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managers, onecampaign atatime.managers, BY DAVID DEJONG AND MATTHEW BOYLE family, haslaunchedamajorassaultontheglobalcoffee market. Fix The Caffeine nameintheglobalmovieindustry.biggest from New York and Moscow. choices. smart is thetimetotakeastakeincountry. tooutperform. the country firm. private-equity markets—amid aroutthathashittwo of theBRICs. the$8trillionU.S.he aimstoupend market. bond corporate MARCH 2015 BY EDWARD ROBINSON BY CATHY CHANANDYOOLIM LEE BY BENBAIN
BY MARIA PETRAKIS 54 BY JEREMY KAHNANDKIELPORTER BY GAVIN SERKIN
BY ZIJING WUANDWILLIAMMELLOR scripted out:He’sscripted the goingtobe BY SARMAD KHAN ‘Emerging markets’ of developed markets.’of developed markedly fasterthanthose general continuetobe growtheconomic ratesin Mark Mobius BY EDWARD ROBINSON
page 38 72 ON THECOVERS Yoo Young Kyu Photograph by Dec. 31inSeoul photographed Michael Kim, Joe Pugliese Photograph by California in Sonoma, photographed Nov. 24 John “Mac” McQuown, 64 78 84
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STRATEGIES 92 Profile Tax-Efficient Investing by JON ASMUNDSSON 95 ETFs How Liquid Is Your ETF? by RYAN KREGER 96 Cheat Sheet Tracking ETFs 97 Commodities AGENDA Smell the Coffee by DEBBIE MASSIELLO and BETH HAUSMANN 10 Crude Oil’s Spillover 98 Foreign Exchange Looking for Clues 12 Economists Debate Stagnation Nation in Saudi Riyal Forwards 14 Goldman: Let’s Break Up JPMorgan by CHRISTOPHER WEISS
16 China’s No. 1 Smartphone Maker 100 What’s New Is Ready for More 18 Investors Flock to Racing Pigeons 20 Japan Gets a Taste for Craft Beer
COMMENTARY
6 Editor’s View The Bond Engineer 8 Letters 22 Bloomberg View 92
Capitalizing on Cuba QUICKHONEY THOMAS; JACOB SEAN McCABE; BY: BEN HOFFMANN; ILLUSTRATIONS GARDNER; LAYNE BY: PHOTOS RIGHT: TOP FROM CLOCKWISE
4 BLOOMBERG MARKETS MARCH 2015 What’s missing from your clients’ portfolios?
(LCOIX) CLEARBRIDGE INTERNATIONAL SMALL CAP FUND (Among 43 Foreign Small/Mid Value Funds) (SBIYX) CLEARBRIDGE INTERNATIONAL VALUE FUND (Among 650 Foreign Large Blend Funds) Overall Morningstar Ratings, as of 12/31/14. The ratings are based on risk- adjusted returns and are derived from a weighted average of the performance fi gures associated with a fund’s 3-, 5- and 10-year (as applicable) rating metrics.
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About LEGG MASON: A leading global investment company, with $709 billion (as of 12/31/14) in assets invested worldwide, focused on long-term, actively managed strategies • A diverse family of specialized investment managers, each with its own independent approach to research and analysis • Over a century of experience in identifying opportunities and delivering astute investment solutions to clients in equities, fi xed income and alternatives Important Information: Equity securities are subject to price fl uctuation and possible loss of principal. International investments are subject to special risks, including currency fl uctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnifi ed in emerging markets. The manager’s investment style may become out of favor and/or the manager’s selection process may prove incorrect, which may have a negative impact on a fund’s performance. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. Morningstar ratings are as of December 31, 2014 and are subject to change every month. A 4- or 5-star rating does not necessarily imply that a fund achieved positive results for the period. Past performance is no guarantee of future results. For funds with at least a 3-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.) Class I shares of the ClearBridge International Value Fund were rated against 650, 583 and n/a Foreign Large Blend Funds over the 3-, 5- and 10-year periods, respectively. With respect to these Foreign Large Blend Funds, Class I shares of the Fund received Morningstar Ratings of 4, 4 and n/a stars for the 3-, 5- and 10-year periods, respectively. Class I shares of the ClearBridge International Small Cap Fund were rated against 43, n/a and n/a Foreign Small/Mid Value Funds over the 3-, 5- and 10-year periods, respectively. With respect to these Foreign Small/Mid Value Funds, Class I shares of the Fund received Morningstar Ratings of 5, n/a and n/a stars for the 3-, 5- and 10-year periods, respectively. Other classes may have different performance characteristics. Classes have a common portfolio. Prior to January 2, 2014, ClearBridge International Value Fund and ClearBridge International Small Cap Fund were known as ClearBridge International All Cap Opportunity Fund and ClearBridge International Small Cap Opportunity Fund, respectively. At that time, the Funds’ management, objectives and strategy did not change. Active share is a measure of the percentage of stock holdings in a manager’s portfolio that differs from the benchmark index. BEFORE INVESTING, CAREFULLY CONSIDER A FUND’S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. YOU CAN FIND THIS AND OTHER INFORMATION IN EACH PROSPECTUS, AND SUMMARY PROSPECTUS, IF AVAILABLE, AT WWW.LEGGMASON.COM/INDIVIDUALINVESTORS. PLEASE READ THE PROSPECTUS CAREFULLY. © 2015 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC and ClearBridge Investments, LLC are subsidiaries of Legg Mason, Inc. INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE FN1410882 Editor’s View
EDITOR-IN-CHIEF, BLOOMBERG NEWS Matthew Winkler
The Bond EXECUTIVE EDITOR Ronald Henkoff MANAGING EDITOR Engineer Dan Ferrara CREATIVE DIRECTOR Siung Tjia THE FINANCIAL ENGINEERS who created the investment instru- ASSISTANT MANAGING EDITOR ments that would play such a toxic role in the global economic crisis Michael S. Serrill DIRECTOR OF PHOTOGRAPHY gave both finance and engineering a bad name. The credit-default Brenda Milis swap, originally designed as a kind of insurance for bank loans, mu- SENIOR EDITORS tated into a monster that aggravated risk instead of mitigating it— Robert S. Dieterich William Hawley impelling, among other things, a $182 billion bailout of American Stryker McGuire (London) International Group Inc. by the U.S. government. Gail Connor Roche Joel Weber Well, the CDS is back, and this time, as Edward Robinson reports, ‘We’ve finally EDITOR-AT-LARGE figured out a financial innovator John “Mac” McQuown plans to embed it inside a Robert Friedman corporate bond (“WHIZ KID,” page 26). Why would he want to do such RANKINGS EDITOR Laurie Meisler way to make a a thing? SENIOR WRITERS bond default- McQuown, still spry and restless at age 80, is an actual engineer Stephanie Baker (London) (he has a degree in mechanical engineering from Northwestern Uni- Katrina Brooker free,’ says Anthony Effinger versity) who pioneered the stock index fund. McQuown is now out to (Portland, Oregon) innovator David Evans (Los Angeles) ease what he and many others say is a coming liquidity crunch in the Jeremy Kahn (London) Mac McQuown. $8 trillion U.S. corporate bond market. Enticed by low interest rates, Yoolim Lee (Singapore) John Lippert (Chicago) companies have issued record amounts of William Mellor (Sydney) debt. At the same time, new capital regula- Edward Robinson (London) Michael Smith (Rio de Janeiro) tions have prompted banks to reduce the DESIGN inventories of corporate bonds that will Lou Vega (Senior Art Director) John Genzo be necessary to make the market work (Managing Art Director) smoothly once interest rates start to rise. Lily Chow (Graphics Director) McQuown, the inveterate tinkerer, PHOTOGRAPHY Lauren Winfield says he can fix that by putting a CDS in- (Deputy Photo Editor, London) Manuela Oprea side a bond, a move that’s been made (Associate Photo Editor) possible by regulatory changes that will COPY EDITORS force most swaps to be traded on exchanges and guaranteed by clearing- Nicole Dekle Collins Joyce L. Kehl houses. “We’ve finally figured out a way to make a bond default-free,” EDITORIAL ADMINISTRATOR McQuown says. Others aren’t so sure. John Bogle, the former head Missy Levy of Vanguard Group Inc., labels McQuown a “genius.” “But geniuses STRATEGIES EDITOR pursue complexity,” he adds—a reminder that financial engineering Jon Asmundsson STRATEGIES CONTRIBUTORS that’s designed to solve a problem can sometimes make it worse. Beth Hausmann, Ryan Kreger, Debbie Massiello, Christopher Weiss
EXECUTIVE EDITOR
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6 BLOOMBERG MARKETS MARCH 2015 BORN BY PASSION
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PUBLISHER Michael Dukmejian Crisis in the Currency Casino 212-617-2653 ADVERTISING SALES DIRECTOR, FXCM Inc. has learned firsthand the dangers 2 percent margin on the underlying currency, AMERICAS Chris Kurtz 212-617-3087 of leverage in the foreign-exchange markets. could stick it with an 18 percent loss if a cur- ADVERTISING SALES DIRECTOR, EMEA Since Bloomberg Markets’ “The Currency Ca- rency moved against a customer by 20 percent. Anna Foot sino” (December 2014) showed how compa- After our story, the Commodity Futures Trad- 44-20-7673-2086 ADVERTISING SALES DIRECTOR, nies lure investors into risky forex trading by ing Commission said it planned to bar inves- ASIA-PACIFIC letting them put down as little as 2 percent, the tors from using credit cards to pay for trades Patrick Brownlow 65-6231-3486 largest U.S. retail forex broker has im- FINANCIAL DIRECTOR ploded—itself a victim of too much le- John Maresca verage. On Jan. 15, New York–based U.S. SALES David Bowling 212-617-4059 FXCM announced that customers’ Ted Dolan 212-617-2182 losses exceeded their margin depos- WEST COAST SALES DIRECTOR Rich Fimbres 323-782-4249 its by $225 million in a single day, MIDWEST SALES DIRECTOR after Switzerland unexpectedly re- Paul Kissane 312-443-5924 moved the trading-range cap on its TEXAS SALES Carol Orr 214-521-6116 currency. The franc soared 41 per- FASHION DIRECTOR cent against the euro, forcing sev- Michele Chicoine 212-617-6629 eral brokers to shut when their TRAVEL DIRECTOR Jonathan Spitz 212-617-7068 customers’ margin accounts swung into the made with retail currency brokers starting LATIN AMERICA SALES DIRECTOR red. FXCM, a subject of our story, saw its shares on Jan. 31. And CFTC Commissioner Sharon Patricia Medici 305-579-4334 plummet 92 percent the next day before trading Bowen called for tighter regulations to protect LATIN AMERICA SALES Tiago Castro 55-11-3048-4645 was halted. Leucadia National Corp., the parent consumers. FXCM didn’t respond to calls or EUROPEAN SALES of investment bank Jefferies Group LLC, agreed e-mails seeking comment. Clare Bowen 44-20-3216-4275 Marie Friel 44-20-3525-8528 to extend a lifeline in the form of a $300 million, DAVID EVANS MARKETING EXECUTIVE two-year loan with a 10 percent interest rate that Laura Cameron can rise to 17 percent. NORTH ASIA SALES MANAGER Correction David Bradford Our story reported that U.S. retail forex bro- 852-2977-4719 kers entice customers with leverage as high as “The Quants on the Left Bank” (February 2015) ASIAN SALES Mark Froude 65-6499-2818 50:1. Most investors lose money in the lightly contained incorrect information on Marc Pot- CONSUMER MARKETING DIRECTOR regulated industry; some have their entire in- ters and Jacques Sauliere, co–chief executive Johnna Ayres vestment wiped out in minutes. For brokers, officers of Capital Fund Management. Potters CONSUMER MARKETING MANAGER Daniel Murphy the higher the leverage they offer, the nar- was born in Belgium and is a naturalized cit- OPERATIONS DIRECTOR rower their margin of protection should cus- izen of Canada; Sauliere has an engineering Bernie Schraml tomer bets go bad. At FXCM, 50:1 leverage, or a background and an MBA from France’s Insead. AD PRODUCTION DIRECTOR James Delahanty PRODUCTION MANAGERS Melvin Arriaza Debra Foley INFORMATION FOR READERS DIGITAL PRODUCTION MANAGER Steven J. McCarthy LETTERS TO THE EDITOR Send an e-mail to [email protected] or type MAG
8 BLOOMBERG MARKETS MARCH 2015 It’s not just about emerging markets, but EMERGING IDEAS.
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Foreign investments may be volatile and involve additional expenses and special risks, including currency fl uctuations, foreign taxes and geopolitical risks. Emerging and developing market investments may be especially volatile. Due to smaller economies, less developed capital markets and lower investor protection standards, these risks are magnifi ed in frontier markets. Due to the recent global economic crisis that caused fi nancial diffi culties for many European Union countries, Eurozone investments may be subject to volatility and liquidity issues. The funds may invest a signifi cant portion of assets in a particular region, industry or sector, which may increase volatility and exposure to risks associated with that particular region, industry or sector. Small and mid-sized company stocks are typically more volatile than that of larger, more established businesses, as these stocks tend to be more sensitive to changes in earnings expectations. It may take a substantial period of time to realize a gain on an investment in a small or mid-sized company, if any gain is realized at all. Investments in securities of growth companies may be volatile. Protection is positioned as an investment goal. Investing in certain securities may help to hedge against certain risks, but does not imply any guarantee from loss. Mutual funds are subject to market risk and volatility. Shares may gain or lose value. Carefully consider fund investment objectives, risks, charges and expenses. Visit oppenheimerfunds.com, call your advisor or 1.800.225.5677 (CALL.OPP) for a prospectus with this and other fund information. Read it carefully before investing. ©2015 OppenheimerFunds Distributor, Inc. TYPE OPPFUNDS
CREDIT TK CREDIT TK ILLUSTRATION BY fundsare ily isFidelityInvestments, whose tal shareholder after Hamm and hisfam- Continen- aside, thelargest Schadenfreude in halfsinceNovember ascrudeplunged. cutnearly hadbeen shares, of Continental largely grounds thathisfortune, comprised duce a$975 millionalimony payment onthe toHarold re- HamminJanuary askedacourt ample ofhowthepaincanspread.Founder Dakota’s shale, provides anotherex- Bakken inNorth operator pioneer andthelargest investmentpopular products. andin ofinsurance companies portfolios inthe fundsthatare included a dozen throughmorethan which holdsthestock shareholder isVanguardlargest Group Inc., considerthatEnergyXXI’speople, second- aproblemformore canbecome prices Strategic Insight. of November, firm accordingtoresearch to$109.9 inthatcategory assets billionas had recordinflowslastyear, pushingtotal products tual fundsandexchange-traded investors,stock mu- Energy-focused too: AG. Bank from Theyattracted Deutsche five report years, according toaDecember andloansinthepast lion innewbonds ple’s problemthantheyrealize.” felt,”be Shaoulsays. more peo- “Itwillbe that’s to wherethebulkofpainisgoing fundsandinmutual funds,and in pension Continental Resources Inc., afracking Resources Continental To ofhow crashing crude getasense bil- $550 raised Oil andgasproducers QUICKHONEY done,” Energy XXI’s Smithsaid. shares alittleover- hasbeen “We thinkthe sell-off thecompanysaid hasplentyofliquidity. in December, Greg Smith, aspokesman, comment.Inaninterview seeking e-mails U.S. renaissance. oilproduction thathavesmall drillingcompanies ledthe a varied oflendersistypicalforthe roster SpainandJapan.Canada, Scotland, Such XXI hasborrowed from banks inAustralia, opment atDevon EnergyCorp., Energy forexplorationanddevel-vice president Jr., veteran anoilindustry who was once haveprices, itsshares. hurt overruns cost that,alongwithoilported The company two inthepast years hasre- $2.5 billionforEPLOil&GasInc. lastyear. in2010andanother bil Corp. properties Mo- Mexico, $1billionforExxon spending throughouttheGulfof assets has bought nameinNovember, fromits Bermuda EnergyXXI,whichdroppedwith debt. theshortfall plugged years—and recent farmore thantheymadein drillers spent savings. a mainstay ofmany Americans’ retirement WITH LEVERAGED AND PRODUCTION Energy XXIdidn’t return callsand Founded 10years agobyJohn Schiller Flush withotherpeople’s money, many BLOOD ATBLOOD BANKS ‘THERE WILLBE ‘THERE EXPLORATION COMPANIES.’ LOANS TO JEFF BAHL a downward spiral. to avoid trying oilcompanies strapped credit ofmoneyforcash- isavitalsource With revenue tumblingalongwithprices, whendrillersneeditmost.patch—just likely toless lendmore moneyintheoil Financial. andBOK ofCullen/Frost including shares &Gaynor Bahl investment Inc., advisor oversee $7.7 billionatCincinnati-based tion firms,” says who helps Jeff Bahl, eraged loanstoexplorationandproduc- energy loans. ofspecific comment ontheperformance ofthebanksdeclinedtoRepresentatives andZionsslid15percent.16 percent, dropped Comerica nancial fell21percent, months throughmid-January, Fi- BOK inthetwoHolding declined27percent Mitsui FinancialGroupInc. Hancock bankSumitomo bank;andJapanese gest Spain’s SantanderSA, Banco big- Scotia; ofNova ofAustralia; Bank wealth Bank Energy XXIlenders,alongwithCommon- areamongmerica, AmegyandHancock Co- report. inaDecember Ratings said 30, asofSept. to energyproducers Fitch from $1.6 billionto $3.4 billioninloans subsidiary,a ZionsBancorp held each ofTexas, Bank andAmegy merica Bank Inc., HoldingCo.,Bankers Hancock Co- FinancialCorp.,well. BOK Cullen/Frost as feelingpressure oil-rich states—are aboveU.S.age points Treasuries. ing theiryieldswere more than10percent- levels asofmid-January,distressed mean- Inc. andSwiftEnergyCo. were tradingat Inc., Energysilver Sandridge Resources Corp., Penn VirginiaCorp.,sources Quick- PetroleumCorp., HalconRe- Goodrich Inc., Resources ral EnergyInc., Comstock suchasChapar- ofcompanies paid. Debt re- confidencetheywillbe investors lose have slideaspanies theirbonds seen mid-January. inthesixmonthsthroughfell 88percent ASJYLYN LODER ANDELIZABETH DEXHEIMER And banksthatare bleedingwillbe atbankswith lev- blood willbe “There regionalbanksin Lenders—especially com- andoilfieldservice Oil producers MARCH 2015 BLOOMBERG MARKETS
11 BRIDGES NORMALCY debated whetherwe’reprofessors, stuckinit. nowHarvard andboth advisers House Mankiw,mers andGregory formerWhite both inJanuary,meeting inBoston Sum- Larry tion.” At theAmericanEconomicAssociation slow growthorno“secular stagna- of ECONOMISTS CALLAprolongedperiod bridges tonowhere.” infrastructure spendingandnot to makesurewegetthe right doing cost-benefit analysis. We want ment isnotparticularly goodat spending becauseIthink govern- “I’m aboutinfrastructure nervous But maybeI’m wrong.” have another sessionnextyearonit. meeting. Idon’t think we’re goingto probably goingtoendatthis AEA discussion ofsecularstagnationis normal economy. Ithink the “I think we’re returningtomoreofa the debate over the possibility the country isstuck in aneraofsubpargrowth. thecountry the debateover thepossibility GDP climbed to 5 percent in the third quarter inthe U.S., inthethirdquarter to5percent GDP climbed butthatdidn’t end Stagnation Nation ECONOMICS isn’t sosure. infrastructure. Mankiw public investment in economic demandismore to battle stagnant things thatshouldbedone Summers says oneofthe AIRPORTS STAGNATION opponent inthe2012presidentialrace Instead, itwas Mankiw, whoworked for Mitt Romney, Obama’s since hehelpedsetPresident Barack Obama’s economic agenda. One mightexpect Summerswould talkup sents about$20,000 perAmerican family.” potential is. That10percentofpotentialrepre- downward ourassessmentofwhat the economy’s potential was;itisbecausewehave revised have gotten closer towhat wepreviously thought the output gaphasclosed, itisnotbecausewe potential asitwasestimatedin2007. Insofaras [Economic output]isnowabout10percentbelow revises downwhat itmeanstoberecovered. “We arerecoveredonlyonadefinitionthat know when that momentwillevercome.” the momenttofixKennedy Airport, Idon’t ment rate approaches doubledigitsisnot moment when the constructionunemploy- long-term, below 2¼ percent, anda in acurrency weprint ourselves, forthe “If amomentwhen wecanborrowmoney, 31% , wholaudedthe the currentstate ofaffairs, Source: Boston Consulting smartphone for ayear thangive uptheir who would ratherforgo sex Percentage ofAmericans recovery.
