan are pulling back, according to a study by academics at Harvard’s Kennedy School. The banks say they are reacting to tighter capital requirements and heavy penalties for mis-selling imposed by financial watchdogs after the 2008 crisis.

      Shadow banks perform bank-like functions such as lending but are subject to lighter supervision because they are funded by professional investors rather than retail depositors protected by government insurance schemes.

      However, the Department of Justice sued Quicken, the biggest non-bank lender, in April, claiming that it knowingly broke rules when making loans backed by the Federal Housing Administration. Then in May, Fannie Mae and Freddie Mac, the government-controlled mortgage buyers, tightened standards on non-banks servicing mortgages.

      The shadow banks’ rise is one of the “unforeseen consequences” of five years of increasingly tough oversight of depository institutions since the Dodd-Frank Act, said Marshall Lux, senior fellow at the Kennedy School and co-author of the study, which uses data from the American Enterprise Institute’s International Centre on Housing Risk.

      While much of the competition from newer lenders is healthy, he said, there were “concerning” signs of slipping standards in underwriting. That raises risks for the FHA, an 81-year-old agency which insures lenders against losses on certain classes of mortgage, as well as for Fannie and Freddie.

      In the fourth quarter last year the median credit score of FHA-insured non-bank borrowers was 667 on the commonly used FICO scale, compared to 682 for bank borrowers, said Robert Greene, Mr Lux’s co-author.

      Securities linked to risky subprime lending, which generally involves borrowers with scores below 660, were major contributors to the financial crisis.

      Bob Walters, chief economist at Detroit-based Quicken, said that “any implication that non-banks are doing riskier loans than banks is flat-out wrong”. He had not seen the study but said non-banks were performing a vital role for America’s mortgage market.

      “If banks are terrified to originate these [government-backed] loans, because — to use the trading adage — they’re picking up nickels in front of a bulldozer, there is not going to be liquidity.

      – Bob Walters, chief economist at Quicken

      Mr Walters added: “If banks are terrified to originate these [government-backed] loans, because — to use the trading adage — they’re picking up nickels in front of a bulldozer, there is not going to be liquidity. First-time homebuyers, minorities, low-income households; they’re the folks getting squeezed out.”

      The new entrants have also brought new technology to the mortgage-application process that has improved an often lengthy and paper-intensive experience for borrowers, the Kennedy School study notes.

      Regulators should weigh those benefits against the costs of cracking down on non-banks too harshly, said Mr Lux. “If [they] were not in the market, then the American dream of owning your own home would be significantly hurt,” he said.

      Chart

      This month Republicans unveiled a draft bill that they said would ease the burden of regulation for banks in various markets, including mortgages. Senator Richard Shelby, chair of the Senate banking committee, said that “a serious, bipartisan effort” was needed “to reform our mortgage finance system”.

      Stealth pays off at Wells investment arm

      Posted on 31 May 2015 by

      Pedestrians pass in front of a Wells Fargo & Co. bank branch in New York, U.S., on Thursday, April 11, 2013. Wells Fargo was ranked as the largest U.S. residential mortgage servicer at the end of December, with contracts on $1.87 trillion in unpaid home loans. The bank said in 2011 that it would stop originating reverse mortgages. Photographer: Scott Eells/Bloomberg©Bloomberg

      Wells Fargo is quietly building the biggest investment bank no one has ever heard of.

      In the first quarter this year the securities unit — which spans advisory for mergers and acquisitons, capital markets, prime broking and research — earned $445m in net interest income, up more than a third from a year earlier.

        That was enough to win the San Francisco-based lender a spot in the global top 10 investment banking fee-earners for the first time, according to data provider Dealogic. For US business, it ranked even higher — seventh — ahead of Credit Suisse and Deutsche Bank.

        Aside from RBC Capital Markets and Jefferies, “we’re probably the only firm that is growing in any significant way” in investment banking, says Jonathan Weiss, who runs Wells’ securities unit. “Most people are in pretty serious retreat.”

        The development has caused some disquiet among analysts and investors. Several note that John Stumpf, chief executive and chairman, and his predecessor Richard Kovacevich, built Wells into the biggest US bank by market capitalisation by focusing on households across America, and avoiding the kind of risky trading and underwriting that felled some of the biggest players on Wall Street.

        To this day, the penalties Wells has paid for misconduct are much less than peers such as Bank of America, JPMorgan Chase or Citigroup, and relate almost entirely to mortgages. Nor, for example, has Wells been implicated in the foreign exchange or interbank lending rate fixes.

