Investor Demands (More! Less!) Show Financial Illiteracy

Investors who participated in a major study on financial literacy published last week spoke clearly: They want more information, more data, more disclosures.

Except when they want less. They want it formatted in tables and, also, not formatted in tables. They demand that the information be posted online, and will only read it in print.

With contradictory findings like these, the report, by the Securities and Exchange Commission, illustrates just how difficult it will be to make Americans smarter about finance: More disclosure doesn’t always mean better disclosure, and if you ask investors what they want, they don’t necessarily agree or even know how to answer.

Consider what happened when the SEC showed study participants mocked-up prospectuses (PDF) for three imaginary mutual funds, which were nicknamed Petunia, Hydrangea Bush, and Gardenia. All three look similar, with charts, graphs, and the like, but with one exception: The paperwork for Petunia and Hydrangea Bush was two pages long, while Gardenia used four pages. The study subjects recoiled at the longer document—rating the Gardenia fund prospectus harder to understand, less visually appealing, less user-friendly, and packed with too much legal jargon.

Hostility to lengthy paperwork is an obstacle for those who are calling on money managers to tell investors more about fee structures, strategies, conflicts of interest, and other important topics. In May, for example, Morningstar (MORN) urged the SEC to require target-date funds (PDF) to show graphs illustrating how their products shift their holdings over time.

“There’s a bit of a diminishing value because the more that is disclosed to us, we may be less likely to pay attention to it,” one member of a Baltimore focus group told SEC researchers. “So somewhere they’ve got to decide the tipping point when people are just going to tune it out because it looks like it’s just too onerous.”

Confusing documents are just one of the reasons American investors consistently flunk financial literacy tests. Last week’s report, which was mandated by the 2010 Dodd-Frank financial overhaul law, painted an especially brutal picture. “Investors have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud,” SEC staff wrote. Women, African Americans, Hispanics, the elderly, and undereducated groups are worse than the average.

“Studies have found that investors do not understand the most elementary financial concepts, such as compound interest and inflation,” they added, citing Library of Congress research. “Studies have also found that many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds.”

“Look, financial things have become more complicated. And we do not explain it very well,” Muriel Siebert, a longtime advocate for financial education, said in an interview. “The funds have gotten more complicated than they were originally. The information is there, but [investors] don’t have the knowledge as to how to take it apart.”

No investor advocates want people to have access to less information, of course. What’s probably called for at this point, rather, is better information, formatted in ways that don’t cause eyes to glaze over. The 40 million-member American Association of Retired Persons (AARP) has called on the SEC to use “information design professionals” to recreate common paperwork so it can be understood by the average investor. The Consumer Federation of America made a similar push to “incorporate lessons from behavioral economics, graphic design, and disclosure design.”

The result, in theory, would be disclosure forms that are clearer, less imposing, and highlight important facts without overwhelming.

Otherwise, the views of some SEC focus group members will continue to be common. “Even though this information may be important,” one said of the current way disclosures are supplied, “it’s more information than I personally want to deal with.”

Summers covers Wall Street and finance for Bloomberg Businessweek.

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No Investor Backlash Over Banks' Credit Downgrades

So turns the post-subprime bizarro world of credit-rating companies: Moody’s Investors Service (MCO)  downgraded Morgan Stanley (MS), Credit Suisse Group (CS), and 13 other banks. Today the banks respond by … rallying? Has the sector no shame? Or do credit ratings perhaps not mean what they used to?

“All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital-markets activities,” Greg Bauer, Moody’s global banking managing director, said in a June 21 statement.

That sounded dour enough, especially with everyone so worried about the systemic reverberations that could emanate from a full-blown euro crisis. Moody’s reduced Morgan Stanley’s long-term senior unsecured debt rating two grades to Baa1, while nine other banks, including Switzerland’s UBS (UBS), got two-level cuts; Credit Suisse was taken down three levels to A2. Meanwhile, in a Scarlet Letter-like rebuke, Goldman Sachs (GS) now must endure the ignominy of an A3 rating on its senior debt—the lowest in the storied investment bank’s history.

This all comes after Moody’s in February said it was reviewing the health of 17 banks. So investors have had four months—which included JPMorgan Chase’s (JPM) bombshell trading-loss revelation, as well as fresh fear and loathing out of Athens and Madrid—to price in new concerns.

Shares of all the firms affected by the downgrade were up Friday in early trading, several by more than 2 percent, with financials leading gains in the Standard & Poor’s 500-stock index. Notably, the cost to protect Morgan Stanley debt against losses dropped to the lowest in more than seven weeks, while credit-default swaps linked to Bank of America (BAC) and Citigroup (C) also improved.

The banks themselves were defiant. Citigroup, which took a cut from Moody’s to its lowest rating since it was formed 14 years ago, said in a statement: “Moody’s approach is backward-looking and fails to recognize Citi’s transformation over the past several years. Citi believes that investors and clients have become much more sophisticated in their credit analysis over the past few years, and that few rely on ratings alone—particularly from a single agency—to make their credit decisions.” The bank said it was “especially surprised” at the ”disproportionately adverse treatment” it says Moody’s has given U.S. banks compared with their European counterparts. Moody’s included Citi among a list of four banks, including Morgan Stanley, Bank of America, and Royal Bank of Scotland Group (RBS), that have a history of “high volatility” and problems with risk management.