LEFT TO RIGHT: BRADLEY C. BOWER/BLOOMBERG; NICHOLAS KAMM/AFP/GETTY IMAGES EXUMA CAYS, BAHAMAS PARADISE ISLAND, BAHAMAS ROSS, CA 75 acre private island located in the heart of Exuma Cays. Lignum Private 3.75 acre sea-to-sea estate. 1,750’ of waterfront. 6,000 sf This 6 BR, 6 and one half bath villa sits on an approximately flat Vitae Cay is one of the most stunning natural Cays with unspoilt main house plus a 2 BR guest house overlooking the beach. Pool acre. A coveted location that is close to town, the Lagunitas beaches, lush vegetation and breathtaking views. WEB: C9XJXD. and dock. Life is less taxing offshore. WEB: 8T6FKS. Tennis Club, and Ross and Branson Schools. $11,950,000. $14,000,000 US. [email protected] $11,800,000 US. [email protected] Isobel Wiener and Danielle Chavanon. Damianos Sotheby’s International Realty Damianos Sotheby’s International Realty Sotheby’s International Realty San Francisco Brokerage +1 242.424.9193 | SIRbahamas.com +1 242.424.9699 | SIRbahamas.com +1 415.730.5556 | RossGoldCoast.com
SONOMA, CA DESTIN, FL KEY LARGO, FL 11,800± sf home with 6 BR, lake, beach, tennis court and This Tuscan-style home presides over 425’ of waterfront from a Sprawling 7,800 sf waterfront home in Ocean Reef situated on manager’s building. 140± acre wine country ranch with 70± 1.8 acre site within a gated community with Fred Couples 18-hole 48,400 sf lot with 300’ of water frontage, open floor plan with potentially plantable acres. 15 minutes to Plaza, 60 minutes to course. Two garages accommodate 9 cars. A screened lanai features 6 BR, 8.5 baths, great outdoor living with pool, and separate guest San Francisco. Price upon request. Donald Van de Mark. a zero entry pool. $4,975,000. Blake Morar and Chris Abbott. house. $9,500,000. [email protected] Sotheby’s International Realty Wine Country Brokerage Scenic Sotheby’s International Realty Russell Post Sotheby’s International Realty +1 707.337.2227 | SonomaRanchEstate.com +1 800.359.0527 x 2859 | ScenicSIR.com +1 305.367.2027 | RussellPostSIR.com
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NEW YORK, NY NEW YORK, NY NEW YORK, NY Spectacular One Beacon Court Penthouse. This 9,000± sf duplex 107 East 61st Street. Spectacular 10,000± sf carriage house with a Park Avenue Magnificence. This enchanting 4 BR, 5 bath duplex features coveted western outlooks towards Central Park & sunlight two-car garage, elevator, pool, large gym, full floor master suite & maisonette is a one-of-a kind residence filled with charm, grandeur from every room. WEB: 0019875. $82,000,000. Serena Boardman. a rooftop sundeck. WEB: 0019863. $29,000,000. J. Roger Erickson. & Old World elegance. WEB: 0019862. $12,500,000. A. Schuster. Sotheby’s International Realty Sotheby’s International Realty Sotheby’s International Realty East Side Manhattan Brokerage East Side Manhattan Brokerage East Side Manhattan Brokerage +1 212.606.7611 | sothebyshomes.com/nyc +1 212.606.7612 | sothebyshomes.com/nyc +1 212.606.7797 | sothebyshomes.com/nyc
© MMXV Sotheby’s International Realty Affiliates LLC. a Realogy Company. All Rights Reserved. Village Houses, used with permission. Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. An Equal Opportunity Company. Equal Housing Opportunity. Each Office is Independently Owned and Operated. TYPE SIRA
Bloomberg Global Poll WHAT’S HOT ... AND NOT Investors are bullish on the U.S. Russia and the EU? Not so much.
WHERE DO YOU PREDICT THE S&P 500 INDEX WILL BE SIX MONTHS FROM NOW?
Higher 51%
Lower Little change/ 25% Not sure 24%
WHAT ARE Russia Pushing for Pieces THE WORST * MARKETS 51% If Goldman Sachs has its way, JPMorgan—the world’s FOR biggest investment bank—would get sliced up. INVESTORS IN THE European YEAR Union * AHEAD? 25% COULD JPMORGAN Chase & Co.’s parts taking drastic action,” he said a few days be worth more to investors than the firm later. Dimon, of course, practically Brazil *Respondents * as a whole? Analysts at Goldman Sachs invented the U.S. banking-conglomerate could give 25% Group Inc. think so. In a Jan. 5 research model when he and former mentor more than one answer. note, a team of analysts there concluded Sanford “Sandy” Weill formed Citigroup that JPMorgan—whose size would subject Inc. to provide virtually any financial HOW DO YOU FEEL ABOUT THE PLUNGING it to stricter capital requirements proposed service that customers need. Yet even PRICE OF OIL FOR THE WORLD ECONOMY? by the U.S. Federal Reserve—could unlock Dimon conceded that he’d ultimately value by splitting its four main businesses be bound by the wishes of U.S. regulators It’s mostly or dividing into consumer and institu- in the event that they push to split up positive tional companies. “JPMorgan—and other JPMorgan. Across the pond, one of money centers—would strongly consider Dimon’s peers seems to already have had 75% strategic alternatives, providing share- a change of heart about the size of today’s holders with a breakup ‘put option’ if financial institutions. “The universal- capital requirements get tougher,” the banking model is dead,” Barclays Plc It’s mostly I’m not analysts wrote. Chief Executive Officer Chief Executive Officer Antony Jenkins negative 19% sure 6% Jamie Dimon wasn’t too thrilled by the said in December. prospect. “We think that we can earn a HUGH SON The poll, conducted from Jan. 14 to 15 by Selzer superior return, still, versus other banks & Co., sampled the opinions of 481 traders, and carry the higher capital and modify bankers and money managers who subscribe to the Bloomberg Professional service. The margin our business model over time without of error is plus or minus 4.5 percentage points.
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create auniverse moreexpansive thanApple’s orSamsung’s? Those investments include21Via- Those fewmonths,Xiaomi thepast During Now, Junisonabuying Lei co-founder of startups. constellation assembling a Lei Jun Can Xiaomi,theworld’s fastest-growing maker, smartphone BLOOMBERG MARKETS justthreeyears after releasing its is China’s BigBang MARCH 2015 INVESTING be different.” different.” be Group. to seems Research Market “Xiaomi Roy, analystatChina aShanghai-based they have hardware DNA,” says James droid players are notsoftware companies; worldwide. An- lion users other “Most mil- MIUI, whichnowhasmorethan 85 Inc.’s system Android called operating by developing ofGoogle an adaptation Thecompanyof itssoftwareroots. began billionlastyear.revenue doubledto$12 company isvalued billionafterits at$45 Ltd. founderYuri Milner. hassaidthe Lei from investors, includingMail.ruGroup opment,” says BinLin,Xiaomi’s president. anddevel-without doingallofthedesign ofhardware allow ustobuildothertypes sleep tracker. will “Investing instartups Corp., makeroftheShineactivity-and- provider,services andMisfitWearables Xiaomi’s because pushhascredibility In December, $1.1 billion Xiaomiraised EDMOND LOCOCO AND ALLOFTHEMAREWEAK.’ ‘THEY HAVE ACOLLECTIVE PH.D. INECONOMICS, copper, tinandaluminuminpredicting slower growth Gartman, describing theworrying accuracy of THE BROOKLYN NETS BANK INBROOKLYN. PROKHOROV COULDMAKE RUSSIAN BILLIONAIREMIKHAIL A PROFIT NETTING a potential sale. 80 percent oftheclub, isexploring commodities tycoon, whoowns for MikhailProkhorov, below. The prove to beawinninginvestment a losingNBA record, butthey’lllikely MILLION MILLION BILLION BILLION MILLION ILLUSTRATION BY sports teams. valuations for professional last year, boosting for theLos AngelesClippers What Steve Ballmerpaid Schwartz, avaluations according to Peter the Netsare worth, Approximately how much 2014 were worth inearly Amount theNets Grantland according to ESPN’s 2013–14 season, What theteam lostinthe for sale)in2010 Center arena, whichisn’t stake intheBarclays the team (anda45 percent What Prokhorov paid for then. about $12billionsince than Prokhorov have lost the eightRussians richer November. Collectively, a highof$12.5billionin BILLION expert atChristie& — Associates
Author Dennis SCOTT SOSHNICK SEAN McCABE mayhave zinc down from of Jan. 14, net worth as Prokhorov’s ,
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18 and painkillers. including cocaine enhancing drugs, performance- for banned positive tested pigeons in2013when six erupted ascandal In Belgium, ously. Thewinningbirdisn’t theonethat simultane- bird)andthenreleased each away homevaries distance for (theexact ofkilometers hundreds point a starting bands,truckedto fitted withtime-keeping birds from differentbreeders’ loftsareout- ceeds exceeded€1million. since2009inwhichthetotalpro- auctions tions.) Thecompany nine hasconducted fortheircountries’racingtradi- prized andtheNetherlandsfrom Belgium are (Birds Bolt. broker thatsold gium-based ofPigeon Paradise, theBel- Ian Somers showoff,”money togetthatface—to says face, alotof andtheyarewillingtospend shipping tycoon in2012. vious record:€250,400, paidbyaChinese ter Jamaican Thepre- sprinter UsainBolt. af- Bolt, named forapigeon online auction payingrecord, €310,000 ($391,000) inan anew GaoFuxinset businessman Chinese among China’s newly rich.InMay 2013, driven inpigeonracing largelybyinterest forapigeon?ros day lunch.Butpay more than 100,000 eu- canmakeaniceSun- squabs spatchcocked mightcontend thatthe Gourmands spikes. and warnedwith offwindowledges from parkbenches vermin shooed to be DWELLERS,TO MOST CITY
In atypicalpigeonrace, hundreds of their theycare alotabout Chinese, “The It’s increasinglycommon, becoming BLOOMBERG MARKETS MARCH 2015 High-Flying Investments Fueled bysurgingdemand,themarketforracingpigeonshastakenoff. pigeonsare INVESTING ter being auctioned. ter being valuable torace. They’re putouttostudaf- aresimplytoo birdssuchasBolt Expensive tured, thebirdsorransomed. are resold withbaitandnets.Ifcap- routes expected waitcalled pigeonpirates alongthebirds’ are thieves.InChinaandTaiwan,So so- race.each Hawks areacommonproblem. cent oftheirentrantswon’t make itbackin ride onarace’s outcome. than€2.5millioncan scene. More betting featureanactive in Chinaalso illegal races speed. the onethattravels average atthefastest butrather homeloftfirst back toits gets Owners anticipate that at least 10per- anticipatethatatleast Owners canexceed€1million, andmany Purses distances. pupils excel atshort and thosewithlarger irises arebetter racers lore, birds withwhiter According to pigeon ien. pigeons.” “Now, exclusive forvery theyarelooking winner totheChinese,”pean Ganussays. itsspeed. feather determines that thelengthofabird’s seventhprimary wing feathers.Onebitofpigeon loreholds ofthebirds’ close-ups feature still catalogs spring insteadofphysical traits,auction off- andits ofapigeon on theracingrecord ter whatyou do.” yougenetics, won’t have awinner, nomat- birds ayear toChina.“Ifyou don’t have the Granger, 500 about Indiana,whosells says MikeGanus,abreeder andracerin “It used to be you any tobe couldsell Euro- “It used While buyers to rely are beginning more iseverything,” blood “In pigeonracing, PricewaterhouseCoopers NationalSources: Ventur since 2000’s $105 billion into U.S. startups in2014, themost Amount venture capitalists pumped e Capital Association, e Capital JEREMY KAHN
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BLOOMBERG MARKETS MARCH 2015 Japan’s New Brews Craft beers flavoredCraft beers withwas THE RUBY-HUED twigs and ripe figs candied in Japanese red sugar, red figscandiedinJapanese and andripe spicy twigs tastes rich, thekindofdrinkyou relishonacoldnight.It’s oneoftwo dozen intriguing brews being poured at a Japanese beer tastingin beer ataJapanese poured intriguingbrewsbeing dozen New York arecatchingthe thatshowwhy craftbeers thecountry’s world’s attention. American expatriate Bryan Baird, whofoundedhisNumazu- American expatriateBryan Baird, based brewery in2000withhiswife, brewery Sayuri,based andisnotedfor “We’re atthedawn erainEastAsia,” ofthecraftbeer says adding distinctly local ingredients tohisaward-winning ingredients local adding distinctly inroads inthelandofKirinandSapporo. INVESTING brews. “ItremindsmeoftheU.S. 20years ago.” panies inJapan’spanies vibrant Baird BrewingCo.Baird isoneofmorethan200com- spread to China, South Korea and Taiwan.spread toChina,South Japan’s revolution that’s beer which isleadingtheAsian 2 million liters ayear,”2 millionliters says authorof Meli, Mark couldn’t you unless getabrewing made license KirinandSapporo.Asahi, until1994, “Up you from behemoths beverages the bland,super-dry asaflavorful arose thriving challengeto industry that Japan does so well. so that Japan does ple oftheEast-West fusion It’srecipes. anotherexam- beer countries’ ing other whisky, brewers are tweak- distillers didwithsingle-malt Justas to cask-conditioned ales. IPAs frombold tofruitbeers of styles, green tea. and addingflavorstrees suchaswasabi and cherry fromJapanese menting withwildyeasts like aginginsakebarrelsmadeof more subtleandoften featureseem uniquetwists though heavily byAmericantrends, influenced tific training.That’s brews, changed.Thenewest fewbrewersrible, says, hadscien- Meli because 60,000, exploded.” microbreweries Craft BeerinJapan Breweries are experimenting withahugerange areBreweries experimenting Initially, were ter- craftbeers alotofJapanese Baird JubilationAle, flavoredBaird withcinnamon ELIN McCOY . “When thelaw itto reduced . “When abi, figsandgreenteamake ji-biru (craft beer) scene, (craftbeer) sugi wood, fer- wood, Sources: Euromonitor International,Bloomberg Budweiser China’s Snow brand Share ofglobalbeervolume controlled by 5.3 % ’s combined total: 4.8%. PHOTOGRAPH BY TO POUR FOUR . character. a citrusy, bitter hop a pineyaromaand subtle brewwith this powerful yet fruit beersincludes ales andinteresting Baird’s longlistof IMPERIAL IPA BAIRD SURUGABAY of orange peel. complex, with anote Japan. It’s elegantand is oneofthebestin colored Indiapaleale This light, copper- IPA OZENO YUKIDOKE nese strain ofredrice. brewed withaJapa- this sweet, fruityone chino beers, including its innovative Hita- around theworld for chi Brewery isknown Sake producer Kiu- RED RICEALE HITACHINO NEST chocolate. off satisfying beerthat this dark, deepand microbrewery makes The country’s first ECHIGO STOUT Bud Light ers sweet hintsof and ERIC HELGAS E.Mc.
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22 BLOOMBERG MARKETS MARCH 2015 ILLUSTRATION BY EDEL RODRIGUEZ
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“distortions” in the capital markets. His No. 1 source of capital for corporations. latest handiwork is a hybrid security that “That’s dangerous,” says Daniel Galla- embeds a credit-default swap, the deriva- gher, a commissioner with the U.S. Secu- John “Mac” tive that helped push the global financial rities and Exchange Commission. “We’ve system to the edge of ruin in 2008, in a cor- had this long bull run in the bond mar- porate bond. ket, but what happens when interest rates McQuown By joining the two securities into an in- rise and there’s more pressure to sell than yanks on a chain and hoists open a metal strument called an “exchangeable bond,” to buy? Liquidity could dry up, and that roll-up door with a clang. In a flowery aloha or eBond for short, McQuown says compa- could make it harder and more expensive shirt, shorts and sandals, he looks like a re- nies will be able to transform junk-graded for companies to issue new bonds, and that tiree with little more on his mind than sip- debt into the equivalent of AAA-rated notes. could impact the broader economy.” ping a mai tai by the pool. But McQuown is And he’s hoping it will help him take advan- The eBond joins a wave of exotic new se- actually one of the architects of the mod- tage of possibly the biggest imbalance he’s curities that are hitting the capital markets ern investing system, and he’s far from seen in a career that stretches back to the seven years after the crash. Intercontinen- retiring. “Come here, I want to show you dawn of quantitative investing—a looming tal Exchange, or ICE, in Atlanta, for exam- something,” he says on a sunny afternoon liquidity crunch in the $8 trillion U.S. corpo- ple, has introduced futures based on CDS in California’s Sonoma Valley. rate bond market. McQuown says reinvent- indexes. And Amundi SA, a Paris-based as- He steps inside a workshop filled with ing the corporate bond to make it less risky set management firm, is one of many com- band saws and other woodworking tools. should make it easier to trade. panies plying investors with automated A gnarled tree trunk the size of a sofa has “The market is bumping into its own “smart beta” exchange-traded funds de- been cut down the middle lengthwise, re- boundaries,” McQuown says, “and this has signed to beat the market with little or no vealing ribbons of grain beneath its bark. created a necessity for solutions.” increase in fees. “I’m going to make a table out of that,” says McQuown is bringing out his “syn- “There’s a lot of action, a lot of experi- McQuown, 80, in the down-home cadence thetic” instrument as years of near-zero mentation, in the market now,” says Josh of his Midwestern roots. interest rates have thrown the debt market Galper, the managing principal of Fina-
A mechanical engineer, McQuown likes into flux. Since January 2009, corporations dium LLC, a finance research firm based AP NEWS: AZIMI/BLOOMBERG MOJGAN IMAGES; ANDREW STAWICKI/GETTY BERKELEY; OF CALIFORNIA, IVERSITY to make things at Stone Edge Farm, his 16- have issued $7.2 trillion in U.S. dollar- in Concord, Massachusetts. “But innova- acre (6.5-hectare) estate nestled between denominated bonds, a 39 percent jump tion does not always reduce risk—it just moves it around.” McQuown says his eBond will enable investors to jettison their credit risk be- cause the swap, which is essentially a form of insurance, will cover their losses should the debtor fail. To garner such pro- tection now, an investor must purchase a swap separately to cover a bond. “We’ve finally figured out a way to make a bond default-free,” says McQuown, a partner at eBond Advisors LLC, a New York–based two mountain ranges north of San Fran- over the prior six years. Meanwhile, new firm that’s producing the new security. cisco. In his metal shop, he machines parts U.S. and international capital require- The newfangled instrument, which Mc- for the natural-gas-fired microturbine he’s ments have forced JPMorgan Chase & Co., Quown developed with fixed-income en- installed in the compound. Rows of caber- Bank of America Corp. and other banks trepreneur Richard MacWilliams, has net sauvignon vines hang heavy with rip- to reduce the risks on their books. Wall won the support of influential figures ening purple fruit destined for his winery. Street’s primary dealers used to stock- in finance. Nobel Memorial Prize–win- He even keeps hundreds of thousands of pile bonds so they could instantly match ning economist Robert Merton and for- bees to make his own honey. buyers and sellers. Now, they’ve whacked mer BlackRock Inc. Vice Chairman Blake Yet what McQuown truly loves to create their supplies of fixed-income securities by Grossman are among the investors in is something that can’t be seen, heard or 76 percent, to $55 billion as of Jan. 5 from tasted. He’s a financial engineer, a maker about $250 billion in 2007. The result: an of methods and instruments that enable unprecedented gap between outstanding Previous spread: Fascinated by astronomy,
investors to exploit what he likes to call bonds and available liquidity in the world’s Mac McQuown built an observatory on his farm. OF UN THALEMANN/CORBIS;COURTESY OF MIT MUSEUM (2); STEFFEN COURTESY JEFF SCIORTINO/CORBIS; FINISH: AP PHOTO; TO START OPPOSITE, JOE PUGLIESE KRAUSE; ADAM NEWS; BLOOMBERG CO./VIA HEWLETT-PACKARD PERICH/CORBIS; SPENCER GREEN; PASCAL PHOTO/M. William 1964 Sharpe’s and Fama’s Eugene Sharpe theories from 1964 to Fama 1970 form the basis for the development of 1970 the fi rst index portfolio at Wells Fargo.