        This relatively light exposure to investment banking — “intrinsically a lower price/earnings business model” — is helping to keep Wells’ valuation ahead of the pack, says Tom Mitchell, an analyst at Miller, Tabak & Co in New York.

        That is why, the bank says, the expansion will be steady, and deliberately low-key.

        $445m

        First-quarter net interest income at Wells Fargo’s securities unit, up more than a third

        “If we’ve been a little stealthy in terms of our build, it is because the strategy is a simple one,” says Mr Weiss, 57, who was promoted to run the securities unit in May last year, replacing John Shrewsberry, who stepped up to be chief financial officer.

        “It’s really been a quiet marketing exercise to identify clients of Wells Fargo that could be, and should be, clients of Wells Fargo Securities.”

        Analysts say that the push into investment banking is partly through necessity, noting signs that Wells’ main profit engine — its ability to sell products from different divisions to the same retail customer — could be beginning to sputter.

        Net income at Wells slipped fractionally in the first quarter, with the average household taking 6.13 products, slightly less than a year before. And in May the bank was hit by a civil lawsuit by the city of Los Angeles, which has accused it of engaging in “unfair, unlawful and fraudulent conduct” through a pervasive culture of high-pressure sales. Wells has said that it will defend itself vigorously.

        “Virtually every bank I’ve followed all want to cross-sell the way Wells Fargo has over the past couple of decades,” says Scott Siefers, an analyst at Sandler O’Neill in New York. “But with $1.7tn in assets it’s tougher to generate outsized growth. You’re moving a battleship versus a speedboat.”

        In the years after Wells bought Wachovia in early 2009 in a deal that transformed the size of its investment bank, much of the growth was a result of hiring. In 2011 two-dozen corporate financiers arrived from Citadel, the hedge fund which had abandoned a plan to become a rival to Goldman Sachs and Morgan Stanley.

        A year later Wells bought an energy-lending unit from BNP Paribas, acquiring about 30 staff in the process, and Merlin Securities, a prime brokerage.

        Mr Weiss says growth will be mostly organic now, with a conscious effort to preserve the bank’s distinctive culture. Wells will not publish a compensation ratio, for example. “Why would we do that?” asks Mr Weiss.

        He adds: “We’re all here to do a good job, and we figure that if we do a good job, we’ll all get well paid.” Nor will it fuss over the much-watched rankings. He quotes a line from Mr Stumpf on how the bank worries less about league tables than kitchen tables, an allusion to its roots in consumer banking, as well as its homely, “aw-shucks” ethos.

        “We don’t see a conflict between being civil and having a good culture and being team-oriented — and succeeding. Quite the contrary,” he says.

        “I think life is kind of a little too short to play with sharp elbows.”

        The ‘best-kept secret’ in fund management

        Posted on 31 May 2015 by

        Robert Leary’s most exhilarating experience after qualifying as a pilot was flying an Aero L-39 Albatros, a Czech jet trainer.

        “It was a ton of fun,” says Mr Leary.

          His earthbound day job also requires him to pilot a highly complex vehicle as president of the $866bn asset management arm of TIAA-CREF, the US financial services provider.

          TIAA-CREF has found itself under fire recently as a supporter of high executive pay. It voted 94 per cent of the time in favour of awards to the 100 most “overpaid” US chief executives in an analysis by As You Sow, a Californian shareholder advocacy group.

          Mr Leary firmly rejects the analysis, arguing that if company boards and management have set appropriate performance targets, then TIAA-CREF will vote in favour of executive pay awards.

          An environmental, social and governance committee, along with a joint committee of the boards overseeing TIAA-CREF’s mutual funds “keep track of what we are doing and the results we are getting”, says Mr Leary in his first interview since becoming president in 2013.

          He dislikes the idea of adversarial relationships between companies and shareholders, emphasising “we are more interested in changing behaviour and getting results than in making a lot of noise, because that is often ineffective”.

          Mr Leary describes TIAA-CREF as “the best-kept secret” in asset management in spite of it being named “best overall large US fund company” by Lipper, the fund research group, for three years in succession.

          Founded in 1918, TIAA-CREF started out offering pension services as the Teachers Insurance and Annuity Association of America. The second part of the unwieldy name followed in 1952 with the launch of the College Retirement Equities Fund, after it was decided that teachers could benefit from owning stocks.

          It is seldom recognised as one of the biggest almond growers worldwide and one of the largest US producers of wine grapes, part of its expanding range of alternative assets that includes energy, infrastructure, private equity and timberland.