Edinburgh-based RBS, the majority U.K. taxpayer-owned lender that took the biggest bailout in the global financial crisis, said the Moody’s action “is backward-looking and does not give adequate credit for the substantial improvements the group has made to its balance sheet, funding, and risk profile.” For its part, Morgan Stanley said that while the new ratings “are better than its initial guidance of up to three notches, we believe the ratings still do not fully reflect the key strategic actions we have taken in recent years.”

Citi further used the Moody’s downgrade to lend its bailed-out moral suasion to the anti-ratings companies movement. ”Investors and clients should make their own decisions,” the bank said. “Citi is aware that analytical alternatives to the ratings agencies exist today from several providers that would further enhance the ability of investors and clients to arrive at their own conclusions without being captive to the judgments of rating agencies.”

The ghost of subprime lingers for the ratings companies. As housing and financials led the economy into its deepest dive in a generation, Moody’s, Standard & Poor’s (MHP), and Fitch Ratings were all late to recognize the error of their overly optimistic credit ratings on everything from mortgage-backed securities to bank debt. They have since been trying to win back the reputational clout they enjoyed before the crisis. The cuts by Moody’s are “a mea culpa from 2007 and 2008,” says James Leonard, a credit analyst with Morningstar (MORN). “The banks have gotten so much better in the last few years in terms of capital, yet their ratings keep going down. What does that tell you? That the ratings were so wrong before.”

“To downgrade a BofA or Citigroup or companies that are sitting on hundreds of billions of dollars of cash in government-backed securities makes no sense,” added Dick Bove, the oft-quoted banks analyst, in an interview on Bloomberg Radio. “You can forget Moody’s,” he said. “You should have forgotten them a long time ago.”

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Investment Guide - How To Become A Rich Investor

Cutting Buffett Helps Sequoia Fund Top Value Investor Rankings

December 29, 2011, 6:15 AM EST By Charles Stein

Dec. 29 (Bloomberg) -- Sequoia Fund Inc., recommended by Warren Buffett when it opened, beat the U.S. stock market over the past four decades, in part because a large piece of the fund was invested in his company, Berkshire Hathaway Inc.

Heeding Buffett’s warning that Berkshire wouldn’t grow as fast as it once did, the managers of the $4.7 billion fund cut their reliance on the stock almost in half in 2010 and put the cash into companies such as Valeant Pharmaceuticals International Inc., a drug distributor. Sequoia is beating the pack again this year, gaining 14 percent through Dec. 27, better than 99 percent of value stock funds, according to data compiled by Bloomberg.

“They have the kind of portfolio Buffett might have if he ran a mutual fund,” Steven Roge, a portfolio manager with Bohemia, New York-based R.W. Roge & Co., said in a telephone interview. His firm, which oversees $200 million, holds shares in Sequoia.

Like Buffett, the managers of Sequoia look for high-quality companies with competitive advantages that the fund can hang onto for long periods. While the scale of Buffett’s $68 billion stock portfolio forces him to buy mainly the largest companies, Sequoia is small enough to benefit from investments in mid-sized businesses.

The fund beat 97 percent of peers over the past 10 and 15 years, according to Morningstar Inc. in Chicago. From 1970 to 2010 the fund returned 14 percent annually, compared with 11 percent for the Standard & Poor’s 500 Index. In its best year, 1976, the fund gained 72 percent, according to “The Warren Buffett Way” (John Wiley & Sons, 1994) by Robert Hagstrom. It lost 27 percent in its worst year, 2008.

Buffett’s Praise

Sequoia Fund was co-founded in 1970 by Richard Cunniff and William Ruane, a friend of Buffett since both studied under legendary value investor Benjamin Graham at Columbia University in 1951. When Buffett shut down his investment partnership in 1969 to concentrate on Berkshire Hathaway, he recommended that his clients invest with Ruane.

“Bill formed Sequoia Fund to take care of the smaller investor,” Buffett wrote in an e-mailed response to questions. “A significant percentage of my former partners went with him and many of those still living have their holdings of Sequoia.”

Ruane ran an unconventional fund, closing Sequoia to new investors in 1982 because he didn’t want its size to limit what the fund could buy. It opened again in 2008, three years after Ruane’s death.

Ruane also held a concentrated portfolio. In 2003, Sequoia had 75 percent of its money in its top six holdings, according to a regulatory filing.

‘Six Best Ideas’

Ruane believed that “your six best ideas in life are going to do the best,” David Poppe, who now runs the fund together with Robert Goldfarb, said at a May 2011 investor day for Ruane, Cunniff & Goldfarb Inc., the New York firm that advises Sequoia.

Poppe and Goldfarb didn’t respond to a request to be interviewed. The two were named domestic stock managers of the year for 2010 by Morningstar. They are finalists for the same award for 2011.