1971 Over the past 50 years,
innovators have changed the START 1960s way investors engage in the THE INDEX PORTFOLIO Mac McQuown capital markets. Now, Mac Leads the research 19 McQuown and his partners aim ENABLES INVESTORS TO 70 to add another milestone by SPREAD BETS ACROSS WIDE team at Wells Fargo s SWATHS OF THE STOCK that developed the reinventing the corporate bond. MARKET FOR THE FIRST TIME. fi rst index portfolio in 1971.
Fischer Black, THE ETF QUANTITATIVE INVESTING above right, and Myron Scholes CONVERTS INDEXES USES MATHEMATICAL MODELING 1980 Work on McQuown’s INTO SECURITIES TO INVEST ACROSS INDUSTRIES, research team. THAT TRADE AS MARKETS AND DIFFERENT-SIZED
EASILY AS STOCKS. COMPANIES. 1975
1980s 1992 0s Hayne Leland David Booth John Bogle 99 1 Finance professor at Co-founder of Dimensional Founder of Vanguard University of California at Fund Advisors, which Eugene Fama and Group introduces the Berkeley, who unveils the introduced quantitative Mac McQuown fi rst S&P 500 Index fi rst ETF in 1992. strategies to Main Co-founding mutual fund in 1975. Street investors directors of via mutual Dimensional Fund funds in 1993 Advisors Nathan Most 1980. EBOND The late physicist creates the S&P 500 EMBEDS A CREDIT-DEFAULT 2014 “Spider” ETF in 1993. SWAP IN A CORPORATE BOND 1994 TO MAKE IT LESS RISKY AND MORE LIQUID. THE CREDIT- DEFAULT SWAP
INSURES INVESTORS 2000s 2010s AGAINST NONPAYMENT OF BONDS IN A 2000 Richard Mac TRADABLE CONTRACT. MacWilliams McQuown Patricia Dunn Managing Partner The late CEO of Barclays partner in eBond Global Investors builds of eBond Advisors
Blythe Masters the iShares ETF Advisors JPMorgan derivatives chief powerhouse in the develops swaps to protect 1990s. the bank from loan defaults.
eBond Advisors. And John Reed, the one- firm. “It’s an important idea that deserves investment firm with $381 billion in assets time chairman of Citigroup Inc. and the to get off the ground,” says David Booth, and another backer of the venture. “The board of trustees at the Massachusetts In- co-founder and co-CEO of Dimensional way bonds trade now is abysmal, and if we stitute of Technology, is an adviser to the Fund Advisors, an Austin, Texas–based can make the bond market as liquid and 1
New sections in the standard off ering contract enable an investor to begin the process of converting a normal corporate bond into an eBond.
EXCHANGEABLE By fusing a corporate bond NORMAL BOND BOND with a credit-default swap, ISSUER the hybrid security aims to eliminate the risk borne by investors. issues
legal language added
2 3 A third party sells SWAP CREDIT- a CDS, which is SELLER DEFAULT SWAP ICE clears the swap. embedded in the sells bond, and puts up cash to back it. clears CREDIT- ICE DEFAULT SWAP (CLEARINGHOUSE) 4
The two transparent as the stock market, that’s a $$ securities are fused socially desirable outcome.” into an The eBond evokes a long line of inven- eBond and cash margin tions that were supposed to tame the mar- provided sold to an kets but instead wrought havoc. In 1998, investor. hedge fund Long-Term Capital Manage- ment needed a $3.6 billion bailout from 14 global banks after its mathematical mod- els for government bond arbitrage blew up buys following Russia’s default. Ten years later, a EBOND raft of mortgage-backed securities meant to HOLDER neutralize risk crashed much of the world’s EBOND economy. John Bogle, the founder of index mutual fund pioneer Vanguard Group Inc. and a champion of no-nonsense investing, has crossed paths with many financial en- impoverish the buyers.” The breakthrough helped usher in the era gineers, including McQuown. He’s as skep- Yet McQuown isn’t an alchemist who of passive investment in an array of stocks tical as ever that their work yields lasting made his name cooking up toxic securi- across the market, now the linchpin in benefits for investors. “I liked McQuown, ties. He actually shares Bogle’s passion for many a 401(k) fund. Sharpe, Fama and and he’s probably a genius—I have no open, cost-efficient markets. Forty-four Scholes were eventually awarded Nobel problem saying that,” Bogle, 85, says. “But years ago, McQuown applied the theories Memorial Prizes for their work; Black died geniuses pursue complexity. Any innova- of economists William Sharpe, Eugene before he could be honored. tion in the financial field is likely to fail. Fama, Fischer Black and Myron Scholes In the 1990s, McQuown and two part- Most are designed to enrich the sellers and to invent the first equities index portfolio. ners devised a way to use a company’s stock price to predict how likely it was to still executed by two traders on the phone, a “broken market.” New York–based Elec- default on its debts. The analytical tool, according to Greenwich Associates, a re- tronifie Inc. is one of several startups com- which the trio sold to Moody’s Corp. in search firm in Stamford, Connecticut. ing online to help investors bypass banks 2002 for $220 million, is a fixture on trad- Wall Street’s top 10 banks still control 90 and find liquidity in “dark pools,” which are ing floors worldwide. Today, McQuown is percent of trading in corporate bonds. And private exchanges used to trade stocks. a partner in DCI, a $5 billion fixed-income the market is still fragmented into tens of Banks, too, are joining the push. Late last hedge fund in San Francisco. thousands of bond issues because a single year, Goldman Sachs Group Inc., Credit Su- “Mac’s one of those guys who’s been company can sell scores of unique notes isse Group AG and 10 of their rivals allied very influential behind the scenes,” says with varying maturities and interest rates. with more than a dozen investment firms Booth, a billionaire who donated $300 mil- “We’ve had a transparent equity mar- to form a global trading network dubbed lion to what became the University of Chi- ket since it began, but we still don’t have a Project Neptune. (Bloomberg LP, the par- cago Booth School of Business in 2008. “To transparent debt market,” McQuown says. ent of Bloomberg News, also operates an bring about fundamental change, you need “Instead, we have all these bilateral ar- electronic trading platform for fixed-in- great thinkers and researchers, but you also rangements with highly levered and highly come securities.) need implementers. People like Mac don’t volatile dealers. There’s no reason in the “Investors have been building larger and win Nobel Prizes; they implement the ideas world why corporate bonds shouldn’t trade larger positions of credit exposure in their of the guys who do. He’s a catalyst.” like equities.” portfolios, and they’re going to need alterna- Now McQuown and MacWilliams, For entrepreneurs and market stalwarts tive ways to exit them,” says Richard McVey, eBond Advisors’ managing partner, are alike, such structural flaws aren’t a worry; chief executive officer of MarketAxess, the betting they can move a market that has they’re an opportunity. BlackRock, the No. 1 digital hub for corporate bonds in the proved impervious to change. For the past No. 1 global investment firm, with $4.3 tril- U.S. “This is a massive capital markets prob- 25 years, the two men have watched as lion in assets, has formed a strategic alli- lem, and it needs to be solved.” equities trading has become as easy and ance with MarketAxess Holdings Inc. to McQuown, still spry, with a mop of accessible as online shopping. When it offer investors an alternative to what it calls snowy hair, a California tan and a kung-fu comes to bonds, little has changed since grip of a handshake, isn’t interested in the days when Michael Lewis played li- starting an electronic trading platform. ar’s poker with his pals at Salomon Broth- Bryan Jennings, below left, and He and MacWilliams have set out to rein- ers in the 1980s. Eight out of 10 deals are Richard MacWilliams are on vent the bond itself. Peter Aherne, head of McQuown’s eBond Advisors team. North America capital markets, syndicate bailout of the insurer. a crisis. But this shared responsibility marks and new products at Citigroup, agrees that “When you look at this corporate eBond, a sea change from the bad old days when in- the eBond could be a breakthrough. “By it’s strikingly similar to what was done vestors gambled their counterparties would linking credit protection and a bond in a with mortgages,” says Angelides, a Dem- make good on their contracts. single security, I would expect there to be ocrat who was California state treasurer portfolio benefits in terms of risk manage- from 1999 to 2007. “Credit-default swaps IT’S LATE AFTERNOON AT STONE EDGE ment and trading opportunities,” Aherne were embedded in mortgage-backed Farm, and McQuown is meeting with says. “More buyers for these securities securities with the idea that they’d be MacWilliams and eBond Advisors CEO should enhance the liquidity of the bonds.” made safe. But the risk wasn’t insured; it Bryan Jennings in his billiards room as But as McQuown and MacWilliams in- was just shifted somewhere else.” shadows stretch across the swimming pool troduce their new product, they may find McQuown and MacWilliams counter outside. The three men are discussing the fund managers underwhelmed by the idea that soon CDSs will not pose the systemic restructuring of the derivatives market of a riskless corporate bond. “The way we threat they did in 2008. Back then, they since the crash. “We could never have developed eBonds without Dodd-Frank and centralized clear- ing,” says MacWilliams, 62, an easygoing man who rides in the Krewe of Hermes pa- rade in his hometown of New Orleans ev- ery Mardi Gras. “In 2008, it wasn’t the swap that was broken—it was trust and faith in the sys- tem,” adds Jennings, 48, who headed fixed-income capital markets and deriva- tives at Morgan Stanley from 2003 to 2012. make money for our clients is by assessing were traded between two parties in an un- “It’s absolutely stupid to have a deriva- risk and generating risk-adjusted returns, regulated and unaccountable system. To tives market based on bilateral trading,” and if you have a security that hedges that bring the $19 trillion CDS market out of McQuown chimes in. “And to load up deal- risk premium away, then why is it compel- the shadows, the Dodd-Frank Wall Street ers with an inventory of credit-default ling? I would just buy Treasuries,” says Reform and Consumer Protection Act swaps is the second-dumbest thing imag- Bonnie Baha, the head of global developed of 2010 mandated that most of these inable. Centralized clearing is one of the credit at DoubleLine Capital, a Los Angeles securities be traded through exchanges benefits of ’08, and I think it’ll change the firm that manages about $56 billion in and processed by clearinghouses that debt markets.” fixed-income assets. “This product sounds guarantee settlement and record every As he strolls the grounds, it’s quickly like a great idea in theory, but in practice it transaction in a database open to regula- evident that the proprietor of Stone Edge may be a solution in search of a problem.” tors. The SEC is writing rules to implement Farm is a man of eclectic tastes. Vegetable And, of course, fusing a security as the measure. (Bloomberg LP operates a beds teem with squash and tomatoes and straightforward as a bond with the notori- swap execution facility for trading these 40 125-year-old olive trees have been re- ous credit-default swap does ring a lot of derivatives.) planted with geometric precision in par- alarms, says Phil Angelides, former chair- The two men are betting these new safe- allel rows. McQuown, who grew up in a man of the Financial Crisis Inquiry Com- guards will ease worries about swaps. ICE, farming family in northern Illinois, em- mission, a blue-ribbon panel appointed by the No. 1 global clearinghouse for credit de- ploys his own arborist to tend to the live President Barack Obama in 2009 to con- rivatives, will process the swaps used to cre- oaks and California bay trees on his es- duct a postmortem on the causes of the ate eBonds. ICE requires sellers of swaps to tate. He’s inclined to go overboard when subprime mortgage disaster. In Septem- backstop their contracts with various mar- he delves into new projects. Years ago, his ber 2008, American International Group gin accounts. If the seller fails to pay off, then wife, Leslie, bought him a backyard tele- Inc. didn’t have the money to back the ICE can tap a “waterfall” of margin funds to scope only to see it go untouched. When swaps it had sold guaranteeing billions of make the investor whole. In the event of a McQuown finally decided he needed “to dollars’ worth of mortgage-backed securi- market crash, it can call on clearing mem- know” astronomy, he purchased a “deep- ties. To prevent AIG’s failure from cascad- bers such as Citigroup and Goldman Sachs sky” telescope with a 20-inch mirror and ing through the global financial system, to pool their resources and fulfill swap con- housed it in a three-story-high observatory the U.S. Federal Reserve and the U.S. Trea- tracts. There’s still a danger that the banks clad in rust-colored steel that resembles a sury Department executed a $182 billion themselves may be unable to muster cash in Mayan pyramid. “He hasn’t changed that McQuown’s Sonoma property displays his eclectic tastes, mixing the old and the new. much since I first met him more than 50 between risk and return and concluded, mathematical formulas based on a compa- years ago,” says Fama, 76, a finance profes- as did McQuown, that a wise way to make ny’s stock option pricing to calculate this sor at Chicago Booth. “He has a basic curi- money in the stock market was essentially probability with greater depth than can be osity about everything.” to invest in all of it. found in conventional credit reports. After earning a degree in mechanical This particular stream of thought ar- As an entrepreneur, McQuown savored engineering from Northwestern University rived at a time when investors typically exploiting such inefficiencies. In 2004, and then an MBA from Harvard in 1961, Mc- put their faith in star stock pickers. “It was at the age of 70, he co-founded DCI with Quown embraced an emerging discipline an exciting time because finance and in- Kealhofer to profit by predicting and man- called computer science. As a young ana- vesting were in a pre-scientific era,” re- aging the default risk in corporate bonds lyst in Smith Barney’s corporate finance calls Sharpe, 80. “Mac was a guy who said, and CDSs. unit in Manhattan, he spent his weekends ‘Surely we can bring economics and math- Yet McQuown was also driven by an en- renting time on an IBM 7090, a room-sized ematics to bear in this area and optimize gineer’s desire to replace a flawed machine mainframe installed in the basement of the Time-Life Building. McQuown wanted to see if he could predict how stocks would perform, so he built a database and then slept next to the whirring machine as it ran his programs. He says with a laugh that he failed in his quest. By 1970, McQuown was leading the management sciences research division at Wells Fargo & Co. in San Francisco. He was blown away by Fama’s theory that equity prices reflect all available information, so a portfolio.’ That required algorithms and with a better one. For years, McQuown it’s virtually hopeless to beat the market serious computing power.” and MacWilliams had kvetched about over time. McQuown also studied Sharpe’s In July 1971, McQuown’s team of brains how antiquated the bond market seemed work. Sharpe had developed formulas, in- unveiled a $6 million portfolio that tracked compared with stocks, futures and other cluding one that came to be known as the 1,500 equities trading on the New York securities. MacWilliams had gotten to Sharpe ratio, to quantify the relationship Stock Exchange for the pension fund at lug- know McQuown in the early 1990s, when gage-maker Samsonite. It would take Bo- he headed EJV Partners LP, a bond data gle, who developed his Standard & Poor’s provider that did business with KMV. 500 Index mutual fund in 1975 separately In the aftermath of the 2008 crash, the from McQuown, to bring low-cost index in- two men rapped by phone daily about how vesting to the masses through Vanguard. to take advantage of the restructuring of More than four decades later, index-based Wall Street. “There is a clear thread from For more details about eBonds, you can use mutual funds and exchange-traded funds Wells Fargo to the eBonds concept,” says the Bloomberg Law Search (BBLS) func- hold $10 trillion in assets, according to David Coulter, the vice chairman of War- tion to display the patent that John “Mac” Statista Inc., a New York–based research burg Pincus LLC, the New York–based pri- McQuown fi led for creating and trading the group. The project left McQuown with an vate-equity firm, and an adviser to eBond securities. Type BBLS
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(Member Canadian Investor Protection Fund) in Canada and Asia, BMO Capital Markets Limited (authorised and regulated by the Financial Conduct Authority) in Europe and Australia and BMO Advisors Private Limited in India. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. “BMO (M-Bar roundel symbol)” is a registered trademark of Bank of Montreal, used under license. ® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere. ™ Trademark of Bank of Montreal in the United States and Canada. as banks and insurers sold unsecured convolute the marketplace, says Turbev- oceans or the brain, McQuown is in his el- swaps supposedly to guarantee subprime ille, a former investment banker at Gold- ement. For him, the capital markets are an mortgage-backed bonds. man Sachs. “Why are we doing this? Is our ever-changing machine to be tuned and Now, McQuown and MacWilliams are society better off as a result of this innova- re-engineered indefinitely. wagering that this maligned derivative tion?” he asks. “You can’t destroy risk; you McQuown’s breakthroughs with index will ultimately justify its usefulness. They just move it around. I would argue that we funds and credit- default analysis worked point out that the junk bond, another in- have to reduce complexity and face the fact to the benefit of investors. The question novation that was once viewed as a fi- that it’s actually good for institutions to ex- now is, will his tinkering do the same nancial weapon of mass destruction, has perience risks.” as the bond market heads into a crucial become an uncontroversial tool. With in- transition? vestors required to trade and clear swaps BACK AT STONE EDGE FARM, IT’S A “There’s going to be a lot of experiments, in an open and accountable marketplace, balmy evening and McQuown has in- and more power to those that are trying to “We can return credit-default swaps to vited MacWilliams and Jennings to join figure out solutions,” McQuown says on the their original purpose—to transfer risk,” him and Leslie for dinner at an outdoor phone a few weeks later. “Otherwise, we’ll MacWilliams says. To create the new instru- ment, eBond Advisors’ lawyers added three sections to the standard contract that bond issuers provide to bond buy- ers. Even so, McQuown and his partners may have difficulty finding investors willing to sell the swaps to embed in the eB- ond because the market has yet to fully recover from the crash. In the second week of January, investors traded $86 billion worth of contracts, a 37 percent drop from the same week in 2011. Moreover, Jennings is hav- ing a hard time persuading chief financial officers to take a chance on using eBonds amid the fixed-income boom.“No McQuown, shown in his woodworking one has a problem raising capital right shop at Stone Edge Farm, is an end up with financial dysfunction, and now,” Jennings says. “The biggest chal- inventor at heart. there’s really no reason for that.” lenge, without a doubt, is overcoming the He’s about to describe an idea for a new question of, ‘Has anyone else done it?’” type of mutual fund when he has to hop off There’s a bigger problem with the table. The couple’s chef serves a decon- the call. Someone calls from the gate. It’s a eBond—and, for that matter, with finan- structed eggplant Parmesan salad with group of researchers from the Institute for cial engineering in general—says Wallace heirloom cherry tomatoes and rocket the Future, a Palo Alto, California–based Turbeville, a senior fellow at Demos, a New from the farm’s organic garden, and group that forecasts social and techno- York–based think tank. The bond is a sim- glasses are filled with the 2006 vintage of logical trends. They’re not interested in ple instrument with a debtor and creditor McQuown’s cabernet sauvignon, which bonds or CDSs. No problem. The engineer that’s proven its utility for centuries. The sells in the secondary fine-wine market is happy to show them how his microtur- eBond inserts a third party into the trans- for $110 a bottle. bine and solar array will soon shift his en- action—the seller of the swap embedded As the conversation turns to “complex- tire compound off the grid. in the security who now bears its credit ity theory,” an interdisciplinary approach risk. Such machinations may be designed developed by physicists at the Santa Fe Edward Robinson is a senior writer at Bloomberg Markets with good intentions, but they just further Institute to analyze systems such as the in London. [email protected] Whatever your market, we’ve got you covered
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MARCH 2015 BLOOMBERG MARKETS 39 about China,” says O’Neill, who coined the term BRICs in 2001 to highlight the rising economic power of Brazil, Russia, India and China. “I assumed China would grow by 7.5 percent a year this decade,” he says. “So far, it will have averaged 7.9 from 2011 to 2014.” The Bloomberg Markets emerging and frontier markets rankings are based on 19 measures of the investing climate, investors by defaulting on its debt. On Optimism about Korea is tempered by from forecasts of gross domestic product Dec. 15, a Bloomberg index tracking 20 its competitive weakness against rival Ja- growth for the next two years to the ease big emerging-markets currencies fell to its pan. “A major issue for the Korean mar- of doing business. MSCI Inc., a New York– lowest level in a decade. The Russian ruble ket is the relative value of the won versus based publisher of equity indexes, desig- fell past 64 to the dollar for the first time the yen,” says Jim O’Neill, retired head of nates countries as emerging or frontier ever, as the price of oil sank and interna- Goldman Sachs Asset Management. As of based on a variety of criteria, including tional sanctions took hold. Bonds issued Jan. 12, the yen was approaching a sev- trading volumes, restrictions on foreign by Brazilian oil giant Petrobras Brasileiro en-year low against the dollar. A weak cur- investors, corporate governance, and cur- SA nosedived amid a massive corruption rency makes exported goods cheaper. The rency and political stability. In 2014, MSCI probe. In December alone, investors pulled South Korean economy grew at an anemic moved Qatar and the U.A.E. from the fron- more than $4 billion from emerging-mar- 0.4 percent in the three months through tier to the emerging index, which helped kets exchange-traded funds, erasing 48 December, according to the Bank of Korea. them pull in $3.5 billion from global percent of the inflow for the year, accord- China’s markets were unaffected by the emerging-markets funds, according to ing to data compiled by Bloomberg. emerging-markets crisis, with the Shang- EFG-Hermes Holding SAE. As the tumult continued into 2015, dis- hai Composite Index rising 58 percent in South Korea, widely considered a devel- cerning emerging-markets investors saw 2014, including reinvested dividends, af- oped market, remains on MSCI’s emerging opportunity. They’re bullish on China, ter slumping 3.9 percent in 2013. “I don’t list because of limits on the convertibility South Korea and, despite a 50-plus per- understand why people are so negative of the local currency and restrictions on cent drop in the oil price, the Gulf nations. access to its markets. South Korea tops Bloomberg Markets’ Saudi Arabia is classified as frontier be- fourth annual ranking of the most-promis- Zig Zag Towers in Doha. MSCI cause it limits direct investment in its shifted Qatar from its frontier to ing emerging nations in which to invest in its emerging index in 2014. 2015, with Qatar No. 2, China No. 3 and the United Arab Emirates No. 4. Saudi Arabia heads the list of the most-promising fron- tier markets. “Both Korea and China look attractive at this stage,” says Mark Mobius, who over- sees $40 billion as executive chairman of Templeton Emerging Markets Group. Not- ing that China and South Korea are oil im- porters, Mobius says, “Both markets will benefit from low oil prices and relatively high economic growth.” More than half of the market capitaliza- tion of South Korea’s Kospi Index of stocks consists of exporters, says Hartmut Issel, head of Asia-Pacific investment at UBS Wealth Management. Samsung Electron- ics Co. alone accounts for 17 percent of the market. “The fate of Korean stocks is thus largely determined by how big customers such as the U.S. are doing,” Issel says.