          Robert Leary, president of TIAA-CREF

          It is also one of the world’s largest agriculture investors, running 1.2m acres of farmland, along with an $82bn property portfolio. This makes it one of the largest property managers globally.

          “People are always amazed when we tell our story because we are such a well-kept secret,” says the 54-year-old.

          He adds that “a big part of the appeal in taking my current role was the opportunity to build a globally recognised asset management business”.

          But for much of its history, TIAA-CREF “was not really run as a [profitmaking] business”, according to Mr Leary.

          It launched its first mutual funds in 1997 but the process of change really began with the 2006 US Pension Protection Act. This legislation brought “a lot more competitors” into not-for-profit retirement business. It also required TIAA-CREF to become “open architecture” and offer products managed by rivals as well as its own funds.

          “TIAA-CREF realised right away that it would face greater competition in its traditional retirement plan market from rivals such as Vanguard and Fidelity,” says Mr Leary.

          Acquisitions and deals have played a significant role in the transformation process that followed.

          It bought Westchester, an agricultural manager, in 2010, followed by GreenWood Resources, an Oregon-based timberland specialist with a strong presence in the America, Europe and Asia, in 2012.

          CV


          Born 1961

          Total pay Not disclosed

          Education

          1983 BA, Union College, Schenectady
          1986 Juris doctor, Fordham University law school, New York

          Career

          1986-90 Associate, White & Case, New York and Jeddah
          1990-95 Vice-president, JPMorgan, New York
          1995-2007 Executive vice-president, AIG Financial Products; president, AIG Financial Securities, American International Group
          2007-10 Chairman and chief executive, ING IM Americas
          2010-11 Chief executive, ING Insurance US
          2011-12 President and chief executive, ING Insurance US
          2013 to present New York executive vice-president and president of asset management, TIAA-CREF

          Mr Leary says that it has been “over the past five or six years that TIAA-CREF has really expanded into a global asset management business and become a real leader in mutual funds. That is very correlated to our retirement plan business, which is also continuing to grow.”

          Last year, TIAA-CREF completed the asset management industry’s biggest deal since the financial crisis, acquiring Nuveen Investments for $6.25bn from Madison Dearborn Partners, a private equity house. The deal boosted TIAA-CREF’s assets by $221bn and elevated it into the top-15 ranking of US mutual fund providers.

          Nuveen is a multi-boutique of seven businesses: Gresham, a commodities specialist; Winslow Capital, a large-cap growth manager; Santa Barbara, a dividend focused manager; Tradewinds, a global equity sector specialist; NWQ, a value-focused manager and Symphony, a corporate credit and equity business, alongside Nuveen’s in-house asset management operations. “We really liked the culture and values of Nuveen. It has proved to be a very good fit,” he says.

          Along with the expansion in investment capabilities, Mr Leary describes Nuveen as a “powerhouse in retail distribution” with a large registered investment adviser network (a client area where TIAA-CREF lacked scale). The acquisition also bolstered the group’s presence among Taft-Hartley labour union investors.

          Nuveen manages a range of European-domiciled Ucits funds, an area Mr Leary has identified for expansion as part of a drive to expand its global client base.

          “The bulk of our clients are still US. We would like to become more global. Although we have been growing significantly, we are not as large as we would like to be in Europe or Asia. But we are doing a bit better in Latin America and the Middle East,” he says.

          TIAA-CREF


          Founded 1918

          Assets under management $866bn (March 31 2015)

          Employees 12,500

          Headquarters New York, with 130 offices worldwide

          Ownership Private

          All of this activity means the house has “no big gaps” in its investment capabilities. Mr Leary says it “could be bigger” in infrastructure and energy, while it also remains “a little smaller than we would like” in emerging markets and will continue to look for small-cap equity managers.

          The exchange traded funds industry’s massive inflows have also caught Mr Leary’s eye. Nuveen has applied to US regulators for permission to launch an actively managed ETF and it already acts as sub-adviser to State Street Global Advisors on a small range of passive bond ETFs.

          But aware of the lead already established by other ETF managers, Mr Leary remains cautious. “The question is where do we want to play, if at all. Real assets have looked like a more attractive area but we will continue to re-examine possibilities in ETFs.”

          Other deals have followed under Mr Leary’s leadership. This year TIAA-CREF bought Henderson out of a $26bn property joint venture the duo established in 2013.

          It has also established a US corporate lending business, Churchill Asset Management, with an experienced team that previously worked at Carlyle, the private equity group.