Since Ruane’s death, the firm has hired more analysts and added more holdings to the portfolio. At the end of 2010, Sequoia held 34 stocks, an all-time high, according to a letter to shareholders in the fund’s 2010 annual report. The same letter explained why Sequoia reduced its stake in Berkshire Hathaway.

Cutting Berkshire

“When Warren Buffett tells the public that Berkshire’s growth rate will slow in the future, it behooves one to listen,” the fund’s managers wrote. Buffett has said on a number of occasions that a company of Berkshire’s size can’t grow at the pace it did when it was smaller.

“We know we can’t do remotely as well in the future as we have in the past,” Buffett said on April 30 at Berkshire’s annual meeting in Omaha.

Berkshire represented 11 percent of Sequoia’s holdings as of Sept. 30, down from 20 percent at the end of 2009 and 35 percent in 2004, according to fund reports.

Sequoia’s Berkshire stake has been a drag on the fund’s returns in recent years, said Kevin McDevitt, an analyst for Morningstar. Over the past five years, Sequoia rose 4.3 percent a year compared with an annual gain of 1 percent for Berkshire. Over 20 years through November, Berkshire outperformed Sequoia by 2.6 percentage points a year.

“There was a time when you could have said they were riding Buffett’s coattails,” McDevitt said in a telephone interview. “That’s not the case anymore.”

Long-Term Investor

A reduced Berkshire stake hasn’t stopped the fund from investing in a style similar to Buffett’s. In 2011, Buffett bought shares of MasterCard Inc. and International Business Machines Corp., two companies Sequoia already owned.

Buffett’s portfolio contains stocks, such as Coca-Cola Co. and Wells Fargo & Co., that he has owned for more than 20 years. Sequoia has holdings, including TJX Cos. and Fastenal Co., that have been in the fund for at least 10 years, regulatory filings show.

TJX, a Framingham, Massachusetts-based discount retailer, has appreciated at a rate of 14 percent a year in the 10 years ended Nov. 30, compared with 2.9 percent for the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. Fastenal, an industrial supplier based in Winona, Minnesota, gained 20 percent a year.

“As an investor, if you get the people and the business right, you can let a company do the hard work for you for a long time,” Thomas Russo, a partner at Lancaster, Pennsylvania-based Gardner Russo & Gardner, said in a telephone interview. Russo, who worked at Ruane’s firm from 1984 to 1989, manages $4 billion.

‘Good and Bad’

Sequoia’s patience hasn’t always paid off. Mohawk Industries Inc., a carpet maker based in Calhoun, Georgia, and a longtime Sequoia holding, lost 19 percent of its value in the past five years as the housing slump depressed carpet sales.

“In the short term, holding Mohawk has been a really poor decision,” Poppe said at the 2009 investor meeting.

Such self-criticism is common at the meetings. At one session, an investment in Porsche Automobil Holding SE, the German automaker, was described as a “disaster.” At another, a manager admitted the firm was too timid about buying MasterCard after it went public in 2006.

“They give you the good and the bad,” said Roge, who has attended several of the firm’s investor meetings.

Sequoia’s managers don’t buy many of the largest stocks because the companies are too well-known and too heavily followed on Wall Street. Their preference is to own businesses “where we believe, not always correctly, that we have an edge in information,” they wrote in their 2009 letter to shareholders.

Valeant Stake

Valeant Pharmaceuticals, the fund’s largest holding, had a market value of less than $7.5 billion when Sequoia purchased it in the third quarter of 2010, Bloomberg data show. The Mississauga, Ontario, drug company gained 62 percent this year.

At the 2011 investor meeting, the fund’s managers emphasized Valeant’s unusual business model, which focuses on acquiring drugs with a proven track record rather than spending money on research and development. They also praised the firm’s chief executive officer, J. Michael Pearson.

Goldfarb told investors that over time he has become convinced that the right executive is crucial to a business’s success. “We’re betting more on the jockey and a little less on the horse,” he said in May at the fund’s annual meeting.

Sequoia typically has far more cash than the 3.7 percent held by the average U.S. domestic stock fund. At the end of the third quarter, cash represented 27 percent of the fund’s assets, according to data compiled by Bloomberg.

Holding Cash

Other well-known value investors, such as Seth Klarman, founder of Baupost Group LLC, a Boston-based hedge fund, and Robert Rodriguez, the longtime manager of FPA Capital Fund and current CEO of Los Angeles-based First Pacific Advisors, let cash build up when they can’t find enough attractive investments.

“In good markets cash can be a drag, but we have not had many good markets lately,” Dan Teed, president of Wedgewood Investors Inc. in Erie, Pennsylvania, said in a telephone interview. Teed, whose firm manages more than $100 million, including shares of Sequoia, said the fund’s cash was a plus because it means they “aren’t afraid to take a defensive position.”

Debt Dangers

Klarman and Rodriguez have written about the dangers of the increase in U.S. government debt, warning that it could pose a threat to the economy and the stock market if it is not whittled down.

Goldfarb normally ducks questions about macroeconomic issues at annual meetings, saying he has no special insight into the future of the economy, interest rates or the prices of oil and gold.

At the 2011 annual meeting, in response to an investor question, he sounded a gloomy note about deficits.