40 BLOOMBERG MARKETS MARCH 2015 markets to the six members of the Gulf Co- operation Council, or GCC. Others can in- vest only via swaps or ETFs. In July, Riyadh
announced it would remove those restric- PROJECTED PRICE-TO- TWO-YEAR tions. It may do so in April, according to AVERAGE GDP BOOK RATIO OF SOVEREIGN CDS EASE OF DOING TOTAL GROWTH, 2015, PRIMARY EQUITY SPREAD, IN BASIS BUSINESS RANK, two people familiar with the matter. That SCORE 2016 INDEX POINTS 2015 will set the conditions for it to be desig- nated an emerging market as early as 2017, 1 SOUTH KOREA 70.7 3.6% 1.0 17.1 5 Sebastien Lieblich, head of MSCI Index Re- 2 QATAR 69.2 6.5 2.0 50.5 50 search, told Bloomberg in July. 3 CHINA 66.3 6.9 2.0 26.1 90 The Saudi stock market had a market 4 U.A.E. 65.9 3.9 1.5 101.8 22 cap of $458 billion as of Jan. 12, making it 5 CHILE 64.7 3.3 0.3 50.6 41 the biggest market in the Middle East by far. The Tadawul All Share Index fell 2.8 — MALAYSIA 64.7 5.1 2.1 46.1 18 percent in the 12 months ended on Jan. 12. 7 PANAMA 62.9 6.5 0.4 62.0 52 Among its listed stocks are Saudi Basic In- 8 PERU 60.3 5.2 1.2 62.8 35 dustries Corp., one of the world’s largest 9 LATVIA 58.7 3.0 0.5 52.6 23 petrochemical producers; Al Rajhi Bank, 10 POLAND 58.5 3.4 1.3 16.5 32 the biggest Islamic lender; and Kingdom 11 THAILAND 58.1 4.0 2.1 37.6 26 Holding Co., the investing vehicle of bil- lionaire Prince Alwaleed Bin Talal Al Saud. 12 CZECH REPUBLIC 57.7 2.6 1.2 25.4 44 The oil price plunge is certain to carve a 13 HUNGARY 54.1 2.5 0.8 90.5 54 hole in the budgets of the Gulf oil and gas 14 COLOMBIA 53.1 4.4 1.4 85.5 34 exporters. The government of Saudi Arabia 15 TURKEY 51.0 3.6 1.6 97.6 55 is already projecting a budget deficit of $39 16 BRAZIL 48.5 1.4 1.2 129.1 120 billion for 2015. Yet the government of King — PHILIPPINES 48.5 6.2 2.8 31.5 95 Abdullah refused to countenance a reduc- tion of oil production to drive up prices in 18 MEXICO 48.3 3.6 2.7 60.5 39 meetings of the Organization of Petroleum 19 SOUTH AFRICA 45.5 2.6 2.2 89.1 43 Exporting Countries. The king died at the 20 INDONESIA 45.0 5.5 2.4 61.5 114 age of 90 in January and was succeeded by 21 MOROCCO 43.4 4.8 2.2 126.8 71 the crown prince, Salman bin Abdulaziz Al 22 RUSSIA 39.4 –0.1 0.7 285.5 62 Saud. Analysts didn’t expect the kingdom’s 23 GREECE 39.2 1.9 0.7 1,449.1 61 oil policy to change under Salman, 79. Money managers point out that Saudi 24 INDIA 35.2 5.9 3.1 70.5 142 Arabia and other Gulf nations can easily 25 EGYPT 30.8 3.6 1.8 223.2 112 fund their ambitious domestic develop- Sources: Bloomberg, International Monetary Fund, ment projects by drawing on the dollar re- FOR “HOW WE CRUNCHED THE NUMBERS,” SEE PAGE 42. World Bank, Economist Intelligence Unit, Transparency serves they built up while petroleum prices International, World Economic Forum, CIA were high. “GCC governments have accu- mulated massive surpluses in the past de- That makes consumer companies, Elsewhere in the developing world, the cade thanks to elevated energy prices,” says construction, real estate and the banks crisis has opened a rift among the BRICs. Dubai-based Rami Sidani, the head of fron- that fund them a good bet, says Hootan “These four countries could hardly be tier markets investing at Britain’s Schroder Yazhari, managing director for global more heterogeneous at this point,” says Investment Management. frontier markets at Bank of America Mer- UBS’s Issel. He sees continuing turmoil in The reserve amounts as of Jan. 12: $734 rill Lynch. He recommends Dubai-based Brazil, No. 16 in the ranking, and Russia, billion for the Saudis, $74.7 billion for the Emaar Properties PJSC and Abu Dhabi– No. 22, in 2015. “In Russia, recession is in- U.A.E. and $45.5 billion for Qatar. “The based Aldar Properties PJSC, First Gulf evitable,” he says. main growth driver in this part of the world Bank PJSC and Abu Dhabi Commercial At the same time, investors glow with is government spending,” Sidani says, Bank PJSC. In Saudi Arabia, clothing re- enthusiasm for the other two BRIC na- “and we expect these governments to pro- tailer Fawaz Abdulaziz Alhokair & Co. and tions. “We are most excited about the new ceed with that in order to diversify their bookstore chain Jarir Marketing Co. are governments in China and India, who have
BRUNO MAZODIER/FIGAROPHOTO/REDUX economies.” among Merrill Lynch’s top picks. put reforms in place that will benefit the
MARCH 2015 BLOOMBERG MARKETS 41 economy and financial markets in 2015,” says Pearlyn Wong, a Singapore-based in- vestment analyst for Switzerland’s Bank
Julius Baer & Co. Narendra Modi took over PROJECTED PRICE-TO- TWO-YEAR as India’s prime minister with a reformist AVERAGE GDP BOOK RATIO OF SOVEREIGN EASE OF DOING TOTAL GROWTH, 2015, PRIMARY EQUITY CDS SPREAD, IN BUSINESS RANK, economic agenda on May 26. Since then, SCORE 2016 INDEX BASIS POINTS 2015 the benchmark S&P BSE Sensex stock in- dex was up 11.6 percent as of Jan. 12. 1 SAUDI ARABIA 78.8 3.5% 1.9 31.3 49 China’s equity market should get a 2 ESTONIA 71.4 2.7 1.1 32.9 17 boost in 2015 from the stock-connect pro- 3 SLOVAKIA 67.1 2.9 1.0 19.8 37 gram that allows foreign investors to buy 4 LITHUANIA 65.8 3.2 1.2 52.5 24 mainland shares through the Hong Kong 5 BAHRAIN 65.7 3.5 0.9 137.7 53 market, says Adam Tejpaul, head of Asian investments at J.P. Morgan Private Bank. 6 SLOVENIA 65.0 1.6 1.0 59.5 51 China will also benefit from lower energy 7 BULGARIA 63.8 2.1 0.6 129.0 38 prices and a dovish monetary policy by 8 VIETNAM 62.4 6.1 1.8 70.6 78 the People’s Bank of China, which will 9 KAZAKHSTAN 61.5 4.5 0.6 231.9 77 provide liquidity to the country’s mar- 10 ROMANIA 60.3 3.0 1.0 61.5 48 kets, Tejpaul says. 11 CROATIA 59.1 0.9 0.8 161.9 65 “Company fundamentals in the main- land are increasingly positive,” says 12 CYPRUS 58.4 0.4 0.1 433.9 64 Andrew Gillan, head of Asia (exclud- 13 LEBANON 49.7 2.9 0.8 253.7 104 ing-Japan) equities at Henderson Global 14 TUNISIA 47.9 3.9 2.9 189.7 60 Investors. “Favored holdings include 15 PAKISTAN 44.9 4.2 2.0 567.0 128 Baidu, which dominates the Internet 16 NIGERIA 43.6 6.6 1.9 308.6 170 search market.” Henderson also likes 17 ARGENTINA 40.6 0.8 1.2 8,838.6 124 Brilliance China Automotive Holdings Ltd., a joint venture partner with Bayer- 18 UKRAINE 38.1 –0.1 0.5 1,934.1 96 ische Motoren Werke AG, and Dongfeng 19 VENEZUELA 23.2 –0.5 4.5 6,420.4 182 Motor Group Co., which has partnerships with Honda Motor Co. and Nissan Mo- Sources: Bloomberg, International Monetary Fund, World Bank, Economist Intelligence Unit, Transparency International, World Economic Forum, CIA tor Co. China is the world’s biggest auto market. Long-term investors shouldn’t be de- terred by the current turmoil, Mobius says. “Three key themes remain in place,” he says. “Emerging markets’ economic growth Bloomberg ranked frontier and being zero to 100. All data were price-to-book ratio of the primary rates in general continue to be markedly emerging markets based on their the latest available as of Jan. 2. equity index, liquidity of the pri- faster than those of developed markets, overall investment potential Economic indicators got 40 mary equity index over three through 2016. We used data percent of the weight in the rank- years, exchange-rate volatility emerging markets have much greater for- from Bloomberg, MSCI, FTSE, ing and included average pro- over three years, two-year sover- eign reserves than developed markets, and Standard & Poor’s and JPMorgan jected GDP growth for 2015 and eign-debt credit-default-swap the sovereign-debt-to-GDP ratios of emerg- to decide whether a country was 2016, plus projected inflation spread and the Economist Intelli- emerging or frontier. Countries rate, government debt as a per- gence Unit’s banking risk score. ing-market countries generally remain were awarded points for their centage of GDP, total investment Political and social measure- much lower than those of developed mar- performance in each of 19 indi- as a percentage of GDP and cur- ments (20 percent) included kets.” Even with major nations like Russia cators. For each variable, the rent-account balance as a per- Transparency International’s Cor- worst-performing country re- centage of GDP. Also included ruption Perceptions Index score, the and Brazil hobbled by low commodities ceived zero points while the best were the current labor participa- EIU’s political risk score, the World prices, scandal and sanctions, Mobius con- performing received the maxi- tion rate, foreign reserves as a Bank’s ease-of-doing-business cludes, growth rates—and share prices—in mum number of points assigned percentage of GDP and World score and the adult literacy rate. to that variable, according to its Economic Forum infrastructure To access a country risk assess- developing markets will outpace those in weight. All other countries re- score. ment spreadsheet on the the U.S., Europe and Japan in 2015. ceived points between these two Financial indicators also got Bloomberg Professional service, extremes. Points were summed 40 percent of the weight in the type XLTP COUNTRY RISK into a total score, with the range ranking. They included the
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TYPE VETF
propelled MBK’s remarkable rise during the punitive tax on excessive cash piles. OF MBK PARTNERS COURTESY THIS PAGE: JO YEON; WON HYUN JIN; GROOMING: HAIR: KANG LEE JI YOUNG; PREVIOUS SPREAD: STYLIST:
46 BLOOMBERG MARKETS MARCH 2015 Then there are new rivals with formi- PE BOOM Since Korea loosened requirements for private-equity funds, the industry has taken off. dable career and family backgrounds who are closing in on Kim. Scott Hahn, a former Total Value of North Asian* Private-Equity Deals Capital Commitments to South Korean chief investment officer for Asia at Morgan (in billions) Private-Equity Funds (in trillions of won) Stanley Private Equity who founded Seoul- based Hahn & Co. in 2010, is one of them. 200420062008201020122014 2005 2006 2008 2010 2012 2014 Like Kim, Hahn, a 43-year-old Korean na- $30 50 tive with a degree from Harvard Business 25 School and experience on Wall Street, has 40 shown he’s able to raise money from in- 20 ternational investors. In 2014, Hahn & Co. 30 and its partner Hankook Tire Co. acquired 15 Daejeon, South Korea–based Halla Visteon 20 Climate Control Corp., the world’s sec- 10 ond-largest supplier of automotive climate 5 10 control parts, for $3.6 billion. Global PE firms are also returning to Ko- 0 0 rea, the region’s brightest spot in terms of sustained deal flow, according to Bain 8393144220169128189209184167144 15 25 44 76 110 148 181 226 234 271 & Co.’s Asia-Pacific Private Equity Report Number of Deals Number of PE Firms 2014. In 2009, KKR & Co. beat MBK and ac- quired Korea’s Oriental Brewery Co. for $1.8 Data exclude VC and government deals. *North Asia refers to China, Japan and South Korea. Sources: Asian Venture Capital Journal, Korean Financial Supervisory Service billion, selling it back to Anheuser-Busch InBev NV for $5.8 billion in 2014. Overseas buyout firms had reduced their investments in Korea in the mid-2000s—spooked by a decade ago, MBK has fully or partially sold world’s 13th-largest economy, it’s still con- mounting public backlash against billions 11 companies in its first two funds, includ- sidered an emerging market under MSCI of dollars of gains foreigners had reaped ing China Network Systems Co. in Taiwan, Inc. criteria. from Korean assets following the 1997– whose sale is pending regulatory approval. Even before he set out on his own with 1998 Asian financial crisis. “Unlike Japan, Those exits have returned an estimated MBK, Kim had been one of the most prom- where private equity developed over years $3.84 billion to investors, generating a re- inent financiers in the country. After grad- in an evolutionary way, private equity hit turn of 2.6 times on equity invested. uating from Harvard Business School in Korea like a revolution,” Kim says. “It was 1990, he rejoined Goldman Sachs and very controversial.” Global firms—includ- KIM SAYS SOUTH Korea will continue to be gained experience as an M&A banker. In ing KKR, Carlyle Group LP, TPG Capital and the most dynamic market for buyouts in 1995, he joined Salomon Smith Barney, CVC Capital Partners Ltd.—have together Asia. “Korea is Google to Japan’s IBM,” he which three years later became part of Citi- raised $16.7 billion dedicated to Asia-Pacific says. MBK allocates up to 50 percent of its group Inc. There, he led the issuance of sov- investments in the 18 months since July funds toward Korea and the rest in China ereign bonds worth $4 billion in 1998. 2013. “Everyone’s coming back,” Kim says, and Japan. Kim says that as a buyout mar- At Carlyle Group, where he served as adding that homegrown companies with lo- ket, China is just emerging and will be- Asia president for six years, until 2005, he cal networks have an advantage over global come the most important market one day. led the firm’s $450 million investment in firms in sourcing local deals. For a country to be a sustainable buyout KorAm Bank, which was later sold to Citi- market, he says, it needs to have a popula- group for $2.7 billion. DEREK MURPHY, SENIOR vice president of tion greater than 50 million and a per cap- Seated in a 20th-floor MBK conference private equity at Ottawa-based Public Sec- ita gross domestic product of more than room, dressed in a gray blazer with a color- tor Pension Investment Board, one of the $30,000. Only seven countries are in that ful handkerchief peeking out of the breast founding investors of MBK, says that to club, and Korea is one of them. The oth- pocket, Kim acknowledges that he hasn’t remain pre-eminent in PE, Kim needs to ers: the U.S., the U.K., Germany, France, It- gotten to where he is entirely on his own. continue to take advantage of his solid in- aly and Japan. South Korea’s population He says his marriage to Park Kyung–Ah, vestor base. “Michael needs to ‘own’ the is 50.4 million, and its GDP per capita on a a daughter of late Korean Prime Minis- large deal market in Korea and ensure that purchasing-power-parity basis is $35,485, ter Park Tae-Joon, opened many doors for all large deals come to MBK first and fore- according to 2014 data from the Interna- him. Kim’s father-in-law built Posco into most,” Murphy says. Since its inception a tional Monetary Fund. Though Korea is the one of the world’s biggest steelmakers from
MARCH 2015 BLOOMBERG MARKETS 47 scratch. He also was one of the most trusted MBK’S BUYING SPREE lieutenants of former President Park Chung C&M ING Life Korea Coway USJ Nepa Hee, under whom Korea became an indus- Cable TV Life insurance Water and air Universal Outdoor trial powerhouse. Park Chung Hee, whose service provider purifier maker Studios Japan apparel brand (Korea) (Korea) theme park (Korea) daughter Park Geun Hye is now president, $2.35 $1.7 $1.1 $1.4 $869.6 governed Korea from 1961 until his assassi- Deal Value BILLION BILLION BILLION BILLION MILLION nation in 1979 by the head of his own secu- rity services. On his first visit to Asia, in 1998, then– Citigroup Co-Chairman Sanford “Sandy” Weill chatted with Kim over dinner. He was so impressed by Kim’s knowledge of Korean and Japanese banks that he asked MBK $578.5 $711.2 $518.1 $183.3 $290.3 Equity MILLION MILLION MILLION MILLION MILLION the young Salomon banker to hop on his corporate jet and fly with him to Tokyo. Acquisition MARCH DECEMBER JANUARY MAY APRIL 2008 2013 2013 2009 2013 During the flight, Kim sat next to his boss Completed Source: MBK and fielded his intense questions. Their re- lationship blossomed. “I always thought Michael was the kind of young man who re- ally deserves success,” says Weill, now 81. has S$223 billion ($167 billion) of assets. Ho So driven was Kim when chasing the “He worked hard. He had good ethics. And put up several hundred million dollars in KorAm deal that his Carlyle colleagues he was very respectful.” Weill says Kim has 2005 to get MBK started. “She basically put nicknamed him “Captain Ahab,” after the always addressed him as “Mr. Chairman.” us in business,” Kim says. “We do invest whale hunter in Melville’s Moby-Dick. Kim Kim set up MBK in 2005 with five se- in funds where they give us new exposure says KorAm became an obsession. “It was nior Asian executives from Carlyle. Kim to new sectors and geographies,” says Ste- my Moby-Dick, and I was obsessed with it.” says one of MBK’s earliest and most ardent phen Forshaw, a Temasek spokesman. “We Kim—5 foot 10, with thick black hair— supporters was someone who “thought often keep long-standing relationships prefers a 45-minute squash game over five it was high time that we have Asians run- with many funds, global and regional.” hours on the golf course. “I have this bad ning an Asian firm.” He’s referring to Ho MBK invests in leading consumer busi- habit of looking at everything in terms of op- Ching, CEO of Temasek Holdings Pte, Sin- nesses, among others. They include Nepa portunity cost, especially when it comes to gapore’s state investment company, which Co., one of Korea’s biggest outdoor ap- my time,” he says. He plays squash with Eric parel companies, which MBK acquired Hoffman, an American who’s been chief for $869.6 million, and Coway Co., Korea’s commercial officer at Aon Risk Solutions biggest health appliance maker, which it Korea since 1998. For nine years, they’ve purchased for $1.1 billion. It also acquired played a couple of times a week when not Tracking MBK Komeda Co., one of Japan’s largest coffee traveling. At the end of each year, the one You can use Bloomberg’s suite of chain operators, for $470.5 million. who’s won the most games gets to keep a tro- private-equity functions to fi nd more Kim credits his success to being in the phy proclaiming him “Big Fat Ahjussi.” (Ah- information about MBK Partners. First, type right place at the right time. He grew up jussi means middle-aged man in Korean.) PE
of Shakespeare’s major works. [email protected] LEE JASON BY ILLUSTRATIONS
48 BLOOMBERG MARKETS MARCH 2015
50 BLOOMBERG MARKETS MARCH 2015 The year-old Nissan plant at Aguascalientes is part of $20 billion in new investment by global auto companies.