          TIAA-CREF further runs socially responsible funds with assets of around $17bn, an area where Mr Leary hints there are “plans to do more”, particularly in Europe.

          However, he has no time to explain further with an aeroplane to New York to catch “but as passenger, not a pilot, on this flight”.

          US demand for EU infrastructure rises

          Posted on 31 May 2015 by

          SOUTH QUEENSFERRY, SCOTLAND - FEBRUARY 18: Construction continues on the new bridge crossing over the Firth of Forth on February 18, 2015 in South Queensferry. The three towers of the new Queensferry Crossing are now at road deck level. The new bridge will be £50 million below the previous budget estimate of between £1.4 billion and £1.45 billion. (Photo by Jeff J Mitchell/Getty Images)©Getty

          Canadian and US investor demand for infrastructure opportunities in Europe is on the rise, confounding fears that political uncertainty about the future of the eurozone could cause foreign investments in the economic bloc to fall.

          Europe’s ability to attract foreign backers for large infrastructure projects has been called into question this year in light of fears about a potential Greek exit from the eurozone and a UK exit from the EU.

            Despite these pressures, North American interest in European infrastructure is on the rise, according to a survey of 305 institutional investors in the US and Canada carried out in the first quarter of 2015.

            The survey, conducted by Armstrong International, an executive search firm, attempted to gauge whether North American investors, including pension funds and endowments with assets of between $1bn and $200bn, are interested in alternative asset classes such as hedge funds, infrastructure and private equity.

            The responses showed that European infrastructure is one of the most popular asset classes among these investors, with half stating that they are considering allocations to foreign infrastructure.

            More than three-quarters of those surveyed said that they are already investing in European alternatives and are considering raising their allocations. Of those that do not currently invest in European alternatives, three-quarters said they are considering investing in the region.

            Armstrong attributed the rising demand for European infrastructure investments to the fact that “in prolonged, low-yield environments, institutional investors [look] to the infrastructure sector as an asset class that can provide predictable yields”.

            David Scott, partner in the infrastructure team at Deloitte, the consultancy, says he has noticed a sharp increase in the number of US pension funds willing to make direct investments in European infrastructure over the past five years, as opposed to merely putting money in infrastructure funds run by third parties. He added that the forthcoming UK referendum on membership of the EU has had no impact on demand for participation in domestic deals.

            North American interest in European infrastructure is not entirely new; global investors’ allocations to European infrastructure assets between 2010 and 2013 were 465 per cent higher than in the previous four years, according to Linklaters, the law firm. It attributed this rise to demand from big investors in Canada, as well as China, South Korea and Japan.

            There is more capital looking for deals than there are available deals

            What the Armstrong survey demonstrates, however, is that midsized pension funds across Canada and the US are keen to get involved alongside the large institutions and sovereign wealth funds that have been investing in European infrastructure for some time.

            Boe Pahari, global head of infrastructure equity at AMP Capital, the Australian asset manager, agrees that “the US pension fund market is becoming more conscious of overseas opportunities, particularly given that Europe is coming out of the financial crisis”.

            North American investors have accounted for 22 per cent of the €25bn of assets allocated to European infrastructure projects so far this year, according to Preqin, the data provider. In proportional terms this is a sharp increase on 2014, when they accounted for 10 per cent of the €85bn spent on European infrastructure deals.

            22%

            The percentage of the €25bn of assets allocated to European infrastructure projects so far this year accounted for by North American investors

            If the pool of investors willing to back large infrastructure projects widens, this could have a significant impact on the European economy. Linklaters estimates that global institutional investors have $1tn at their disposal for investments in European infrastructure assets over the next 10 years. The law firm predicted that if fully invested, this capital could raise the EU’s gross domestic product by 1.4 per cent by 2023.

            As demand for infrastructure opportunities in Europe rises, competition for involvement in the best deals has intensified. Mr Scott says: “Competition is pretty strong at the moment. There is a lot of capital that is looking for the right investment and I suspect at the moment there is more capital looking for deals than there are available deals.”

            The countries that are most oversubscribed are the UK, the Nordics and Germany, which is pushing investors towards Mediterranean countries where returns are more promising, according to Mr Pahari. “When people look at the UK or the Nordics today, there is not a lot of growth that is possible, given the pricing,” he says.

            Mr Scott similarly notes that there is greater interest in countries that were considered too risky five years ago, notably Spain and Portugal, while some of the countries more traditionally perceived as havens have suffered a blow to their reputations.