“My own feeling is that we’re just repeating the housing bubble in a different form,” he said. “We’ve substituted an unsustainable buildup of government debt for what is an unsustainable buildup of consumer debt. This one really feels worse to me and more dangerous. I think we’re living in a time of false prosperity.”

--Editors: Christian Baumgaertel, Josh Friedman

To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel in Boston at cbaumgaertel@bloomberg.net

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U.S. Economy Rebounding as Investor Favorite in Global Poll

December 08, 2011, 6:56 AM EST By Rich Miller

(For more on the Bloomberg poll, click on POLL.)

Dec. 7 (Bloomberg) -- The U.S. receives its highest rating from international investors in more than two years on new optimism that the world’s largest economy will weather the financial crisis in Europe and avoid a recession in 2012, according to a Bloomberg poll.

More than two in five of those surveyed -- 41 percent -- identify the U.S. as among the markets that will perform best over the next year. That’s up from less than one in three who felt that way in September and is the biggest percentage for the U.S. since the survey began in October 2009. It’s also almost double that of the next two top-rated markets, Brazil and China, according to the quarterly Bloomberg Global Poll conducted Dec. 5-6 of 1,097 investors, analysts and traders who are Bloomberg subscribers.

The U.S. “may not be in the best shape ever, but compared to others it should outperform,” Alexis Laming, a poll respondent and associate director for Arab Bank (Switzerland) Ltd. in Geneva, says in an e-mail. It has “good growth potential for next year.”

Less than a quarter of investors say they expect the U.S. to relapse into recession within the next year, according to the poll. In September, half those surveyed forecast a U.S. economic contraction within that time frame.

U.S. respondents are more optimistic about the American market than their counterparts overseas: More than half pick it as a best-performing market for 2012 compared with a third of non-U.S. investors who do the same.

Treasuries Safest

Investors also give a vote of confidence in the U.S. Treasury market. Seven in 10 say Treasuries will remain the safest investment for at least the next year, while 47 percent say they anticipate the market will have that distinction for at least the next three years.

European investors are the most skeptical about U.S. government bonds: Almost 40 percent say the securities aren’t the safest investment now.

The poll follows the release of a series of stronger-than- forecast economic statistics in the U.S. The unemployment rate fell last month to 8.6 percent, its lowest level since March 2009, while manufacturers reported that their business expanded in November at its fastest pace in five months. Still, the jobless number compares with the 5.0 percent rate at the start of the last recession in December 2007.

Global Prospects Better

The prospects for the global economy also are improving, though not as much as for the U.S., according to the poll. One in three investors -- 33 percent -- say they expect the world economy to fall into recession within the next year, down 10 percentage points from September.

Stocks, especially U.S. shares, are the asset class of choice, based on the poll. Almost two of five surveyed identify equities as the investment that will offer the highest returns over the next year, while 43 percent say they plan to increase their exposure to stocks in the next six months. That’s up from 39 percent in September.

Almost half of investors say they expect the Standard & Poor’s 500 Index to rise in the first half of next year. That’s a higher percentage than for stock markets in Europe and Asia. The S&P index yesterday rose 0.1 percent in New York to 1,258.47, a three-week high.

Avoiding Europe

“Equity valuations are currently very attractive and have quite a bit of room to run,” John Macdonald, a poll participant and account executive at Balance Sheet Solutions LLC in Warrenville, Illinois, says in an e-mail, adding that his comments shouldn’t be construed as a recommendation to buy shares. He sees “a bona fide bull market cycle” developing as an expanding U.S. jobs market boosts consumer confidence and the European Union reaches “some form of resolution” of its debt crisis.

Until that happens, though, investors are steering clear of Europe, according to the poll. More than half those surveyed name the EU as among the markets that will suffer the worst returns over the next year.

Asian investors are the most downbeat on Europe: More than three in five say its markets will perform the worst in 2012. Forty-three percent of Europeans single out their region as a market to avoid.

A majority of respondents say they plan to reduce their exposure to European sovereign debt and the euro over the next six months. The currency stood at $1.34 at 4:08 p.m. in New York yesterday.

EU on ‘Precipice’

“I am dumbfounded by the current situation globally,” says survey respondent David Jaderlund, a general partner at Jaderlund Investments in Santa Fe, New Mexico. “The EU is on the precipice, yet is valued” at 1.34 to the dollar, he adds in an e-mail.

European leaders will meet in Brussels on Dec. 8-9 in their latest attempt to tackle the region’s financial crisis. As part of that effort, German Chancellor Angela Merkel and French President Nicolas Sarkozy have called for new rules to tighten euro-area economic cooperation.

The brightening outlook for the U.S. and world economies has encouraged investors to become less conservative with their money, the poll results show. About a quarter of those surveyed intend to increase their holdings of commodities over the next six months, up from 19 percent in September.

Pluralities of more than 40 percent say they expect prices for both gold and crude oil to rise in the first half of next year. Gold futures for February delivery fell 0.2 percent to settle at $1,731.80 an ounce at 1:46 p.m. on the Comex in New York yesterday. Prices have climbed 22 percent this year. Crude oil for January delivery rose 29 cents to $101.28 a barrel on the New York Mercantile Exchange yesterday. Futures are up 11 percent this year.