MARCH 2015 BLOOMBERG MARKETS 51 the AMIA’s president, told reporters in Jan- company, for a third of its tax receipts. Mex- uary. “The growth reflects the confidence ico hedged its oil sales for 2015 and is guar- the industry has in our country.” anteed $76 a barrel, but that hedge will end The burgeoning auto industry is just one late in the year. example of Mexico’s manufacturing prow- Still, investors expect 2015 to be a turn- ess—and one reason investors think it will around year. “Mexico is among our clear robots weld and bolt together Nissan Sen- outperform the rest of Latin America in favorites in terms of fixed income and eq- tras at one of the Japanese company’s fac- 2015. “The growth pickup in the U.S. is go- uities,” says Jorge Unda, chief investment tories in Aguascalientes, Mexico, on a cool ing to be felt first and foremost in coun- officer for Latin America at Spanish bank December morning. The $2 billion facil- tries like Mexico,” says Gerardo Rodriguez, Banco Bilbao Vizcaya Argentaria SA. “Of all ity, opened in November 2013, churns out a BlackRock Inc. portfolio manager. “Going the emerging markets, it’s the most related 600 gleaming new cars a day and employs into 2015, clearly Mexico is one of the mar- with the American economy, and the Amer- 3,000 workers. Acres of autos sit in the sun kets that’s looking attractive.” ican economy is going to continue growing.” outside the plant, waiting to be loaded onto Mexico is No. 18 in Bloomberg Markets’ The U.S., where GDP shot up 5 percent in trains bound for the U.S., where consumers ranking of the 25 most-promising emerging the third quarter of 2014, is the destination enjoying the lowest gasoline prices in five markets in which to invest. for 80 percent of Mexican exports, which in- years are crowding auto dealerships. The nation has had a rocky couple of clude, in addition to oil and cars, flat-screen The 192,000-square-meter (2.1-million- years. Estimates of 2014 economic growth televisions, mobile phones, computers and square-foot) Nissan Motor Co. plant is one are just 2.1 percent—low for an emerging airplane components. Total Mexican ex- of half a dozen that have sprung up or been market—after gross domestic product ex- ports added up to $363 billion in the first 11 announced for central Mexico’s industrial panded 1.4 percent in 2013, President En- months of 2014—85 percent of them from belt in the past five years, contributing to rique Pena Nieto’s first full year in office. manufacturing. a nationwide $20 billion investment by Turmoil in developing nations last year sent “There’s very little debate, very little global automakers eager to establish ready the peso into a 12 percent tailspin, forcing questioning of Mexico’s manufacturing access to the U.S. market. Mexican vehicle the central bank to intervene. Mutual, pen- competitiveness,” says Nikolaj Lippmann, exports are expected to rise to a record 2.9 sion and hedge funds tracked by research Mexico equity strategist at Morgan Stanley. million in 2015, with more than 70 percent firm EPFR Global yanked $3.66 billion out “That is very much something investors of the cars and light trucks headed to the of the nation’s stock market. The bench- take for a given at this stage.” U.S., according to the Mexican Automobile mark IPC stock index gained little ground in And the labor comes at a low price. Mex- Industry Association, or AMIA. December 2014 after slipping 2.2 percent in 2013. And ican autoworkers make an average of 20 exports alone were up 21 percent over the the expected rush of new oil and gas invest- percent of what their U.S. counterparts do, previous year, to 195,091. Mexico is also the ment after Pena Nieto opened the industry according to Luis Lozano, a partner at Price- world’s sixth-biggest manufacturer of auto to foreign competition could be stalled by waterhouseCoopers in Mexico City. parts, with an estimated $81.5 billion in plummeting oil prices. More important, if Eric Conrads, an equity portfolio man- sales in 2014, according to trade group INA. low oil prices persist, Mexico’s budget will ager at ING Groep NV, picks Mexico over “The growth in production and in ex- get a shock, since the government depends Chile, which tied for fifth in the Bloomberg ports has been spectacular,” Eduardo Solis, on Petroleos Mexicanos, the state-owned oil Markets ranking; Peru, No. 8; and Brazil, which tied for 16th. Brazil is afflicted with stagflation, Conrads says, while Colombia, No. 14, will be hit by the oil price slide, and In addition to cars, Mexico builds computers, Chile is suffering from the low price of cop- EXPORT POWER televisions and airplane components. per. “You need to focus on countries that are doing their homework,” he says. “Mex- Mexican Exports $400 ico, it’s a better move.” (in billions) The challenge for foreign investors is Total Exports 300 finding a way to buy into Mexican manu- Total Manufacturing facturing. “Almost 100 percent of the eco- Auto Manufacturing 200 nomic growth in Mexico has been externally driven,” Lippmann says. “The problem eq- 100 uity investors have is that there’s just very few ways of playing that.” Morgan Stan- *Through November. 0 Source: Mexican National ley recommends investing in stocks tied Statistics Agency 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* to Mexico’s expected economic recovery,
52 BLOOMBERG MARKETS MARCH 2015 a joint venture between Nissan and Germa- ny’s Daimler AG that will make both Infiniti and Mercedes-Benz luxury vehicles. An- other maker of luxury cars, Audi AG, also has plans to produce in Mexico starting in 2016, joining its parent company, Volkswa- gen AG, which makes more than 475,000 cars, including Beetles, Golfs and Jettas, in the country every year. In December, General Motors Co., which made 678,388 automobiles last year in Mex- ico, announced it would spend $3.6 billion through 2018 to modernize its four Mexi- can plants. The manufacturing hasn’t been enough to save Pena Nieto’s popularity, which plunged to 39 percent late last year in a Grupo Reforma poll amid slow growth Robots weld Nissan and raging protests over his government’s Sentra chassis. Mexico handling of the disappearance of 43 stu- including construction and real estate. Af- could produce 5 million dents, who were allegedly killed by drug cars a year by 2020. ter a recent selloff, valuations look “quite at- gangs working with local police. His ap- tractive,” he says. proval rating, down from 50 percent just BlackRock’s Rodriguez says one of the places in the emerging-markets space in four months earlier, has also been slapped best ways to profit from Mexico’s resur- which you can go that deep with reason- by conflict-of-interest scandals in his gence is through long-term government able liquidity,” says Rodriguez, a former administration. bonds. Thirty-year, fixed-rate, peso-de- Mexican deputy finance minister. He says The automakers haven’t been kept away nominated government debt yielded an av- a lack of equity options also makes struc- by the drug violence, which reached a peak erage of 3.7 percentage points more than tured credit, real estate and private equity under Pena Nieto’s predecessor, Felipe Cal- similar-maturity U.S. Treasuries in the four appealing. deron. Keishi Egawa, chief executive of- years ended on Dec. 31. “There’s not many Economists project Mexico will grow ficer of Mazda Motor Corp.’s Mexico unit, 3.4 percent in 2015, its quickest pace since says the Guanajuato region, where Mazda 2012 and faster than Brazil, Chile or South opened a $770 million factory in early 2014, Africa. Pena Nieto’s opening of the oil and is relatively safe and that his only crime telecommunications industries will help problem has been theft. For that reason, Screening for Mexican Latin America’s second-biggest economy Mazda ships some cars out of the country Auto-Parts Makers grow by more than 5 percent a year in the by sea rather than train. long term, Deutsche Bank AG analyst Este- The 5,000-employee Mazda plant will Type EQS
MARCH 2015 BLOOMBERG MARKETS 53
Behind gates depicting what the future is supposed to look like, workers begin to create a mini Dubai.
MARCH 2015 BLOOMBERG MARKETS 55 what repels and allures investors with an eye on Nigeria. I meet one of them, Lon- don-based Kevin Daly, who invests $13 billion in emerging-markets debt as a portfolio manager for Aberdeen Asset Management Plc, in Lagos’s Radisson Blu luxury hotel. He’s one of 10 fund managers I’m trailing across frontier markets from Argentina to Myanmar to discover which will become the investment magnets of tomorrow. Daly believes that Nigeria—de- spite widespread violence, poverty made worse by corruption and the collapse in oil prices since the middle of last year—will with time become increasingly attractive to investors because of its large and grow- ing population (now 177 million) and its abundance of natural resources. Nigeria topped my list of the 10 Samuel Pelumi, 24, taps away on a laptop If all goes according to plan, this will be most-promising frontier markets for inves- with a damaged screen. A zoology major at a 10-square-kilometer (4-square-mile) tors during the next five to 10 years, based the University of Lagos, Pelumi is studying complex of skyscrapers, eight-lane boule- on population, gross domestic product and how controlling pollution could mitigate vards, shopping malls and a yacht marina. other indicators as interpreted by the 10 the dangers from the diseases to which For the time being, 4-meter-deep (13-foot- fund managers on my tour. (Nigeria ranks Makoko’s residents are exposed. “I need deep) craters—future parking garages— 16th out of 19 countries in Bloomberg Mar- to find solutions,” he says. pockmark a desolate sandscape. kets’ annual ranking of the most-promis- Ten kilometers (6 miles) south, where Makoko and Eko Atlantic—flip sides ing frontier economies in which to invest, the lagoon meets the Atlantic, a very dif- of Africa’s largest city, with a metropol- based on 19 criteria ranging from projected ferent sort of community is rising from itan population of 11 million—sum up GDP growth to currency stability. See page the water. A 100,000-concrete-block Ac- 38.) This West African nation comes closer cropode breakwater holds the ocean back than other countries I visited to resem- from a land-reclamation area destined Construction at Eko Atlantic, bling high-growth economies such as Bra- to become the Dubai-like Eko Atlantic. which is designed to become zil, China and India. The United Nations an oceanside business and residential complex forecasts that by 2050, Nigeria will over- take the U.S. as the world’s third-most-pop- ulous country, behind India and China. Its economy, with a GDP of $521.8 billion in 2013, edged out South Africa’s for the con- tinent’s top spot. Daly and I need a car in a hurry for our first meeting of the day, so I haggle over the price with a driver. Before we can climb into his vehicle, though, a large woman blocks our path. “You cannot take this car,” she screams, slamming the door almost onto my fingers. The driver leans across shouting: “Why you take my cus- tomers? Get away from them.” Marching over to him, the woman says he shouldn’t be here. With the passenger side clear and only a few minutes to make our meeting, we jump into the car. Before we can pull away, the woman lands a punch through
56 BLOOMBERG MARKETS MARCH 2015 Odigna aliquat. Im deliquat ullam vullum incillam Name Here tpatem eugiam, commy nulla.
Zoology student Samuel the open window on our driver. I have to Pelumi works on his laptop threat from Boko Haram, an Islamist terror restrain him from retaliating. “Did you outside his home alongside group whose name means Western Educa- the Lagos Lagoon. see?” he says as we speed off. “She was tion Is Forbidden. In a single day last year, pregnant, so it’s lucky I didn’t hit her.” Our Boko Haram killed 75 people commuting cabbie tells us the woman is part of a mafia into Abuja and abducted 276 schoolgirls, that controls taxi ranks. who are still missing. The group’s target- In Lagos, driving is a dangerous business. ing of the capital marks a ratcheting up On another day, a policeman leaps into my Compared with some of its neighbors, Nigeria has of the insurgency that has claimed 13,000 taxi and punches my driver while the car prospered under 16 years of democracy. lives in five years. On Jan. 10, in Boko Ha- is moving in an attempt to elicit a fine for $3,416.50 ram’s stronghold of northeastern Nigeria, a $3,500 something we didn’t do: run a red light. Ni- suicide bomber described by onlookers as Per capita GDP geria’s roads are the fifth deadliest among 3,000 being a girl no more than 10 years old det- 175 locales tracked by the World Health Or- onated explosives hidden under her veil, ganization. I can believe it. When I arrived 2,500 killing as many as 20 people, including the here to do research for my book, I’d hoped child. Days earlier, in a succession of at- 2,000 to hire a driver I’d used on a previous visit— tacks on towns in the north, Boko Haram only to learn he’d been killed a month ear- 1,500 militants killed hundreds of residents; es- lier when a car traveling in the opposite timates varied as to the number of victims. 1,000 direction flipped onto his windshield. In Abuja, we interview Sanusi Lamido Danger of another kind plagues the 500 Sanusi, who until February 2014 was gov- Nigerian capital, Abuja, 700 kilometers ernor of the Central Bank of Nigeria and northeast of Lagos. When we visit, the city 0 is now the emir of Kano, the main city in is on high alert due to the ever-present 1995Source: IMF 2014 northern Nigeria. “Boko Haram isn’t really
MARCH 2015 BLOOMBERG MARKETS 57 a Muslim-Christian thing, because they’ve executive officer of Dangote’s cement killed many more Muslims than Chris- Already Africa’s largest economy, Nigeria is forecast to business, tells us the refi nery will produce tians,” he says. “When you have a system overtake the U.S. in population in 35 years. 400,000 barrels a day beginning in 2017 in which 90 percent lives in poverty, 70 and eventually reach a million barrels, Population projection for 2050 (in billions) percent in absolute poverty, you’re likely which would make it the second-biggest 2.0 1 to have one problem or another.” INDIA 2 refi nery in the world. As central bank governor in 2009, Sa- 1.5 CHINA Ngozi Okonjo-Iweala, Nigeria’s fi nance nusi pushed out eight top bankers accused 3 minister, tells us she’s been studying the of corruption. Like Pelumi, the young zo- 1.0 NIGERIA fi nances of a Nigerian couple, Alhaji Ka- 440.4 4 ology student, Sanusi tries to fi nds solu- moru Yusuf and his wife, Bolanle, to fi nd 0.5 MILLION U.S. tions to the problems in front of him. To out what’s right and wrong with the econ- alleviate poverty in the world’s third-poor- 0 omy. They took out short-term loans to est country, he turned his attention in Source: United Nations progress from a roof-nail business to 2013 to tomatoes. Sanusi found they were building Nigeria’s fi rst cold-roll steel mill mostly being left to rot in the fi elds, while in an eff ort to take business away from imports of tomato paste—a staple ingredi- Chinese exporters. Like tomato paste and ent for suya meat sticks fl avored with hot paste imports by a third, Sanusi tells us— fuel, steel is a natural for Nigeria, where chili and ground peanuts and sold on ev- and ease the deprivation that has made the government says more than 3 billion ery main street—cost $360 million a year. the north fertile ground for Boko Haram metric tons of iron ore lie untapped. A lack of storage facilities or food proces- recruiters. Alhaji and Bolanle succeeded, Okon- sors meant that tomato farmers would Nigerian President Goodluck Jonathan jo-Iweala tells us, but she wants to make it take whatever price they could get—or ousted Sanusi from the governor’s job af- easier for others to follow suit. What’s miss- leave the fruit to decay. ter the central bank urged the president’s ing in Nigeria, she says, is a state-backed Sanusi teamed up with industrialist offi ce to investigate the disappearance of development bank along the lines of Ger- Aliko Dangote, Africa’s richest man and a tens of billions of dollars in oil revenue many’s KfW bank or Brazil’s BNDES. “You fellow Kano native, to build a $25 million that should have benefi ted the Nigerian can’t expect people to borrow short term— tomato paste factory that bought tomatoes economy. Sanusi was never charged with for three years—to invest in a 15-year at a fi xed price from 8,000 farmers. With any wrongdoing. “The episode should re- endeavor,” she says. “There’s a missing in- a contracted income, farmers were able mind investors that Nigeria’s country risk stitution.” Not for long. In December, the to borrow to buy their seeds. The facto- is high,” Aberdeen’s Daly says. Abidjan, Ivory Coast–based African Devel- ry’s output enables Nigeria to cut tomato Back on Lagos Island, we visit Dangote’s opment Bank approved a fi nancial package headquarters, from which he presides of $500 million to support the establish- over a vast enterprise stretching from ce- ment of the Development Bank of Nigeria. ment to telecommunications to fl our. All The country has launched a similar ef- of this will be dwarfed by Dangote’s next fort to boost home ownership. The govern- Gauging Nigeria’s Risks venture—oil refi ning—even with the beat- ment says Nigeria needs 17 million new You can use the Sovereign Credit Risk ing that crude prices have taken, plunging homes, a defi cit it says is growing by 2 mil- (SRSK) function to compare Nigeria’s from $107 a barrel in June to $47.43 as of lion a year. Probably only 50,000 Nigerians model-calculated probability of default with Jan. 12. Oil accounts for 90 percent of Ni- have mortgage accounts, Okonjo-Iweala that of other African countries. Type SRSK geria’s exports. Most of the crude from says. The Nigeria Mortgage Refi nance Co.
58 BLOOMBERG MARKETS MARCH 2015 Students attend class at a ramshackle school in the Makoko slum in Lagos, marred the run-up to the Feb. 14 presidential fund assets. That’s double the weighting in Africa’s largest city. election pitting the incumbent Jonathan of the benchmark JPMorgan CEMBI Broad Di- the People’s Democratic Party against for- versified composite bond index. construction—Okonjo-Iweala sees growth mer military leader Muhammadu Buhari of In the longer term, Daly says, eco- coming from nonoil minerals yet to be ex- the All Progressives Congress. nomic momentum should come from in- ploited: zinc, copper, bitumen, tantalite In recent months, the election-related vestment in oil production by Dangote and gemstones. Then there’s Nigeria’s bloodshed and the oil price drop have led and others. Daly says an improving econ- best-loved industry: Nollywood. Measured Daly to cut Aberdeen’s holdings of Nigerian omy will reduce public debt, increase for- by the number of movies made per year government bonds denominated in the lo- eign-currency reserves and strengthen (not box office earnings), Nigeria’s film in- cal currency, the naira, to zero. Daly says the other indicators that credit-ratings firms dustry ranks second only to India’s Bolly- government’s response to Boko Haram has use to assess risk. As it stands, Nige- wood, with Hollywood trailing a distant been ineffectual. He’s also worried about oil. ria has a long-term foreign-debt rating third. “It’s amazing to me,” Okonjo-Iweala “A further sustained collapse in the price of three levels below Standard & Poor’s in- says. “When I’m in the Caribbean, people oil is by far the biggest risk,” Daly says. He vestment-grade category. Daly is betting say: ‘Are you Nigerian? We’ve been watch- says the naira has weakened but not enough that will change for the better. “Nigeria ing your movies.’ The potential to service to make it attractive compared with the sell- is the one country in Africa you could the black diaspora and beyond is amaz- off in other oil-sensitive currencies such as see having its credit rating increased to ing; we’ve only just begun to plumb that. the Russian ruble and Colombian peso. For investment grade over the next 10 years,” Nigeria has the potential to be another the time being, Daly is investing in the na- he says. California.” tion’s banks. The bonds of Nigerian lend- Gavin Serkin is an emerging-markets editor-at-large Of late, Nigeria has looked less like Cali- ers, including Zenith Bank Plc and Guaranty at Bloomberg News in London. [email protected] fornia than, well, Nigeria. Almost daily out- Trust Bank Plc, make up 2 percent of Aber- This article is adapted from Frontier: Exploring the Top Ten Emerging Markets of Tomorrow (Wiley/Bloomberg Press, breaks of Boko Haram–inspired atrocities deen’s emerging-markets corporate bond February 2015).