            France, for example, has worried some institutional investors due to a long-running dispute between the government and the country’s motorway operators — which include the likes of Macquarie, the Australian financial group, and Vinci, the French construction company — over whether they can raise tariffs.

            In 2012, the Norwegian government stunned investors when it said it would slash the tariffs that Gassled, the country’s undersea gas pipeline network, can charge for transporting fuel by up to 90 per cent from 2016. The ruling came just months after several international investors and energy companies bought a stake in the pipeline network from Statoil, the Norwegian oil and gas company.

            $1tn

            Estimated amount institutional investors have at their disposal for investments in European infrastructure assets over the next 10 years

            Armstrong warned: “If [the desire for stable yields] is one of the reasons driving increased interest, many investors may be disappointed. Infrastructure returns can be lumpy.”

            Mr Scott accepts that European infrastructure is far from risk free. He says: “Clearly the biggest risks are a change in regulation or in the tax regime. If investors are looking to generate long-term stable cash flows, what would hurt them is a change in regulation that would change the revenues.”

            But he adds: “I do think this is a pretty resilient asset class. It is less prone to the risk of shocks than most [investments]. Everyone needs to use water from a water business.”

            Mr Pahari also concedes that investments will “always have some element of regulatory risk”, although he believes this can be planned for.

            He says: “There will always be a need for governments to raise taxes or find fiscal levers to manage their budgets, but governments will need to balance that with the need to find private capital, and they are in competition with each other to attract capital. Having international investors is seen as a good thing. This is the beginning of a lot more privatisation around Europe.”

            Infrastructure deals: If you build it, they will invest

            Big investors, including many of the world’s largest pension funds and sovereign wealth funds, have long been backers of European infrastructure projects. Canadian pension funds have been at the forefront of that trend.

            Ontario Teachers, for instance, has bought stakes in the airports of Birmingham, Bristol, Brussels and Copenhagen, while Borealis, the investment arm of Canadian pension fund Omers, acquired a Finnish electricity network in
            2014 and a Czech natural gas distributor in 2013.

            Calpers, the largest US public pension fund, has similarly been active in Europe, acquiring a 12.7 per cent stake in Gatwick airport
            in 2010.

            The desire to get involved in European infrastructure deals extends beyond North American investors.

            In 2012, China Investment Corporation, the Chinese sovereign wealth fund, bought a 10 per cent stake in Heathrow, the UK’s largest airport.

            The Chinese fund also bought a 7 per cent stake in Eutelsat, the French satellite company, in 2012; a 9 per cent stake in Thames Water, the UK utility, in 2012; and a 30 per cent stake in the exploration and production business of GDF Suez (now Engie), the French electricity company, in 2011.

            In 2013, meanwhile, Sumitomo Corporation of Japan agreed to pay £165m for Sutton and East Surrey Water, another UK supplier.

            New rules let Visa, Mastercard enter China

            Posted on 31 May 2015 by

            The China UnionPay Data Co. logo is displayed outside a restaurant in Beijing, China, on Thursday, Sept. 16, 2010. The U.S. filed two complaints against China at the World Trade Organization, concerned that curbs on payment-processing companies such as MasterCard Inc. and Visa Inc. are at a disadvantage because China favors a monopoly provider, China UnionPay Data Co. The second complaint is over dumping duties on more than $200 million of U.S.-made steel products. Photographer: Nelson Ching/Bloomberg©Bloomberg

            Global bank card operators including Visa and Mastercard can seek licenses to clear domestic Chinese payments starting on Monday, following a long-running struggle to penetrate a market dominated by a powerful state-backed incumbent.

            The biggest share prices gains for both Visa and Mastercard over the last year have come in response to Chinese government policies that open the local payment card market to foreign players.

              In late October, China’s cabinet announced it allow foreign companies to access the market. The government followed up in April with specific rules, which come into effect on June 1.

              Previously, all renminbi payments had to be cleared through China UnionPay, a network created by the central bank and now owned by 85 mostly state-owned banks. But in 2012, the World Trade Organisation ruled that China unfairly discriminated against foreign payment processors, handing a victory to the US, which brought the complaint.

              Industry experts say foreign players still face major challenges in trying to win market share from UnionPay, the settlement network used by 80 per cent of debit cards accounting for 72 per cent of total transaction value in 2014, according to Datamonitor.

              “Visa and Mastercard need to build up their local infrastructure. In the past they just operated as a sales office. They don’t really have the physical presence,” said James Chen, former China general manager for Mastercard and now greater China general manager at First Data Corp.

              “They need to start to recruit people and buy equipment — basically build from ground zero.”