Fewer Cash Reserves

Thirty-six percent of investors plan to build their cash reserves over the next six months. That’s down from 42 percent in September, which was the highest percentage reported since the poll began asking that question in June 2010.

Bonds are identified as the asset class that will offer the worst returns over the next year: Almost three in 10 singled them out for that distinction. Even though U.S. Treasuries are seen as safe, almost two in five respondents say they’ll reduce their holdings in the securities in the first half of 2012.

Forty six percent forecast that the yield on the 10-year Treasury note will be higher six months from now, compared with 40 percent who said that in September, the poll shows. The yield on the 10-year note stood at 2.09 percent at 4:59 p.m. New York time yesterday.

The dollar still finds favor among investors. More than one in three say they are increasing their holdings of the U.S. currency; only 14 percent are reducing them.

U.S. Improving

Thirty-eight percent of those contacted say the U.S. economy is improving, almost four times as many as those saying that in September. About a quarter say it is deteriorating, down from three in five in September. The balance described the U.S. economy as stable. Less than one in 10 expect another financial meltdown in the U.S. within the next year.

The world economy is described as deteriorating by 54 percent of those polled, compared with 68 percent who felt that way in September.

Geopolitical events may alter the outlook. Twenty-four percent of those surveyed expect a military strike against Iran’s nuclear program within the next year. Another 35 percent anticipate that occurring within the next two to five years.

The Bloomberg Global Poll was conducted by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 3.0 percentage points.

--Editors: Mark McQuillan, Robin Meszoly

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Mark McQuillan at mmcquillan@bloomberg.net

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American Economy Rebounding as Investor Favorite in Global Poll

December 07, 2011, 7:53 AM EST By Rich Miller

(For more on the Bloomberg poll, click on POLL.)

Dec. 7 (Bloomberg) -- The U.S. receives its highest rating from international investors in more than two years on new optimism that the world’s largest economy will weather the financial crisis in Europe and avoid a recession in 2012, according to a Bloomberg poll.

More than two in five of those surveyed -- 41 percent -- identify the U.S. as among the markets that will perform best over the next year. That’s up from less than one in three who felt that way in September and is the biggest percentage for the U.S. since the survey began in October 2009. It’s also almost double that of the next two top-rated markets, Brazil and China, according to the quarterly Bloomberg Global Poll conducted Dec. 5-6 of 1,097 investors, analysts and traders who are Bloomberg subscribers.

The U.S. “may not be in the best shape ever, but compared to others it should outperform,” Alexis Laming, a poll respondent and associate director for Arab Bank (Switzerland) Ltd. in Geneva, says in an e-mail. It has “good growth potential for next year.”

Less than a quarter of investors say they expect the U.S. to relapse into recession within the next year, according to the poll. In September, half those surveyed forecast a U.S. economic contraction within that time frame.

U.S. respondents are more optimistic about the American market than their counterparts overseas: More than half pick it as a best-performing market for 2012 compared with a third of non-U.S. investors who do the same.

Treasuries Safest

Investors also give a vote of confidence in the U.S. Treasury market. Seven in 10 say Treasuries will remain the safest investment for at least the next year, while 47 percent say they anticipate the market will have that distinction for at least the next three years.

European investors are the most skeptical about U.S. government bonds: Almost 40 percent say the securities aren’t the safest investment now.

The poll follows the release of a series of stronger-than- forecast economic statistics in the U.S. The unemployment rate fell last month to 8.6 percent, its lowest level since March 2009, while manufacturers reported that their business expanded in November at its fastest pace in five months. Still, the jobless number compares with the 5.0 percent rate at the start of the last recession in December 2007.

Global Prospects Better

The prospects for the global economy also are improving, though not as much as for the U.S., according to the poll. One in three investors -- 33 percent -- say they expect the world economy to fall into recession within the next year, down 10 percentage points from September.

Stocks, especially U.S. shares, are the asset class of choice, based on the poll. Almost two of five surveyed identify equities as the investment that will offer the highest returns over the next year, while 43 percent say they plan to increase their exposure to stocks in the next six months. That’s up from 39 percent in September.

Almost half of investors say they expect the Standard & Poor’s 500 Index to rise in the first half of next year. That’s a higher percentage than for stock markets in Europe and Asia. The S&P index yesterday rose 0.1 percent in New York to 1,258.47, a three-week high.

Avoiding Europe

“Equity valuations are currently very attractive and have quite a bit of room to run,” John Macdonald, a poll participant and account executive at Balance Sheet Solutions LLC in Warrenville, Illinois, says in an e-mail, adding that his comments shouldn’t be construed as a recommendation to buy shares. He sees “a bona fide bull market cycle” developing as an expanding U.S. jobs market boosts consumer confidence and the European Union reaches “some form of resolution” of its debt crisis.

Until that happens, though, investors are steering clear of Europe, according to the poll. More than half those surveyed name the EU as among the markets that will suffer the worst returns over the next year.

Asian investors are the most downbeat on Europe: More than three in five say its markets will perform the worst in 2012. Forty-three percent of Europeans single out their region as a market to avoid.