MARCH 2015 BLOOMBERG MARKETS 59 LURCHING BETWEEN EXTREMES There is a tendency to make general judg- ments—“Africa is a basket case,” or “Af- rica is rising.” We always lurch from one extreme to the other. What people need to do is spend a little time looking at the granularity of what’s happening in Africa. If you go to some parts of the Congo, you might say, “This is jungle; this is ungov- ernable.” Other countries are fracturing— look at what’s happening in Libya. That’s a complete failure. Go to other nations, such as Botswana or Mauritius, and you’ll see a pleasant place with a sensible government. Na- MO IBRAHIM, a Sudanese-born billionaire mibia is a very well-run country. It’s huge, philanthropist, says the Ebola outbreak in with a lot of potential resources, and it has West Africa has once again painted the en- good roads and railways. This is a country tire continent as a disaster zone. It’s a per- investors should look at. ception he’s been working to dispel since selling his African mobile-phone network EBOLA SUCCESSES for $3.4 billion in 2005 and founding the Senegal and Nigeria managed to control Mo Ibrahim Foundation to promote hon- the situation. The federal government and est and accountable government. His pri- the state government of Lagos played an mary tool: data. important role. We saw civil society play The Ibrahim Index of African Gover- a major role, and Nigerian business. It nance measures how well nations are de- shows what can be achieved when society veloping their economies, safeguarding important tools for investors and risk comes together in a moment of real unity. rights and guaranteeing the rule of law. managers,” says Hendrik du Toit, chief The battle is also in dealing with trau- Researchers synthesize information from executive officer of Investec Asset Man- matized communities. Liberia, Sierra 34 sources, including the International agement, a firm that originated in South Leone and Guinea are each coming out of Monetary Fund and African Development Africa and is now based in London. Ibra- conflicts. An initiative must address how Bank. Atop the 2014 list: Mauritius. On the him, 68, spoke with Bloomberg Markets to make these countries more resilient to bottom: Somalia. about the challenges and opportunities handle the next outbreak. “The Ibrahim indices have become of investing in the second-most-populous benchmarks of governance in Africa and continent. RELIABLE DATA With the data collected over the last 10 years, we hope academics are able to troll AFRICA’S BEST- Island nations Mauritius, Cape Verde and the Seychelles get high through and discern the key drivers. We GOVERNED NATIONS marks for governance in Ibrahim’s index. Conflict-torn Somalia need to understand the links between se- ranks at the bottom. curity and development or between ed- 1 MAURITIUS 2345CAPE VERDE BOTSWANA SOUTH AFRICA THE SEYCHELLES ucation and development or between SCORE 81.7 76.6 76.2 73.3 73.2 human rights and development. These 84.5 78.2 85.3 68.1 70.8 questions can be answered only by get- 77 83.5 73.1 74.4 74.1 ting reliable data; otherwise, it becomes 79.7 63.1 65.9 71.9 63.6 a discussion dominated by polemics and 85.6 81.6 80.4 78.8 84.4 ideological differences. I love Africa and have always been gunning for people to invest. I prefer to be an African realist. To SAFETY AND RULE OF LAW PARTICIPATION AND SUSTAINABLE ECONOMIC HUMAN DEVELOPMENT do that, we need facts. Strength, accessibility HUMAN RIGHTS OPPORTUNITY Commitment to and transparency of legal Openness and integrity Conditions for business education and cultural Edward Robinson is a senior writer at Bloomberg Markets system of political process development institutions in London. [email protected]
60 BLOOMBERG MARKETS MARCH 2015
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64 BLOOMBERG MARKETS MARCH 2015 Hellenic Bank Chairwoman Irena Georgiadou at the after a banking crisis on the divided Mediter- firm’s headquarters ranean island threatened the existence of the in Nicosia euro, an unusual array of investors, including U.S. billionaires Wilbur Ross and Daniel Loeb; Cyprus Calling
Viktor Vekselberg, Russia’s second-richest the Ottoman Empire, the precursor of that country’s sovereign bonds, with €4.5 man; and Kislyi, are buying stakes in Cy- modern-day Turkey. The country gained billion in losses. Germany, which had priot banks. Ross and Vekselberg are back- independence in 1960 after almost a cen- contributed the most to saving indebted ing Bank of Cyprus, the country’s biggest tury of British colonial rule, only to erupt euro-zone states, balked at bailing out lender, while Loeb’s Third Point Hellenic into violence between Greek and Turkish rich Russians with money in Cyprus. Rus- Recovery Fund owns 27 percent of Hel- Cypriots. A Turkish invasion following an sia, which had given Cyprus a €2.5 billion lenic Bank. Athens-backed coup seeking to unite the loan, declined to throw another lifeline. The flurry of activity marks a renewed country with Greece led to a division of the That’s when the European Central Bank interest in the country after a 10 billion island in 1974 that’s still in effect. and the IMF told Cyprus the only way it euro ($11.6 billion) rescue by the Euro- Banking, along with pean Union and the International Mon- tourism and shipping, etary Fund deflated a financial industry buoyed economic growth that had ballooned to seven times the size after the division. The of the country’s economy. While banks are island’s reputation as a still hobbled by capital controls and non- financial center was performing-loan ratios in excess of 50 per- boosted during the Leb- cent, the investors share a conviction that anese civil war from 1975 Cyprus, an EU nation closer to Beirut than to 1990, when wealthy Brussels, is on the cusp of a recovery af- Middle Easterners aban- ter what the IMF called one of the largest doned Beirut for Nico- banking collapses on record. sia. After the fall of the Loeb is betting the best way to invest in Berlin Wall, Russian and that recovery is through Hellenic Bank, eastern European busi- the island’s second-biggest lender, which nesses moved to Cyprus, didn’t require a bailout or seize customer which offered low corpo- deposits. “We are a small bank, but we are rate tax rates, a legal sys- the only systemic bank that has not been tem based on British law bailed in or bailed out,” says Irena Geor- and strict bank-secrecy giadou, the bank’s 38-year-old chair- rules. woman, sitting in an office at Hellenic Wargaming was one Bank headquarters in Nicosia on the day of them. Kislyi began de- of the screening, talking over the peal veloping online games of church bells. “We are maybe the right with his college friends proxy for the recovery of Cyprus.” while studying phys- Cyprus, the second-smallest economy ics and computer sci- in the 19-nation euro zone, with a popula- ence at Belarusian State tion of 1.1 million, is poised to expand 0.4 University in Minsk in Victor Kislyi, founder and CEO percent this year, the IMF estimates, after 1995. In 2010, a year before incorporating of Cyprus-based video game shrinking 3.2 percent in 2014. “It’s making his business in Cyprus, he tapped a lucra- company Wargaming, which a much faster rebound than the much big- tive seam with World of Tanks, in which owns a stake in Hellenic Bank ger crisis economies of Greece, Portugal, multiple players destroy virtual repli- Spain and Italy,” says Christian Schulz, cas of mid–20th century Soviet, German senior economist at Berenberg Bank in and U.S. armored vehicles. The company, would get the money it needed for a bail- London. “It’s more likely than the other which says its games have 110 million reg- out was to seize deposits at the two largest southern European crisis countries to do istered users, reported profit of €24.6 mil- banks and convert the funds into equity, what Estonia and Latvia did: take the pain lion on sales of €234 million in the first six the first time such a tactic had been used up front, do the reforms necessary, helped months of 2013, the last period for which it in the euro zone. In March 2013, Bank of by the fact that they are small.” has released results. Cyprus acquired most of the assets and At the crossroads of the Middle East While Wargaming’s business was boom- loans of Cyprus Popular Bank Pcl, then the and Europe, Cyprus has been overrun for ing, Cyprus was sinking. The restructuring second-biggest lender, and seized almost centuries by empires and armies: Assyri- of Greece’s €200 billion of privately held half of the savings of 21,000 customers. ans, Persians, Greeks led by Alexander the debt in 2012, the largest such move in his- Shareholders of both banks were almost
Great, Venetians and, for three centuries, tory, left the island’s banks, big holders of wiped out. PATALAH/WARGAMING OF SLAVA COURTESY
66 BLOOMBERG MARKETS MARCH 2015 Billionaires, from left, Daniel Loeb, The deposit seizure at Bank of Cyprus that if the country’s economic woes led to Wilbur Ross and Viktor Vekselberg affected Wargaming, which recorded an higher taxes, his company might move to invested in Cyprus banks after a impairment charge of €8.2 million. a more attractive jurisdiction. financial crisis in 2013 threatened Restrictions were imposed on mov- Then the Americans arrived. Loeb, 53, the existence of the euro. ing money abroad, the only such capi- known for his vitriolic critiques of execu- tal controls in the euro area and still in tives of Sony Corp., Yahoo! Inc. and other place, leaving Russian and other deposi- companies in which he acquired stakes, business” for the bank and one rea- tors with money captive in Cypriot banks. had bought Greek sovereign bonds on a son Wargaming invested €40 million, Kislyi, who declined to be interviewed for bet shared by only a few that the euro area says Vangelis Georgiou, 45, the video this story, echoed the concerns of many would continue to support the country. game company’s general manager, sit- about the fate of Cyprus as a business and Third Point Offshore Fund, his firm’s big- ting in a 19th-century house with ce- offshore center when he warned in a July gest hedge fund, rose 21 percent in 2012 on ramic-tile floors that serves as the firm’s
LEFT TO RIGHT: SIMON DAWSON/BLOOMBERG; BEN BAKER/REDUX; BELINSKY YURI/ITAR-TASS PHOTO/CORBIS YURI/ITAR-TASS BELINSKY BEN BAKER/REDUX; SIMON DAWSON/BLOOMBERG; RIGHT: LEFT TO 2013 speech to Wargaming shareholders the investment. In April 2013, Loeb, a for- headquarters. mer distressed-debt analyst at Jefferies The building, where palm trees tower in Group LLC and high-yield-bond salesman the courtyard and employees are locked in at Citigroup Inc., started Third Point Hel- combat on their laptops, is a short distance lenic Recovery. from an 11-story skyscraper that Wargam- CYPRUS RISING In November of that year, the fund made ing bought for €11.8 million in January The island’s economy is poised to recover after a banking crisis in 2013 led to a contraction of its first and only banking investment in ei- 2014. Still shrouded in green netting and more than 5 percent. ther Greece or Cyprus, acquiring a stake in scaffolding in December, and festooned Hellenic Bank and diluting control of the with banners announcing the company’s Year-over-year GDP change Church of Cyprus, which had co-founded new global headquarters, it’s the clearest 2 % the lender in 1976 to help finance an eco- sign that Kislyi’s concerns about Cyprus 1 nomic recovery after the Turkish invasion. have abated. 0 It was the first foreign direct investment Hellenic Bank’s share of the island’s –1 Projections in the country since capital controls had deposits increased in the second quar- been imposed and, along with a similar ter of 2014 to 12.6 percent from 11.8 per- –2 infusion of capital from Wargaming, en- cent in 2013, compared with a drop to 25.5 –3 abled the bank to avoid taking state aid percent for Bank of Cyprus, according to –4 or seizing customer deposits. Loeb and a central bank data. At the end of Septem- –5 spokesman for the fund declined to com- ber, the share had risen to 13.4 percent. ment. Shares fell 13.6 percent from the With those deposits, Hellenic Bank aims –6 date of his investment on Nov. 1, 2013, to expand as lending growth recovers, says
2009 2010 2011 2012 2013 2014 2015 2016 through Jan. 12. Georgiadou, the first woman to run a com- Not being tainted by the stigma of mercial lender in the country. “We have Source: IMF a bail-in is “definitely a key driver of the liquidity, we have the support of the Cyprus Calling
probably will fall as fewer Russians travel abroad after a 46 percent drop in the value of the ruble against the dollar last year. “With the deprecia- tion in the ruble, there is cer- tainly some further pressure on whether Cyprus can come out of recession,” says Bank of Cyprus CEO John Hourican. In December, Russian Pres- ident Vladimir Putin, citing the seizure of deposits in Cy- prus and Western sanctions imposed after his country’s an- nexation of Crimea, urged Rus- sian businesses to repatriate funds from abroad. That could hurt Hellenic Bank, where Rus- sian deposits account for 24 percent of the total, according to an investor presentation. It A wall in Nicosia marks the dividing line shareholders, the capital and the ambi- between the Greek-Cypriot and Turkish- could also have a devastating effect on the tion, and we want to be the bank that will Cypriot parts of the Mediterranean island. island’s economy, the IMF says. finance this recovery,” she says. Greece, where unemployment remains The bank also has a mountain of non- above 25 percent and elections have re- performing loans to work through: 56 vived talk of an exit from the euro zone, percent of its total loans as of Sept. 30, economy. As an adviser to then–Labor Min- doesn’t offer better prospects, though Cy- up from 46 percent at the end of 2013. It ister Georgiades during the March 2013 cri- prus banks are less exposed now to Greek reported losses of €124.8 million for the sis, she says, she burst into tears when they debt. “Important partners of Cyprus are first nine months of last year amid fall- learned the only choice was to seize depos- all—in particular, Greece—not the kind of ing property prices and a contracting its after the government failed to get funds country you want to bet your recovery on, economy. from Russia. “We were thinking there must Georgiadou, a former Pricewaterhouse- be something somewhere, some button to Coopers LLP accountant and chief finan- press to fix everything,” she says. cial officer of Cyprus-based online-betting Now that she’s running Hellenic Bank, firm Megabet Ltd., has firsthand experience there’s still no magic button. The bank’s Analyzing Bank Bonds of how banks were sacrificed to save the fate rests on an economic recovery, and that depends in part on what hap- You can use the Fixed Income Search pens to Greece, Cyprus’s biggest (SRCH) function to fi nd bonds issued by trading partner, and Russia, which Cyprus-based banks. Type SRCH
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but Russia is clearly the biggest, most imminent risk,” says Schulz, the Berenberg Bank economist. “Russia is definitely the Achilles’ heel there.” The island’s division also is a continuing risk. The discovery of offshore natural gas deposits— cited by investors, including Ross, as a selling point for Cyprus’s long- term outlook—is complicated by tensions with Turkey. Unification talks between the two sides of the island, which make up the nation that belongs to the EU, were called off in November after Turkey dis- patched ships to search for gas in Cypriot waters. Even if Hellenic Bank with- stands these shocks, it will have to contend with a bigger compet- itor. Bank of Cyprus, backed by Ross and Vekselberg, reported a profit of €76 million in the first nine months of last year. Acker- mann, 67, the new chairman, is a formidable presence in the Euro- pean banking industry. “Very few of these severely impacted banks return to profitability as quickly as did Bank of Cyprus,” says Ross, 77, Chrysostomos II, the archbishop of who made money investing in Bank of Ire- Bank of Cyprus, where about half the the Church of Cyprus, whose stake in land Plc. Vekselberg and Ackermann de- loans are souring, still has much to do to re- Hellenic Bank, which it co-founded, clined to comment. store confidence among customers who lost has been reduced to 3.6 percent their savings. Just as Hourican was telling shareholders at the annual meeting in No- vember that his company had to “recover AWASH IN BAD LOANS the lost trust between the bank and society,” Chrysostomos II, the archbishop of the police were holding back protesters. “You Church of Cyprus. His church, once one A surge of soured loans threatens to erode profi tability at banks in Cyprus, which has been seized my savings,’’ one of them shouted. of the island’s biggest investors, has seen in a recession since 2012. “Now you want to seize my house?” its stake in Hellenic Bank dwindle to 3.6 Georgiadou is betting Hellenic Bank can percent and dividend income from Cy- Nonperforming 60% capitalize on steering a different course. prus banks dry up, forcing cutbacks in so- loans* as a percentage of 50 “Hellenic Bank managed to find investors,” cial and philanthropic programs. total loans she says. “It was a time when Cypriots were “They wanted to punish the old share- 40 lining up outside banks, taking out their holders,” says Chrysostomos, 73, sitting in 30 money, and there you go, you have private front of an icon of a stern Christ in a cavern- *Loans that have been in arrears 20 investors, they see the macro story, they ous palace in Nicosia. “That’s why I’m no for more than 90 days as well as see the balance sheet, and they put real longer interested in the chapter called restructured 10 loans that, at money in the bank.” banks.” the time of res- 0 tructuring, had been The investments by Loeb and Kis- in arrears for more Maria Petrakis is a reporter-at-large at Bloomberg News than 60 days. 2010 2011 2012 2013 2014 lyi, while they may have saved Hel- Sources: Central in Athens. [email protected] With assistance from Bank of Cyprus, IMF lenic Bank, are a bittersweet blessing for Georgios Georgiou in Nicosia.