              Chinese banks do issue Visa, Mastercard and American Express credit cards — whose payments are processed through their foreign-currency networks — but few Chinese merchants accept them. Instead, Chinese cardholders use them mainly for foreign travel.

              Before 2010, many banks issued dual-currency credit cards with both a UnionPay and a foreign logo. But dual-currency cards were largely halted after a dispute between Visa and UnionPay in 2010.

              Central bank data shows that banks had issued 4.9bn debit and credit cards in the country by the end of 2014, with retail payments totalling Rmb42tn ($6.8tn), a third higher than 2013.

              Even after the new rules take effect, foreign operators face a long road. Though now ostensibly independent from the government, UnionPay has been chaired by a succession of former senior officials from the People’s Bank of China, and the government is keen to support the company’s growth both within China and overseas, where its cards are now accepted in 150 countries.

              “Realistically Visa and MasterCard are not going to be the dominant card networks in China in the near future,” said Tristan Hugo-Webb, associate director of global payments at Mercator Advisory.

              “Nonetheless, even a small share of the fast-growing Chinese electronic payment market will be a big boon for Visa and MasterCard as they increasingly face competition from other players in the global payments marketplace.”

              Twitter: @gabewildau

              Movers & shakers: June 1

              Posted on 31 May 2015 by

              Andrew “Buddy” Donohue is returning to the Securities and Exchange Commission as chief of staff in June after leaving Goldman Sachs’ asset management arm. Mr Donohue (pictured), who served as director of the SEC’s division of investment management between 2006 and 2010, replaces Lona Nallengara, who is leaving the SEC.

              ● The Abu Dhabi Investment Authority has appointed John Pandtle as head of the US in Adia’s internal equities department, a newly created position. Mr Pandtle joins the sovereign wealth fund from Eagle Asset Management in Florida.

                OM Asset Management, the $224bn US-listed multi-boutique, has hired Trevedi Tewari as head of institutional for the UK and Ireland. Mr Tewari joins from Scottish Widows Investment Partnership.

                GAM, the Swiss-listed $127bn global asset manager, has appointed Richard McNamara as chief financial officer. Mr McNamara, who will join in the second half of 2015 from Henderson, is replacing Marco Suter, who will remain at GAM as a senior adviser.

                Aviva Investors has hired James Tothill as head of third-party sales. Mr Tothill joins the £246bn asset management arm of Aviva, the insurer, from Aria Capital Management.

                The Swedish Investment Fund Association has a new chief executive. Fredrik Nordström will take on the role in October from the current chief executive, Pia Nilsson, who is retiring. Mr Nordström is a former chief executive of AMF Fonder, the fund management arm of AMF, the SKr552bn Swedish pension provider.

                Effie Datson is to join State Street as global head of product for its alternative investment solutions division, a newly created role. Ms Datson, who will focus on expanding InfraHedge, State Street’s $15bn managed account platform, joins from Deutsche Bank where she was global co-head of hedge fund sales.

                ● The $5bn Municipal Employees’ Annuity and Benefit Fund of Chicago has chosen Juan Lopez as its new investment officer. Mr Lopez, who joined from Watermark Investment Advisors, replaces Michael Walsh, who left in October to become the CIO of the Laborers’ Annuity and Benefit Fund of Chicago.

                ● Two hires for the cross-asset solutions team at Unigestion, the $17.8bn Swiss-based asset manager. Luca Simoncelli, who will be responsible for institutional clients in the UK, joins from BlackRock. Florian Ielpo takes on the role of head of macroeconomic research in the Geneva office after moving from Lombard Odier Investment Managers.

                Kathleen Jacobs is to take on the role of chief investment officer of New York University’s $3.5bn endowment. Ms Jacobs, who served previously as managing director in the office of investments for the New York Presbyterian Hospital, replaces Tina Surh, who stepped down in December.

                Valeria Falcone has moved to Cornerstone as country head of Italy for the $47bn global real estate investment manager, from Carlyle, the private equity group.

                TCW, the $180bn Los Angeles-based asset manager, has hired Brian Ford as a senior vice-president for the institutional marketing team, from Pimco.

                Some fund houses ‘manipulate’ benchmarks

                Posted on 31 May 2015 by

                The fund industry has been dealt a damaging blow by its own professional body. It has accused asset managers of selecting inappropriate benchmarks in a bid to market themselves more easily to investors.

                The CFA Society of the UK, a body that provides training to 11,000 investment professionals, said it has found evidence of fund managers “misusing benchmarks to demonstrate that they have skill when, in fact, this can just be an illusion”.