A majority of respondents say they plan to reduce their exposure to European sovereign debt and the euro over the next six months. The currency stood at $1.34 at 4:08 p.m. in New York yesterday.

EU on ‘Precipice’

“I am dumbfounded by the current situation globally,” says survey respondent David Jaderlund, a general partner at Jaderlund Investments in Santa Fe, New Mexico. “The EU is on the precipice, yet is valued” at 1.34 to the dollar, he adds in an e-mail.

European leaders will meet in Brussels on Dec. 8-9 in their latest attempt to tackle the region’s financial crisis. As part of that effort, German Chancellor Angela Merkel and French President Nicolas Sarkozy have called for new rules to tighten euro-area economic cooperation.

The brightening outlook for the U.S. and world economies has encouraged investors to become less conservative with their money, the poll results show. About a quarter of those surveyed intend to increase their holdings of commodities over the next six months, up from 19 percent in September.

Pluralities of more than 40 percent say they expect prices for both gold and crude oil to rise in the first half of next year. Gold futures for February delivery fell 0.2 percent to settle at $1,731.80 an ounce at 1:46 p.m. on the Comex in New York yesterday. Prices have climbed 22 percent this year. Crude oil for January delivery rose 29 cents to $101.28 a barrel on the New York Mercantile Exchange yesterday. Futures are up 11 percent this year.

Fewer Cash Reserves

Thirty-six percent of investors plan to build their cash reserves over the next six months. That’s down from 42 percent in September, which was the highest percentage reported since the poll began asking that question in June 2010.

Bonds are identified as the asset class that will offer the worst returns over the next year: Almost three in 10 singled them out for that distinction. Even though U.S. Treasuries are seen as safe, almost two in five respondents say they’ll reduce their holdings in the securities in the first half of 2012.

Forty six percent forecast that the yield on the 10-year Treasury note will be higher six months from now, compared with 40 percent who said that in September, the poll shows. The yield on the 10-year note stood at 2.09 percent at 4:59 p.m. New York time yesterday.

The dollar still finds favor among investors. More than one in three say they are increasing their holdings of the U.S. currency; only 14 percent are reducing them.

U.S. Improving

Thirty-eight percent of those contacted say the U.S. economy is improving, almost four times as many as those saying that in September. About a quarter say it is deteriorating, down from three in five in September. The balance described the U.S. economy as stable. Less than one in 10 expect another financial meltdown in the U.S. within the next year.

The world economy is described as deteriorating by 54 percent of those polled, compared with 68 percent who felt that way in September.

Geopolitical events may alter the outlook. Twenty-four percent of those surveyed expect a military strike against Iran’s nuclear program within the next year. Another 35 percent anticipate that occurring within the next two to five years.

The Bloomberg Global Poll was conducted by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 3.0 percentage points.

--Editors: Mark McQuillan, Robin Meszoly

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

To contact the editor responsible for this story: Mark McQuillan at mmcquillan@bloomberg.net

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KKR, Apax Lead Cannibals Contest for Shrinking Investor Dollars

July 13, 2011, 7:26 PM EDT By Anne-Sylvaine Chassany and Cristina Alesci

July 14 (Bloomberg) -- About a month after London-based Apax Partners LLP began raising a 9 billion-euro ($12.7 billion) leveraged buyout fund, local rival Permira Advisers LLP told investors it wanted 6.5 billion euros for a new pool, people briefed on the talks said.

Permira, which still has more than a year to finish investing its existing 9.6 billion-euro fund, is joining a rush by private-equity firms including New York’s KKR & Co. and Warburg Pincus LLC to raise cash now, just as investors warn they haven’t got the money to continue backing all firms.

“Many firms have realized they can’t count on their clients’ loyalty only to raise funds,” said Jeremie Le Febvre, a partner at Triago SA, which helps firms raise money. “They can’t afford to wait if they want a piece of the pie. It’s reality-check time for everyone, and some will be disappointed.”

Investors in private-equity funds, known as limited partners, say they’re planning to reduce pledges to the largest of the new pools and invest in fewer of them, partly because they haven’t received enough money back from previous funds to match commitments during the boom years. LPs are also shifting away from large buyout funds to firms targeting smaller deals and investments in faster-growing emerging markets, making the pie available for LBO firms in Europe and the U.S. even smaller.

“Firms at the larger end are taking one another on in fundraising, vying for scarce and selective capital,” said Mounir Guen, head of MVision Private Equity Advisers, which helps firms raise funds. “They’ll end up partially cannibalizing one another, hence take much longer to raise their funds and make it more challenging to reach their targets.”

Ramping Up

Leveraged-buyout firms are seeking more than $170 billion this year, more than what they sought in 2006 at the height of the private-equity boom, according to research firm Preqin Ltd. Nearly half of all private-equity fund managers plan to raise capital in 2011, according to a survey by Rothstein Kass, an advisory firm.

“Fund managers can influence the timing of their fundraising, and many of them delayed it last year,” said Helen Steers, head of Pantheon’s European primary funds group, a backer of private-equity firms. “Equally, they have been ramping up this year, because debt financing has come back allowing to fund deals, but also because they are more eager to come back to market now.”