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largest chain of movie theaters, measured by number of movie screens, and the sec- ond-largest commercial property com- ECLINING IN A BEIGE LEATHER pany, measured by leasable floor space. Wanda’s malls, offices and luxury ho- seat in his Gulfstream G550 private tels boast a total floor space of 93.5 mil- jet, Wang Jianlin barks an unlikely lion square meters (1 billion square feet), R 1½ times all the leasable space in Manhat- order as the aircraft descends into a remote tan. Among the marquee projects: Western Europe’s tallest residential building, One pocket of Southwest China. Nine Elms, in London; and Qingdao Ori- ental Movie Metropolis, which upon com- From Beijing to Hollywood to London the Bloomberg Billionaires Index. That pletion in 2017 will be the world’s biggest and elsewhere in his expanding property, moved him closer to China’s richest man, movie studio and theme park. For the stu- film and entertainment empire, Wang, the Alibaba Group Holding Ltd.’s Jack Ma, dio’s 2013 groundbreaking ceremony, in billionaire chairman of Beijing-based Da- who was worth $27.3 billion as of Jan. 15. the Chinese coastal city of Qingdao, Wang lian Wanda Group Co., is known as a stick- Wang’s empire had revenue of $40 flew in Nicole Kidman, Leonardo DiCap- ler for formality. Not only does he favor billion in 2014. He controls the world’s rio, John Travolta, Catherine Zeta-Jones, dark business suits and ties, he empow- ers his receptionists to fine employees who fail to meet his dress standards. To- day, though, China’s second-richest man is clad in khaki pants and sneakers. And as the jet prepares to land in China’s poorest province, Guizhou, he instructs his entou- rage to follow his example. “This is a trip to lift poverty,” Wang tells them. “Suits are not appropriate.” Swiftly, all jackets are discarded. Despite Wang’s efforts, his reception on the ground is anything but casual. Lo- cal officials in pressed black suits stand to attention in a piercing December wind. A police escort clears roads for his motor- cade. As he approaches the hardscrabble city of Danzhai (population 170,000), neon signs along the four-lane main street flash the message, “Warmest welcome to Chair- man Wang.” It’s the kind of treatment typ- ically reserved for visiting government ministers. And though Wang, 60, has no political rank, he has rapidly growing fi- nancial clout, in China and abroad. In the leadup to the December initial public offering of one of Dalian Wanda’s listed units and the January IPO of an- other, Wang’s fortune jumped more than 60 percent to $24.6 billion, according to
Nicole Kidman, above, brings glamour to the groundbreaking for the Qingdao Oriental Movie Metropolis. Right, an outsize artist
rendering of one piece of the complex. VIA AP IMAGES IMAGINECHINA VIA AP IMAGES; TOPPHOTO BOTTOM: TO TOP THIS PAGE, OHSUMI/BLOOMBERG; PREVIOUS SPREAD: TOMOHIRO Ewan McGregor and Kate Beckinsale to strategy as key to transforming Dalian provide star power. Wanda from a company heavily depen- In lesser deals, Wang has also snapped dent on China’s volatile property market up a British yacht manufacturer, Sun- into a more-diversified global business seeker International Ltd., and bought a PUBLIC empire. “I give myself six more years to 20 percent stake in Atletico Madrid, the Wang make Wanda a world-class company in the reigning Spanish football champions. Jianlin’s league of Microsoft and Wal-Mart,’’ Wang Net Worth* Dalian Wanda Wang has even taken a shot at help- says while devouring a simple breakfast of $24.6 B Commercial ing tackle one of China’s most intracta- Properties plain congee (rice porridge) and corn ac- ble challenges: narrowing the wealth gap $10.9 B companied by a bowl of fresh cherries. between the rural poor and the country’s More specifically, Wang says that by new rich such as himself. Hence his ap- 2020 he wants to increase revenue by 2½ pearance at Danzhai, where far from tread- times to $100 billion—equivalent to the ing the red carpet with Hollywood royalty, current annual sales of International Busi- he trudges through pigsties while talking ness Machines Corp. His target for net up the $160 million worth of philanthropic profit is $10 billion, more than Coca-Cola investments he has planned. Wang hopes Co.’s estimated earnings for 2014. his efforts, which include awarding schol- Last year, 70 percent of Wanda’s reve- AMC arships and building food-processing Entertainment nue came from its property arm. By 2020, plants, will double the living standards of $2.1 B Wang aims to reduce that dependence 2 million farmers in the next five years. to 50 percent, with much of the rest of The tycoon visits a crumbling hovel in- his income coming from the burgeoning PRIVATE Wanda habited by Huang Jinhe and his family. Chinese film industry, which is now the Department Store There, surreptitiously, Wang has his per- $5.1 B world’s second largest by box office re- sonal assistant slip a wad of cash to the ceipts, surpassed only by Hollywood. 64-year-old farmer: 10,000 yuan ($1,600), China’s movie box office is growing at the equivalent of two years’ income for the 40 percent annually and in 2014 came to Huangs. an estimated $4.9 billion, according to Wanda E-Commerce $1.6 B the Chinese Film Producers’ Association. ANG, A FORMER SOLDIER By contrast, U.S. theater takings rose just Wanda Media in the People’s Liberation 1 percent in 2014, to $10.9 billion. If that $1.6 B WArmy who still retains a ram- trend holds—and Wang predicts it will— rod-straight military posture and close- Art Collection China will overtake the U.S. as the world’s $1.6 B cropped hair, made his first pot of gold biggest movie market by 2017. Buying Hol- developing real estate in Dalian, a north- Wanda Cinema Line lywood studios, Wang says, will give him $1.2 B eastern coastal city. Then he started buy- the expertise, content and distribution he Wanda Tourism ing up movie theaters across China. In *As of Jan. 15. needs to conquer that market. Source: Bloomberg $0.5 B 2012, he began producing and distribut- “Wang has a great thesis,” says David ing locally made films, including the En- Tawil, president of Maglan Capital, a New glish-language Man of Tai Chi, directed by for land on Wilshire Boulevard in Beverly York–based hedge fund that owns about Keanu Reeves, star of the Matrix movies. Hills, California, on which he says he will 1 percent of MGM. “We all know the boom- That same year, he paid $2.6 billion plus build the headquarters of his nascent U.S. and-bust cycle that occurs in property debt to acquire AMC Entertainment Hold- movie empire. As Wang tells it, U.S. movie markets, and it could be particularly bad ings Inc., the second-biggest U.S. cinema studios are falling over themselves to sell in China. Wang knows it the best. It’s wise operator. Now, he says, he’s in talks to buy a stakes to him. “Many people come knock of him to be diversifying away.’’ majority stake in Lions Gate Entertainment at my door, but Wanda is only interested The U.S. motion-picture industry, how- Corp., the Hollywood studio that made the in the big players and we want control,’’ ever, may not be entirely convinced. “Ev- Hunger Games films. And he says he’s also Wang says. eryone respects that Wang has the clout keen to invest in Metro-Goldwyn-Mayer Spokesmen for Lions Gate and MGM and money,’’ says Robert Cain, president Inc., producer of the James Bond and Hob- declined to comment on any discus- of Santa Monica, California–based Pacific bit franchises. sions. Wang, however, is less reticent. Bridge Pictures, an industry adviser that In readiness for those deals, and deals to Cocooned in the wood-paneled luxury of his counts Universal Studios Inc. and China come, Wang in September paid $1.2 billion Gulfstream, he describes his Hollywood The richest people in mainland China. Film Group Corp. as clients. “But there’s a He was dispatched to China’s wild and Wang and Ma traded positions on the list in 2014. healthy degree of skepticism in Hollywood windswept northern frontier with Rus- regarding Chinese money because there sia, where the two erstwhile Communist 1 JACK MA hasn’t been much delivered, only big talk.’’ allies, by then bitter rivals, were fight- $27.3 B Tawil says Wang could change that. ing a bloody border war and the only en- Founder of Alibaba “His AMC purchase in 2012 makes him the tertainment was one propaganda film a Group most credible buyer,” Tawil says. week. 2 AMC has made Wang a popular man Wang rose through the ranks to become WANG JIANLIN $24.6 B among U.S. equity investors. He bought the a battalion commander before he left the Founder of Dalian company outright and then sold roughly 20 army at age 32, a surprise to friends, who Wanda Group percent of it in a New York IPO in late 2013. thought he had a good shot at becoming The stock rose 29 percent in 2014. one of the top brass. “It was no longer war- 3 MA HUATENG Wang has gone back to the IPO market time,’’ Wang says. “The slogan changed $16.1 B twice since the AMC sale. His flagship, from ‘Ready for war any time’ to ‘It’s all Chairman of Tencent Dalian Wanda Commercial Properties Co., about economy.’ It was crystal clear to me Holdings made an unspectacular debut in Hong where I should be going.’’ Kong on Dec. 23. On Jan. 22, however, Following his discharge, Wang worked 4 ROBIN LI Wanda Cinema Line Co., which oper- for the local government in Dalian for $15.7 B ates 14 percent of the movie screens in two years before taking over a near-bank- Founder of Baidu China, soared 44 percent on the Shenzhen rupt state-owned property company that exchange. was 6 million yuan in debt. “The govern- 5 ZONG QINGHOU ment was freaking out and said whoever $11.2 B HOULD WANG INDEED END UP can turn it around will get the company for Chairman of owning a Hollywood studio, he free,’’ Wang says. “I thought to myself, If Hangzhou Wahaha
could find worse story lines than his I get some bank loans and land, it should HSUMI/BLOOMBERG S *As of Jan. 15. Source: Bloomberg own rise from boy soldier to billionaire. be possible.’’ The son of a Communist guerrilla who Business deals in China have for mil- fought alongside Mao Zedong on the Long lenniums been oiled by guanxi—a term March, Wang decided at age 15 to follow meaning connections or relationships. were clustered. He redeveloped it, paid off his father into the army—in part because Wang says he tapped connections made all the debt and made his first 10 million in those harsh times, soldiers received during his army career to secure loans, yuan. slightly larger rations of rice and oil than then convinced the Dalian government As his empire grew, he says, he figured their civilian comrades. to sell him land where malodorous slums out better ways to maintain relations with local authorities in cities where his signature Wanda Plaza shop- ping malls are located. “We tickle the right spot,’’ Wang says. “Government wants to show po- litical performance, so we give them a fair share of the profit in taxes and help solve their prob- lems like employment.’’ Wanda in turn benefits be- cause it receives subsidies for culture-related projects such as entertainment parks with film
Wang’s Chinese real estate portfolio includes the Dalian International Conference Center, left, the Wuxi Wanda Cultural Tourism City Exhibition Center, opposite top,
and Wanda Movie Park in Wuhan. O (2); TOMOHIRO CHING/BLOOMBERG NELSON FAVRE/BLOOMBERG; JEROME OHSUMI/BLOOMBERG; TOMOHIRO BRENT LEWIN/BLOOMBERG; BOTTOM: TO TOP or historical themes. Wanda Group re- because it wouldn’t pay bribes, according ceived 7.9 billion yuan in government sub- to Wang. Mapping Dalian Wanda sidies in the 3½ years through June 2014, “I was quite depressed. For a few years, according to Wanda Commercial’s IPO I could only buy land secondhand from You can use the Relationship Map (RMAP) prospectus. “Wang leverages his cultural other people,’’ Wang says. “We still made function to get a high-level overview of a se- projects to get support from provincial money, but it wasn’t a pleasant time.” lected company. Type 3699 HK
30 years after leaving the army, he still sa- vors the discipline and simplicity of mili- tary life. One legacy is an employee code of conduct difficult to imagine elsewhere. Wanda’s receptionists are nicknamed the dress police, because they keep a marking sheet of staff who don’t turn up in the de facto company uniform of a dark suit with a light-colored shirt for men and a below- the-knee skirt for women. Violators have 100 yuan deducted from their salary for each breach. Unlike many Asian tycoons, who work until they drop, Wang says he will retire in six years, to devote himself to philan- thropy and help turn China’s notoriously underperforming national soccer team into a globally competitive outfit. His only son, Wang Sicong, owns 2 per- cent of the company. However, Wang says he hasn’t decided on a succession plan and will eventually donate most of his holding in Dalian Wanda to charity. “I don’t need that much money,” he says. “It’s never about the wealth but the process of pursu- ing wealth. As long as the process is thrill- ing, the numbers in the end don’t matter.’’
Zijing Wu covers billionaires at Bloomberg News in Hong Kong. [email protected] William Mellor is a senior writer at Bloomberg Markets in Sydney. [email protected] TOP TO BOTTOM: JI HAIXIN/IMAGINECHINA; IMAGINECHINA VIA AP IMAGES VIA AP IMAGES IMAGINECHINA JI HAIXIN/IMAGINECHINA; BOTTOM: TO TOP Photograph by SAM KAPLAN by David de Jong and Matthew Boyle
JAB, the investment firm managing the $14 billion fortune of a reclusive Austrian family, is diversifying from luxury brands with an assault on the global coffee market. purchases in JAB’s $17 billion caffeine-in- in 2014, double the $14 billion in 2011, fused race to create the world’s second-big- Becht says. JAB’s equity value rose to $15.2 gest coffee conglomerate, behind Nestle billion at the end of 2014 from $9 billion at and its 22 percent market share. the end of 2011. “The JAB guys are the best Models and actors JAB began its coffee run in June 2012. team in consumer goods. Period,” Dibadj It bought a 12 percent stake in D.E Master says. “These folks are the smartest opera- descended on New Blenders 1753 NV, the maker of Senseo and tors of companies that I’ve ever seen.” York’s Cipriani Wall Douwe Egberts brands. It increased that to The JAB trio may be savvy dealmakers 15 percent in October 2012 and bought the and managers, but they’re little known out- Street restaurant last whole company in October 2013. At $10.4 side of Europe. Harf, who was born in Ger- May, Georgia May billion, the deal was the biggest ever in many, led JAB for almost a quarter century the $84.5 billion market for ground and before bringing in two partners. Dutch- Jagger, Chris Tucker instant coffee and coffee beans. This year, man Becht, 58, ran decongestant and con- and Victoria’s Secret JAB plans to combine the Mondelez busi- dom maker Reckitt Benckiser Group Plc Angel Doutzen Kroes ness, the second-largest coffee maker, in Slough, England, before joining in 2011. with an 11 percent market share, and No. Goudet, 50, a Frenchman, was chief finan- among them. The real 3 Master Blenders, at 5 percent, into a new cial officer of candymaker Mars Inc. VIP in the ballroom was someone few peo- company called Jacobs Douwe Egberts. The four billionaire Reimann siblings ple would recognize. He’s Peter Harf, first JAB will also run three coffee shop and ba- who entrust JAB with their fortunes are among equals in a trio of executives who gel chains, including Peet’s Coffee & Tea even less visible. Four years after the death manage the $14 billion fortune of Austria’s Inc. and Caribou Coffee Inc., in the U.S. of Albert Reimann, the great-great-grand- Reimann family. The closely held invest- If anyone can figure out how to profit son of the original co-owner of chemical ment firm Harf runs as senior partner, Lux- from the world’s growing thirst for coffee, maker Joh. A. Benckiser GmbH, his nine ad- embourg-based JAB Holding Co., widely JAB can, says Ali Dibadj, who covers con- opted heirs appointed Harf as CEO to man- known as JAB, is plotting a massive chal- sumer products at Sanford C. Bernstein age their assets. Albert Reimann had left lenge to Switzerland’s Nestle SA in the & Co. in New York. Trott’s BDT Capital each with 11.1 percent stakes in the family global coffee industry. brought in co-investors, including Colom- chemical company. In 1996, five Reimanns The occasion this evening in Manhattan bian billionaire Alejandro Santo Domingo. bought out their four siblings. Andrea Rei- was the annual gala for Delete Blood Can- Harf tapped two of the founding families mann-Ciardelli went on to sell her share cer DKMS, the foundation Harf co-founded of Anheuser-Busch InBev NV, the world’s for almost $1 billion in 2003 to the other after the death of his first wife in 1991. The guests represented Breakdown of Holdings* Harf’s many worlds. Byron Reckitt Benckiser $5.8 B Trott, chairman of investment D.E Master Coty $4.6 B and advisory firm BDT Capi- Blenders Mondelez coff ee $3.1 B tal Partners, had enlisted his JAB invests the 1753 Reimann family’s $1.8 B billionaire clients to invest in $6.3 B Equity Value JAB Luxury $14 billion fortune JAB’s coffee deals. Executives Jimmy Choo $639 M in household staples $574 M from JAB-controlled Coty Inc., and luxury brands. Peet’s Coff ee & Tea seller of namesake fragrances *Represents the combined Einstein Noah for David Beckham and Jen- holdings of Matthias Reimann- Restaurant Group $228 M Andersen, Stefan Reimann- Miscellaneous nifer Lopez, were making the Andersen, Wolfgang Reimann and Renate Reimann-Haas as Liabilities Caribou Coff ee $208 M rounds. Others sported Jimmy of Jan. 22. Source: Bloomberg –$9.2 B Choo pumps, a JAB brand made famous in Sex and the City. largest brewer. Becht, who serves as JAB’s siblings who’d kept their stakes. These Rei- These days, Harf, 68, has his mind on a chairman, says the firm’s executives, ju- manns, all trained scientists, have never business far less glamorous than rock star nior partners and handpicked chief exec- been involved in any JAB businesses and perfumes and $2,995 crystal-encrusted sti- utive officers for the companies it controls have never granted interviews. The family letto heels. On May 7, the day of the gala, have their own money riding on success. declined to comment for this story. he and JAB partners Bart Becht and Oliv- “We’ve all invested pretty much close to Under Harf’s tutelage, the Reimanns ier Goudet announced a $5 billion cash our total personal wealth in JAB,” he says have moved into the ranks of the world’s deal for the coffee unit of Mondelez Inter- during a November interview. 500 richest people. Renate Reimann-Haas,
national Inc. It was one of the rapid-fire JAB managed about $28 billion in assets 63; Wolfgang Reimann, 62; Stefan MARTEL PREVIOUS SPREAD: ANGELA CAMPOS/STOCKLAND
BLOOMBERG MARKETS MARCH 2015 Senior partner Peter Harf, below, has orchestrated JAB’s consumer- products push. CEO Olivier Goudet, right, arrived in 2012, a year after Chairman Bart Becht, far right.