                  In a report issued by the society, examining how fund managers select benchmarks and indices, it found that poor practices range from selecting and using inappropriate benchmarks to overlooking the impact of leverage.

                  Fund groups might be tempted to misuse benchmarks in this way if they are “more interested in asset gathering than in delivering performance to clients”, said Will Goodhart, chief executive of CFA UK.

                  Jake Moeller, head of UK research at Lipper, the data provider, agreed there was scope for benchmarks to be misused.

                  “Benchmarking can certainly be manipulated if the fund manager nominates a benchmark that makes them look good in a certain sector. That is a problem,” he said. “Some smaller houses will try and paint their performance in as good a light as possible when they want to get assets.”

                  An asset manager could nominate a large-company stock index as their benchmark, for example, but primarily invest in mid-sized companies, Mr Moeller said. This could unfairly flatter their performance.

                  Mr Moeller said it was unlikely that “reputable” fund houses engaged in such practices. “I do not think fund groups are that cynical. Most fund managers work on a best-practice basis and reputable fund groups do not want to be seen to be manipulating benchmarks,” he said.

                  Mr Goodhart urged investors to ask more questions of their asset managers about which benchmarks have been selected in order to tackle this problem. He added that regulators might apply more scrutiny to benchmark selection.

                  Some smaller houses will try and paint their performance in as good a light as possible

                  Dominic Johnson, chairman of the New City Initiative, an association representing 49 asset management companies, said regulatory attention was unnecessary. “I am always loath to encourage greater scrutiny from regulators — then you got box-ticking,” he said. “I don’t think [benchmark selection] needs regulatory control but it does need greater education.”

                  CFA UK also criticised the industry for failing to highlight additional costs to investors when marketing new products to them, particularly with respect to the increasingly popular smart beta category of funds — strategies that aim to provide a better risk/return trade-off than traditional market capitalisation-weighted indices.

                  “All too often innovation in the world of indices overlooks the necessary cost-benefit analysis. While new indices might look more attractive than traditional cap-weighted indices, it is rare for providers to indicate the additional costs involved. These alternative indices vary in terms of their costs and net benefits,” the report said.

                  SEC issues new warning to private equity

                  Posted on 31 May 2015 by

                  The US regulator has issued a fresh warning to the $3.5tn private equity industry to expect more fines and enforcement actions for overcharging investors with inappropriate fees and expenses.

                  The Securities and Exchange Commission said there was “still room for improvement” on private equity managers’ fees and expense allocations, while also acknowledging that “some progress” had been made following its warning in 2014 that the industry should expect greater scrutiny from regulators.

                    Speaking in May at a conference in New York, Marc Wyatt, acting director of the SEC’s Office of Compliance Inspections and Examinations, said “many managers” seemed to believe that if investors did not object to how they were being charged expenses, then these costs were legitimate.

                    He noted that it was common practice for managers to shift expenses from parallel funds created for friends, family and preferred investors to their flagship funds.

                    With more private equity managers developing investment vehicles that will be open to retail investors, Mr Wyatt said “full transparency [on fees and expenses] is essential”.

                    The SEC has broadened its investigation to look at private equity real estate managers, where the regulator has identified instances of investors being overcharged for property management and legal services.

                    It also highlighted concerns about the co-investment trend, where large investors participate in “invitation-only” opportunities alongside private equity managers. Co-investments are less costly than investing in a conventional private equity fund. The SEC said it was concerned that investors in private equity funds were not being informed properly about co-investments by other investors.

                    Steve Judge, chief executive of the Private Equity Growth Capital Council, a trade body, said agreements between private equity managers and institutional investors were “the result of highly negotiated terms between sophisticated parties, with updated information [being] continually provided throughout the life cycle of a fund”.

                    If private equity firms decided to enter the retail investor space, said Mr Judge, “we anticipate a similar focus on appropriate transparency and successful partnerships with these investors”.

                    John Carney, co-head of corporate investigations at BakerHostetler, the law firm, said the SEC was being “very robust” in its examinations of private equity managers.

                    “However, it is not clear if the SEC is catching only minor infractions that will result in speeding tickets or uncovering major fraud, instances where investors are being intentionally deceived with non-transparent and extremely complex fee and expense arrangements,” said Mr Carney, a former senior counsel and securities fraud chief at the SEC.