In the U.S., KKR and Providence Equity Partners are seeking as much as $10 billion and $6 billion respectively. New York- based Warburg Pincus is preparing to raise a new fund after investing more than 80 percent of the $15 billion vehicle it raised in 2008, people familiar with the matter said last month.

Crowded Europe

Unlike KKR, which invests in broad range of companies, Providence specializes in media and communication deals, and Warburg’s investments range from backing early stage companies to buyouts of mature businesses.

Europe is more crowded. Five of the region’s seven largest firms are raising funds or are about to do so. BC Partners Ltd, which last year began marketing the first large European buyout fund since the financial crisis, has gathered more than 4 billion euros for its 6 billion-euro pool. Cinven Ltd., the London-based firm founded by the coal miners’ pension plan, is seeking 5 billion euros. EQT Partners AB, Scandinavia’s biggest private-equity firm, has secured 3.5 billion euros out of the 4.3 billion euros it’s seeking, people familiar with the matter said on July 5.

Officials at Warburg, KKR, and Providence declined to comment on fundraising. Officials at Permira, which outlined its fundraising plans to investors last month, Cinven, BC Partners, EQT and Apax also declined to comment.

‘Harder Than Ever’

“It’s a big issue if managers can’t get at least 50 percent from current investors,” said Richard Anthony, senior managing director at Evercore Partners Inc.’s private funds group, which helps firms raise money. “It’s hard to raise money when existing clients aren’t backing you, because sourcing new capital is harder than ever, even for more established funds.”

Almost 90 percent of limited partners won’t commit -- or “re-up” -- to some of their existing fund managers, partly because they don’t have enough capital available, a June investors survey by investment firm Coller Capital Ltd. showed. A fifth of firms may fail to raise new funds, investors polled by Coller predicted.

Sharing Clients

“We’ll very quickly see who the winners are,” said Rhonda Ryan, head of the European Private Funds group at Pinebridge Investments, which manages about $20 billion of private equity assets. “It will take longer before we see those who can’t reach their target, and for some funds, we’ll probably see some targets revised down over time.”

Firms are competing for the same clients. Apax and Permira in London share 26 investors across their funds, according to Preqin. California State Teachers’ Retirement System and Pennsylvania State Employees’ Retirement System are among 19 investors in both of their most recent funds. Apax and BC Partners share 23, including the Michigan Department of Treasury and Pennsylvania State. Canadian Pension Plan Investment Board, Canada’s largest pension plan, and New York State Teachers’ Retirement System are among 10 investors in both Permira and Cinven’s latest pools.

“Investors have finally woken up to the huge costs associated with having many relationships,” said Erik Hirsch, chief investment officer for Hamilton Lane Advisors, which helps clients with $89 billion select private equity funds. “They should have always chosen between A or B fund and not committed to both A and B. But there’s a lot more pressure now to choose one, which means fewer ‘yes’ votes.”

Dropping Blackstone

While still committing to large buyout funds, Pinebridge favors mid-market funds, Ryan said. Pantheon won’t commit to about 40 percent of the managers it invests with today, up from 30 percent before, Steers said.

Investors are already making choices affecting the most established firms. Pennsylvania State Employees’ Retirement System, a longtime backer of Blackstone Group LP’s buyout funds, hasn’t committed to the New York firm’s latest fund, which so far has attracted more than $16 billion.

Washington State Investment Board, one of the largest private equity investors, cut its allotment to KKR’s latest fund to $500 million from a $1.5 billion commitment to its predecessor. The Oregon Public Employees’ Retirement Fund has committed $525 million to KKR’s new pool, down from a $1.3 billion pledge in the firm’s 2006 pool.

Providence’s Niche

“Washington continues to look for balance in its investment selections,” said Liz Mendizabal, a spokeswoman for Washington State Investment Board.

Pamela Hile, a spokeswoman for Pennsylvania, and James Sinks, a spokesman for Oregon, didn’t respond to calls seeking comment.

Both pensions committed to Providence’s new fund, which has secured about $3 billion so far. Washington State raised its investment to $300 million from $250 million in the previous fund, according to the board’s minutes. Oregon allotted $150 million, half the amount committed previously.

“It’s clearly in the minds of some fund managers that you need to be differentiated to fundraise at the moment,” Ryan said.

--Editors: Edward Evans, Christian Baumgaertel

To contact the reporters on this story: Anne-Sylvaine Chassany in London at achassany@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net

To contact the editors responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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Investor 'Say on Pay' Is a Bust

Bloomberg

By John Helyar

This was supposed to be the year when shareholders at public companies finally had their say about executive pay. As a result of the passage of the Dodd-Frank Act last July, shareholders for the first time can cast proxy votes on top executives' compensation. Median pay of chief executives jumped 35 percent, to $8.4 million, for Standard & Poor's 500 CEOs in 2010. So shareholders' say-on-pay votes, although only advisory, were expected to widely challenge companies where compensation didn't reflect performance or were out of line with those at competitors.

Institutional Shareholder Services (ISS), which advises investor clients on proxy and shareholder issues and is the largest firm of its kind in the U.S., has recommended nay votes on pay for 293 companies so far this year. Among them: Pfizer (PFE), whose ex-CEO Jeffrey Kindler resigned in December with a severance package valued by ISS at $34.4 million. Another is JPMorgan Chase (JPM), where chief Jamie Dimon was awarded a 1,474 percent compensation boost for 2010, to $20.8 million.

Yet through June 14, shareholders by a majority vote objected to executive comp at just 32 of the 1,998 companies that have convened annual meetings this year. "Say-on-pay is at best a diversion and at worst a deception," says Robert A.G. Monks, the veteran corporate governance activist who founded ISS in 1985. "You only have the appearance of reform, and it's a cruel hoax."

Given that the proxy advisory firm's clients typically comprise 20 percent of a company's shareholder base, why so few nays on pay? Some of the credit—or blame—goes to the Center on Executive Compensation. The three-year-old center is an offshoot of the HR Policy Assn., a lobbyist on human resources issues for 300 of the largest U.S. companies, including Procter & Gamble (PG) and IBM (IBM).

The center advised companies that received negative ISS recommendations to send rebuttals to shareholders and itself warned the nation's 100 biggest institutional investors about possible "bias and errors" in proxy advisers' recommendations. "We provided some guidance on how to tell their pay-for-performance stories," says Charles Tharp, the center's CEO. The center also published a white paper in which it said ISS has published errors, holds excessive power, and has conflicts of interest because it both consults with some companies on corporate governance and issues proxy voting recommendations on them. The paper recommended that ISS, Glass Lewis, the No. 2 proxy advisory firm, and others, be more strictly regulated by the Securities and Exchange Commission.

Patrick McGurn, executive director of ISS, disputes the center's claims and says the proxy adviser isn't an irresponsible disrupter. He notes that ISS supported management on 88 percent of say-on-pay votes. "These are K Street lobbyists who get a good revenue stream out of saying things companies don't want to say," he says.

Many companies countered ISS's recommendations in letters to shareholders. Pfizer took umbrage with ISS's objections to ex-CEO Kindler's severance package, calling it necessary to secure noncompete terms and "in the best interests of shareholders." JPMorgan Chase said ISS's objection to CEO Dimon's pay hike failed to grasp the big picture. "The Firm has come through the worst economic storm in recent history stronger than ever, and a major part of the Firm's success is due to Mr. Dimon's long-term vision, leadership, disciplined approach and business acuity," the company said in its letter.

ExxonMobil (XOM) also countered ISS's objection to CEO Rex Tillerson's $88 million pay package over the past three years, when its stock generated a 5.8 percent negative return. ExxonMobil took issue with ISS using one-year and three-year returns to gauge performance. "We believe the ISS model is contrary to the best interests of shareholders," its letter said. "The Compensation Committee of the Board uses well-informed judgment when setting compensation."

The rebuttals were effective. Pfizer won 57 percent of the shareholder vote on executive pay. ExxonMobil and JPMorgan Chase received 67 percent and 73 percent shareholder support, respectively.

Lynn Turner, a former managing director for research at Glass Lewis and former chief accountant at the SEC, says mutual funds, which own 70 percent of U.S. equities and are many companies' biggest shareholders, cast few negative pay votes out of business considerations. Corporations contract with big mutual funds to run (401)k plans for their employees, he says, making funds disinclined to dissent. The big mutual fund companies "won't vote against management on compensation unless they're really bad," says Turner.

Some companies that received negative ISS recommendations this year made changes and then won the firm's blessing. General Electric (GE) initially got a thumbs down this year because it granted CEO Jeffrey Immelt 2 million options despite a lagging stock price. GE then conferred with major shareholders, according to an SEC filing, and made the vesting of Immelt's options contingent on the company meeting performance targets. ISS then dropped its objections. ISS's McGurn says cases like this show how say-on-pay helps foster accountability. Anything that creates more "engagement" between management and shareholders is good for corporate governance, he says.

The bottom line: Shareholders this year for the first time could vote on executive pay. A majority voted against pay plans at only 32 of 1,998 companies.

Helyar is a reporter for Bloomberg News.

View the original article here

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

More than one million hardcovers sold
Now available for the first time in paperback!

The Classic Text Annotated to Update Graham's Timeless Wisdom for Today's Market Conditions

The greatest investment advisor of the twentieth century, Benjamin Graham taught and inspired people worldwide. Graham's philosophy of "value investing" -- which shields investors from substantial error and teaches them to develop long-term strategies -- has made The Intelligent Investor the stock market bible ever since its original publication in 1949.

Over the years, market developments have proven the wisdom of Graham's strategies. While preserving the integrity of Graham's original text, this revised edition includes updated commentary by noted financial journalist Jason Zweig, whose perspective incorporates the realities of today's market, draws parallels between Graham's examples and today's financial headlines, and gives readers a more thorough understanding of how to apply Graham's principles.

Vital and indispensable, this HarperBusiness Essentials edition of The Intelligent Investor is the most important book you will ever read on how to reach your financial goals.

Price: $21.99

Click here to buy from Amazon