                    The comments by Mr Wyatt followed a now infamous speech, entitled “Spreading sunshine in private equity” by his predecessor, Andrew Bowden, in 2014. Mr Bowden described many of the standard industry contracts as “an enormous grey area” that allowed hidden and “backdoor” fees to be charged to investors.

                    Private equity groups were inundated with questions from concerned investors following Mr Bowden’s comments.

                    How will private equity managers react to the reality of SEC oversight? The regulator is carrying a big stick

                    Blackstone, the world’s largest buyout fund manager, said it would stop levying some of the fees it had been charging its portfolio companies, bowing to pressure from the regulator.

                    Professor Ludovic Phalippou, a finance professor at the University of Oxford Saïd Business School who specialises in private equity, said: “Bowden’s ‘sunshine’ speech freaked out the entire PE industry” as some of the practices identified by the SEC had been going on for at least 20 years.

                    Private equity partnership agreements should be “simplified and standardised” to address conflicts of interest, said Prof Phalippou.

                    He cautioned that the move by private equity managers to repay monitoring fees charged to portfolio companies “could be window dressing” to persuade investors that their behaviour had changed.

                    Jay Baris, chairman of the investment management practice at Morrison & Foerster, a law firm, said private equity managers had been accustomed to flying below the radar of regulators.

                    “How will private equity managers react to the reality of SEC oversight? The regulator is carrying a big stick and it is a real challenge,” said Mr Baris.

                    Prof Phalippou said the SEC’s investigations also raised important questions for regulators in other countries.

                    “Without the SEC, these practices would still be going on. Why is the UK regulator — and supervisors in other countries — asleep?”, he asked.

                    US endowments cut private equity stake

                    Posted on 31 May 2015 by

                    General atmosphere at 2013 Harvard University 362nd Commencement Exercises at Harvard University on May 30, 2013 in Cambridge, Massachusetts.©Getty

                    Harvard University commencement exercises

                    Large US endowments have cut their allocations to private equity by a fifth as a mountain of money already committed to the asset class threatens to drive up already high deal prices.

                    US endowments with more than $1bn in assets cut their allocation to 12 per cent in 2014, from 15 per cent a year earlier, according to the annual Commonfund report on endowments.

                      “Big endowments and other high-profile investors that are trimming private equity target allocations, after years of increasing them, are doing so because of the difficulties they face trying to recycle two years’ worth of exceptional, record-high cash distributions from private equity,” said Antoine Dréan, chairman of Triago, a private equity adviser.

                      “Many investors feel there are not enough high-quality classic private equity funds currently raising money to permit them to easily reinvest that amount of cash without lowering the level of return they have come to expect from the asset class.”

                      Private equity managers are unlikely to be losing sleep over this pullback, however. Investors such as the Harvard Management Company said the retrenchment is a cyclical move prompted by the volume of “dry powder” rather than a loss of faith in the asset class. Dry powder, already committed capital yet to be put to work, is sitting at a record $1.2tn according to Preqin, the data provider.

                      In its annual endowment letter, HMC, which manages the university’s $36bn endowment, said it was “aware that market conditions in private equity are somewhat heated today”, adding “as a result, actual exposure to private equity may decrease in the near term before it increases”.

                      The California Institute of Technology’s endowment said in its annual report it had just 8 per cent in private equity, compared with its 11 per cent target, because deal pricing was excessive.

                      Private equity houses bought companies for an average enterprise value of 10 times their earnings before interest, tax, depreciation and amortisation last year, according to S&P Capital IQ LCD data, marking a post-crisis high. Several deals so far this year have been struck at richer valuations still.

                      Yale’s endowment, an early proponent of private equity investing under David Swensen, its chief investment officer, has led the way in reducing its exposure, too. In 2013, well ahead of the pack, Yale said it would cut its allocation target from 35 per cent to 31 per cent.

                      Public pension funds are following suit. California’s Calpers reduced its target allocation to 10 per cent from 14 per cent last year, ahead of conducting a comprehensive review of its relationships with private equity managers.

                      The review is expected to rationalise the number of managers Calpers deals with, but the fund said it would maintain its target allocation.

                      In December, the Pennsylvania Public School Employees’ Retirement System sold a $1.75bn portfolio of private equity funds as part of a plan to cut its exposure to the sector to 15 per cent.

                      As a result, some private equity houses are now struggling to raise new money.

                      “Funds that have relied primarily on financial leverage and a generally rising tide of asset prices have the hardest time raising money,” said Mr Dréan.

                      He expects cash to start flowing to “new geographies and new niches within private equity”, such as emerging markets, litigation funding and lower cost structures such as co-investment.