time was North American head of Weight Watchers International Inc., says he was ready to accept an offer to become CEO of Reimann-Andersen, 51; and Matthias Rei- Nestle’s Nespresso, are rising at quadruple publicly traded Peet’s Coffee in the sum- mann-Andersen, 49, have individual net that rate. Where JAB’s plans may falter is in mer of 2012. Then its board suddenly went worths of $3.5 billion, according to the its lack of innovation with roast and ground silent. The next thing he knew, JAB had Bloomberg Billionaires Index. They control coffees. JAB’s Peet’s and Caribou shops will swooped in to buy Peet’s. Burwick found 92.5 percent of JAB’s equity, with JAB exec- be butting up against outlets run by giants himself once again interviewing for the utives owning the rest. “Peter is a great pa- Starbucks Corp. and Dunkin’ Brands Group CEO job, this time over breakfast at the triarch and consigliere to the family,” says Inc. “They’re No. 2, but a distant No. 2 at the Sofitel New York hotel with Harf, Becht Trott, who met Harf through Goudet. “He’s moment,” says Jonny Forsyth, a beverage and Goudet. They offered him the post the been with the Reimanns from the very be- industry analyst at Mintel Group Ltd. next day. “I went from probably being CEO ginning. Their trust and confidence in JAB JAB also faces a looming deadline that of a public company to being CEO of a pri- stems from that relationship.” could derail its ambitions. It’s awaiting a vate company, working for guys I had not With its shift into coffee, JAB is back- decision by European Union regulators, even met 24 hours before,” Burwick recalls. ing a consumer favorite with unique stay- due by May 6, on whether combining Mon- Becht says he’s always had a passion for ing power. Grocery items from soda to soup delez’s coffee business with Master Blend- coffee. “I’ve been investing in coffee for a have seen sales dented by price wars and ers will hurt competition. To appease long time, ever since Green Mountain Cof- health concerns. The coffee market has regulators, JAB has put the L’Or Espresso fee became public in 1993,” says Becht, who grown by 44 percent since 2009 and is ex- and Cafe Grand’Mere brands on the block. has since sold his shares in the company panding at about 5 percent a year, according What JAB lacks in coffee experience, it now called Keurig Green Mountain Inc. to Euromonitor International. Single-serve might make up for with its speed and will- Harf met Goudet, who’s now JAB’s CEO,
CLOCKWISE: DYLAN COULTER; HANS-RUDOLF SCHULZ; GILBERTO TADDAY HANS-RUDOLF SCHULZ; GILBERTO COULTER; DYLAN CLOCKWISE: capsules, delivered by machines such as ingness to spend. Dave Burwick, who at the on the board of another beverage company,
MARCH 2015 BLOOMBERG MARKETS 81 beermaker Anheuser-Busch InBev. Gou- bid for cosmetics seller Avon Products Inc. det, a silver-haired expatriate who lives in May 2012. Then it delayed its own IPO. outside Washington, was also bullish on When CEO Michele Scannavini left, Becht the drink. “He developed our coffee strat- came in to run the business for now. In Oc- egy,” Harf says in an e-mail. “We like the tober, JAB took Jimmy Choo Plc public growth, the low capital intensity, the sta- Joh. A. Benckiser founded in London. The shoemaker’s 650 million bility over the business cycle and the pric- pound ($976 million) market value on Jan. ing power of strong brands.” 20 was only 100 million pounds more than Harf arrived at Joh. A. Benckiser JAB had paid in 2011. JAB folded Labelux GmbH in 1981, fresh from Boston Con- last year and put the brands under its di- sulting Group. The namesake company rect control. “We don’t claim that we’re ex- was founded by Johann Adam Benck- perts in luxury,” says Becht, a fan of Coty’s iser in 1823 in Pforzheim, Germany, and Bottega Veneta fragrance, who’s wearing a attracted chemist Ludwig Reimann five Children Reimann black Armani Collezioni suit and a white years later. The company passed to the adopted by siblings with shirt without a tie in Coty’s New York office. Albert Reimann* 23% JAB stakes Reimann family when one of Johann “Having said that, the businesses are gradu- Benckiser’s heirs ceded his stake. It went ally doing better and better.” on to spend a century and a half making Coffee is showing more promise, espe- citric acid and other specialty chemicals cially when it’s combined with bagels. On before wading into such products as den- Sept. 4, Goudet approached billionaire in- ture adhesive cream. Harf embarked on vestor David Einhorn about bagel chain Net worth of each an international buying binge, adding Eu- JAB-owning sibling Einstein Noah Restaurant Group Inc., ac- ropean detergent makers, and began sell- cording to a person familiar with the talks. ing the chemical assets. The consumer Einhorn’s hedge fund, Greenlight Capi- *Great-great-grandson of original co-owner. Figures as of Jan. 22. business accelerated with Becht, who Sources: Bloomberg, JAB tal, was Einstein’s largest stockholder, with joined Benckiser from Procter & Gam- more than a 35 percent stake. The two met ble Co. in 1988. Four years later, Harf ac- interest,” Becht recalls. “You could make at Cafe Centro in New York’s MetLife build- quired perfume maker Coty from Pfizer a lot of changes and have a big impact.” ing. Harf and Becht didn’t take part in the Inc. for about $440 million. “We bought Becht and Harf worked in tandem. Becht discussions. Goudet was easy to deal with, consumer-goods businesses from com- rose to CEO of household-products maker the person familiar with the matter says. panies for which it wasn’t the primary Benckiser NV in 1995, while Harf engineered The acquisition, valued at $374 million, a merger with British consumer-goods out- was announced on Sept. 29 and closed five fit Reckitt & Colman Ltd. to create Reck- weeks later. “We do the standard market itt Benckiser in 1999. Becht posted annual scouting of what’s out there, try to build re- net income growth of more than 10 percent lationships over time with targets and see if What’s Brewing in Coff ee during most of the next decade. Market value we can make transactions happen,” Becht For an overview of the retail coff ee market, increased more than sixfold, earning Becht says. “The guns-blazing approach gener- type BI BEVG
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to Bramson’s proposal and then asks for with the most successful activist manag- comments from the floor. Heads snap to- ers, such as Bill Ackman, whose Pershing ward Bramson, a slight, pale 63-year-old Square has returned 21 percent a year since with a full head of neatly combed silver it was founded in 2003, or Jeffrey Ubben, hair, sitting with his team in the back rows. who can boast an average gain of 17 per- The seconds tick by, but Bramson stays si- cent a year since 2000 at ValueAct Capital lent, staring straight ahead impassively. Management. One shareholder stands and says he The London press has discovered has met Bramson and come away unim- Bramson, especially since 2010, when he pressed. Another complains about the went after F&C Asset Management Plc, an cost of this proxy fight. The next speaker institution with a history that stretches says Sherborne, if it sees so much value to back to 1868. Newspapers refer to him as HE CROWD ASSEMBLED be unlocked in Electra, should try to buy an American corporate raider and com- beneath the ornate chandeliers in Sad- the company outright. plain he is “laying siege” to venerable dlers’ Hall in London is expecting a show- This is the most persistent criticism U.K. firms and “parking his tanks on the down. Sherborne Investors, led by Edward Sherborne has faced while pursuing a half lawn.” A columnist for the Evening Stan- Bramson, a publicity-shy New York activ- dozen U.K. companies in a little over a de- dard, Nick Goodway, decries Bramson’s ist who has targeted a succession of British cade: that a minority stake hardly justi- activism as a bid for “creeping control” of money management firms in the past four fies the management control it demands. a company and writes that it mostly bene- years, has called this shareholder meeting Bramson has an answer to the critique— fits “the creeps.” to oust one member of the board of Electra but doesn’t offer it at the meeting. The The complaint at the shareholder meet- Private Equity Plc and add Bramson and shareholders vote, and Bramson loses, ing that Sherborne should buy Electra another candidate as directors. with 61 percent against his proposal. He and pay shareholders a premium to do so The management of Electra, one of the walks out without having uttered a word. came from none other than Edward Bon- U.K.’s oldest private-equity firms, sits up The defeat for Bramson is rare, though ham Carter, a member of one of Britain’s front. Sherborne, having built a 20 per- his keeping quiet is not. He tends to let his most established Establishment families. cent stake in Electra at the time of this Oc- results speak for themselves. Investors in “If Mr. Bramson thinks there is 1 billion tober gathering, has argued in a letter to Sherborne’s funds and partnerships gained pounds of hidden value, he should make shareholders that the firm’s leadership is an average of 19 percent annually after fees a bid for the company,” said Bonham Car- mismanaging its investments, overcharg- for the 12 years through 2014, according to ter, who’s vice chairman of Jupiter Fund ing investors on fees and interest, and un- the firm. That’s testament to a quirky, one- Management Plc. derutilizing its cash. target-at-a-time activism that Bramson has Bramson’s response, delivered in a Roger Yates, Electra’s chairman, be- arrived at after almost 40 years in the in- rare interview a month after the meet-
gins by explaining the board’s opposition vestment business. His returns put him up ing, is that he doesn’t owe shareholders a OF SHERBORNE INVESTORS PREVIOUS SPREAD: COURTESY
Spirent Communications (in pence) Nautilus Reveals stake Sells Buys Buys more Gets out* 8/8 8/6 TO 9/17 7/5 TO 2/29 11/7 TO 11/24 5/27 Buys more 8/24 TO 9/20 90 $14
Joins board 12 80 12/22 Becomes Sherborne Investors has scored big wins 10 CEO with a string of activist investments in 70 3/26 U.K. companies in the past decade—and 8 suff ered a setback at Nautilus, the one 60 U.S. company it tried to turn around. 6 50 4 40 2
30 20062007 200820090 2007 2008 2009 2010 2011 *Sherborne distributes shares to its investors. Sources: Company fi lings, Bloomberg 8/1 10/1 6/15 6/15 allowing others to cast him in a negative light. At the interview, in his 32nd-floor, mid- town Manhattan offices, Bramson dis- cusses his investments and his methods at length, though he is reluctant to go into his personal life. With a commanding view of the Chrysler Building and the East River as a backdrop, he says he’s been called a lot of names over the years: “corporate raider,” “vulture investor,” even “pond scum.” The last is a joke, an example of Bramson’s ver- mouth-dry sense of humor. Bramson says what matters most to him is the opinion of his investors, who have included Soros Fund Management, Black- Rock Inc. and Aviva Plc, the London-based insurer. “All those people know what we do. It is not a secret. They are the largest investing institutions in the U.K. or in the world. They don’t think it’s anathema.” When Bramson invests, he likes to push for changes from within. He seeks at least one seat on the board, preferably as chair- Bramson has kept his firm small, making premium because he isn’t in control. Even investment decisions with Stephen Welker, man. Once he has that, he says, he will with a board position—even as chair- whom he hired as someone to mentor. spend a month or two meeting staff, ask- man—everything he does at a target firm ing questions and listening. Staying quiet is requires the consent of directors who are tactically smart in a turnaround, Bramson not affiliated with Sherborne. Icahn. He has never run an hourslong says. If you spell out your intentions early, When Bramson invests, he outlines press conference or opined about a target you might stir resistance among the em- what he thinks is wrong with a target com- company on television. He only agreed to ployees whose support you need later. “Peo- pany in a letter to shareholders but doesn’t talk for this story after his outside pub- ple usually won’t defy you openly, because berate management in public. In this, he’s lic relations counsel convinced him that it’s not a good career move,” he says. “They
COURTESY OF SHERBORNE INVESTORS COURTESY the polar opposite of an Ackman or a Carl his reluctance to speak to the press was stand back and watch you go over the cliff.”
F&C Asset Management (in pence) 3i Group (in pence) Electra Private Equity (in pence) Buys Gets out* Buys Buys more Sells Buys Loses vote Buys more 8/17 TO 12/17 8/16 TO 10/22 1/2 TO 2/28 6/20 11/12 2/28 TO 5/6 10/6 12/4 TO 1/9
120 400 3,100
Joins board 3,000 100 2/3 350 2,900 2,800 80 300 2,700 2,600 60 250 2,500 2,400 40 2010 2011 2012 2013 200 2013 2,300 2014 8/1 11/15 12/15 11/30 2/24 1/14/15 Each target gets Bramson’s full atten- and preferred stock, Bramson managed to houses, all that crap,” he says. He owns tion, since he puts Sherborne’s money into reduce the equity required to just $140,000, horses. His wife is a dressage competitor, one company at a time. “If you want to di- which was borrowed from one of Sword’s and she convinced him to learn to ride. “I versify, do it yourself,” he says. backers, heirs to International Business like feeding them biscuits,” he says. He Though the British press habitually de- Machines Corp. founder Thomas Watson’s also collects classic cars. Mirroring his in- scribes Bramson as a U.S. raider, he was fortune. Bramson laughs and says that deal vestment style, it’s restoring them, not in fact born in England. His mother was made him a pioneer in the use of excessive owning them, that he enjoys most. “You American, his father, British, and he re- leverage, which became synonymous with get to see how they’re really made. You ad- mains a U.K. citizen. One can still catch the buyouts of that time. Bramson did an- mire the craftsmanship,” he says. “At the traces of his birth country in the way he other half dozen successful deals in the end of it, though, all you’ve got is this old rounds the vowels in words like half and in next decade before founding Sherborne. car—so I would typically sell them off.” his preference for tea over coffee. Then he promptly got in trouble. In the early 2000s, Bramson almost When he left for the U.S. at age 24, in 1975, In 1987, Sherborne acquired Am- shut down Sherborne. He was unhappy, he he didn’t look back. He was fed up with the pex Corp., once a pioneer in audio and says, that private equity had become more economic malaise in Britain—and the pol- itics. This was before Margaret Thatcher’s government. Labour was in power. “They were very dirigiste,” Bramson says. “They were actually talking admiringly about the French model of central planning.” A year after arriving in New York, Bramson joined a boutique firm being set up by William Sword, a former Morgan Stanley investment banker. This was the video tape recording equipment. It was a about generating asset management fees era when buyout firms such as KKR & Co. $479 million leveraged buyout for which than finding investment returns. That’s got their start. In his first deal, Bramson Bramson put in about $60 million, financ- when he hit on a new approach. He real- spun out Buffalo Color Corp., a producer of ing the rest with junk bonds that carried ized that he made more money improving synthetic indigo dye, from Allied Chemical a 13.25 percent interest rate. In Bramson’s businesses that were doing OK than try- Corp. The deal had a price tag of $35 mil- telling, everything went well for two years, ing to save companies that were in trou- lion. By constructing a Jenga tower of debt and then it didn’t. ble. “The problem with the doggy ones is Bramson was still trying to fix Ampex that they might actually be dogs,” he says. 20 years later, in 2007, when—in an ironic So Bramson morphed from private-eq- twist—an activist firm ousted him. Ampex uity investor to activist fund manager. He filed for Chapter 11 bankruptcy protection found a new partner in Matthew Peacock, Following PE Deals 15 months later. a British banker who was setting up a bou- Type SIGB LN
quently. Bramson avoids the risk of sud- 70 percent. Then Sherborne flirted in 2013 Jeremy Kahn is a senior writer at Bloomberg Markets den redemptions. The first vehicle, offered with 3i Group Plc, another private-equity in London. [email protected] Kiel Porter covers private-equity fi rms at Bloomberg News in London.
DANIEL LYNCH/REX DANIEL in 2010, has been wound down; Bramson shop. Sherborne bought a 5 percent stake [email protected]
MARCH 2015 STRATEGIES PROFILE
Tax-Efficient Investing Ballentine Partners, which oversees $5 billion for 154 wealthy families, focuses on maximizing returns BY JON ASMUNDSSON and minimizing the share the government takes.
BALLENTINE PARTNERS IS a wealth manage- says. Yet the advisers tended to narrowly focus on ment firm with roots in an unusual institution: a their areas of specialty and were stumped by ques- summer camp. tions about strategy. Camp Kehonka, founded in 1902, brought girls to Ballentine, who had been a computer salesman the southeast shore of Lake Winnipesaukee in New for International Business Machines Corp., says Hampshire to swim and make handicrafts. In 1910, a he was unable to find an investment advisory firm young man named A.C. Ballentine applied for a job that could provide the broad, strategic counsel his there. No position was open, but the camp’s founder family needed. So he decided to create one—the invited him to visit for a week. Ballentine ended up wealth manager that became Ballentine Partners. staying for the rest of his life, becoming owner and director of the camp. “He went as a guest and he THE MAIN IDEA of the firm, says Bal- never left,” his son Roy Ballentine says. lentine, who is chairman and CEO, is to COVENTRY EDWARDS-PITT, By the time the elder Ballentine died in 1984, harness financial planning to investing. WILL BRAMAN the camp’s mile of waterfront land on New Hamp- Ballentine Partners, which is based in CHIEF WEALTH ADVISORY shire’s largest lake had become very valuable. So, Waltham, Massachusetts, now oversees OFFICER, CHIEF largely to pay the tax bill, the family sold it. “The $5 billion for 154 families and individu- INVESTMENT OFFICER, BALLENTINE PARTNERS sale of the camp was a very traumatic event within als, with an average net worth of about Serve only families and my family,” Ballentine, 65, says. “There were peo- $50 million. individuals. ple who literally stopped talking to me for over a Coventry Edwards-Pitt, the firm’s chief Focus on taxes. decade because I was right in the center of all the wealth advisory officer, says that Ballen- Use ETFs for equity decisions we needed to make.” tine serves only families with taxable investments. In trying to hang onto the camp, the family used income, not foundations or other institu- capable advisers on taxes and trusts, Ballentine tions. “We care very much about taxes,”
92 HAIR, MAKEUP AND GROOMING: CAITLIN MURPHY MURPHY CAITLIN MAKEUP AND GROOMING: HAIR, Edwards-Pitt, left, and Braman, at the firm’s Waltham, Massachusetts, office, say taxes govern their investing.
PHOTOGRAPH BY BEN HOFFMANN STRATEGIES PROFILE MARCH 2015
she says. “It governs how we do everything.” of mid-2014, 87 percent of U.S. large-cap active man- As an example, Edwards-Pitt points to the market agers trailed the Standard & Poor’s 500 Index for five crash in 2008. Ballentine’s clients invest in the U.S. years after fees. After taxes, he says, almost none of equities market via exchange-traded funds. When the active managers beat the U.S. benchmark. the market was near its bottom, Ballentine had them Within the bond allocation, Braman says, the sell those funds and buy into largest slice is municipal bonds, thanks to their “like kind” ETFs, which they tax advantages. For real assets, most Ballentine cli- ‘WE FOUND A $50 then rode back up. “We were ents have about 6 percent in master limited part- able to capture all of those nerships, 4 percent in real estate investment trusts MILLION ESTATE- taxable losses for our cli- and 1 percent in commodities. ents,” she says, referring to PLANNING MISTAKE,’ tax laws that allow investors BRAMAN SAYS THAT Ballentine tends to make EDWARDS-PITT to carry losses forward over smaller allocations to alternatives than many multiple years. wealth management shops. The reason: Private SAYS. Ballentine doesn’t pool pools aren’t tax efficient, he says. “Most of the gains client assets, Edwards-Pitt, come as short-term gains or income,” he says. 38, says. Each family’s investments are tailored to Alternatives, though, are valuable for their low their needs, she says. (One consequence is that Bal- volatility and low correlation to the broader mar- lentine isn’t allowed to report investment results kets, he says. “Traditionally, we have been a fund-of- except in one-on-one meetings, she says.) funds shop,” Braman says. “We’ve used the Corbin Chief Investment Officer Will Braman Pinehurst fund for probably seven years,” says the firm’s investing approach is based he says, referring to a fund-of-funds run by on four building blocks: equities, fixed in- New York–based Corbin Capital Partners. Type ETF come, real assets and alternatives. The
FINDING LOW-COST ETFS Ballentine Partners uses ETFs to get inexpensive exposure to stock markets in the U.S. and overseas. You can use the new Exchange Traded Funds (ETF) function to compare ETF costs. To compare U.S.-traded ETFs that invest in international stocks, for example, type ETF
94 STRATEGIES ETFs MARCH 2015
How Liquid Is Your ETF? BY RYAN KREGER
THE WIDE-ANGLE view of the exchange-traded- funds market is one of explosive growth and variation. Last year, investors sank about $200 TRADING DATA billion—more than the market value of Chevron Here, the Schwab ETF’s Corp.—into U.S. ETFs covering a plethora of sec- implied liquidity greatly exceeds its volume. tors, countries and strategies. Liquidity and trans- parency are the calling cards of the market, which has grown to some 1,600 funds managing com- bined assets of $2 trillion. Look more closely and you see that ETFs dif- fer widely in how successful they are at attracting money and how nimble they are in buying and sell- ing positions. A new function on the Bloomberg Pro- fessional service lets you examine and compare the liquidity of these funds and their underlying assets. Implied Liquidity (ETFL) function. Type DES
95 STRATEGIES ETFs MARCH 2015
EDIT BASKET Click here to make REMOVE STOCK the list of stocks Uncheck a box to easily editable. take out an illiquid position.
billion in notional value can potentially be traded The VARIABLE PERCENTAGE field in the up- ETFL lets you or created. per-right corner of the page can be adjusted accord- investigate how removing a stock might To a hedge fund or pension fund looking to make ing to your confidence in the overall liquidity in the affect an ETF’s implied a large trade in the Schwab ETF, that reading indi- market or the basket of holdings. liquidity. cates the fund can do so without making a substan- The function also enables you to edit the creation tial impact on the price of the underlying shares or basket. That means you can dig into the question of getting trapped in an illiquid product. In this case, how removing illiquid assets and replacing them the investor could easily make a trade as large as with cash or similar securities would affect liquidity. $50 million by enlisting an authorized participant to create new shares of SCHG by going out into the FOR EXAMPLE, CLICK on Edit Basket in the bot- market and buying the underlying stock holdings tom left of the screen. As of Dec. 14, the two stocks of the fund. that had the lowest numbers of implied daily trad- able shares, or IDTS, and hence constrained the li- quidity of the ETF the most were Rollins Inc., the Atlanta-based owner of Orkin Exterminating, and CALCULATING IMPLIED Erie Indemnity Co., an Erie, Pennsylvania–based LIQUIDITY insurer. Determining the implied liquidity of an exchange- To remove the two least-liquid stocks from the traded fund is based on calculating the implied basket, click on the boxes to the left of their names daily tradable shares, or IDTS, for each stock that’s to remove the check marks. Click on Save. included in the ETF’s creation basket. The formula is: Removing the Rollins and Erie Indemnity stocks boosts the implied liquidity of the whole portfolio IDTS = ((30-day ADV of the stock × VP) / to 110.9 million shares worth a notional $5.78 bil- stock shares per creation unit) × creation unit size, lion. This feature gives you a clearer understand- where ADV is the average daily volume of the stock. ing of what you’re getting into when participating VP is variable percentage, which is an adjustment in the creation and redemption process. that aims to limit any price impact on the stock ETFL and the implied liquidity data enable you by constraining the trade to a specifi ed portion of to understand how an ETF’s underlying assets im- average daily volume. By default, the VP is set at 25 pact trading of the overall fund. Armed with this percent. knowledge, you can dramatically expand your This formula is based on calculations by David choices of investable funds to include those that J. Abner that were published in The ETF Hand- book: How to Value and Trade Exchange Traded may have seemed off-limits before. Funds (Wiley, 2010) . Abner is the head of capital markets at New York–based WisdomTree Asset Ryan Kreger is on the staff of the Data Management department Management. RYAN KREGER at Bloomberg in Princeton. [email protected]
96 STRATEGIES CHEAT SHEET MARCH 2015
Tracking ETFs
EXTF
ETFL
PULL OUT AND SAVE. // PRESS
At one time or another, you may have had an unfortunate situation with a vending machine. So you know the slightest imprecision can keep you from getting what you want. Investments are no different. If not matched precisely to your strategy, you’ll be left hanging. To help prevent this, State Street Global Advisors offers over 140* SPDR ETFs. They cover a broad range of asset classes, so investors have the tools they need to build CRTGEKUGCPFFKXGTUKƂGFRQTVHQNKQ If you have a craving for precision, then visit us at spdrs.com/highlights.
Before investing, consider the funds’ investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus, which contains this and other information, call 1.866.787.2257 or visit www.spdrs.com. Read it carefully. '6(UVTCFGNKMGUVQEMUƝWEVWCVGKPOCTMGVXCNWGCPFOC[VTCFGCVRTKEGUCDQXGQTDGNQY VJG'6(UPGVCUUGVXCNWG$TQMGTCIGEQOOKUUKQPUCPF'6(GZRGPUGUYKNNTGFWEGTGVWTPU The SPDR® S&P 500® ETF Trust is an exchange traded fund designed to generally correspond to the price and yield performance of the S&P 500 Index.TM o41%3 p41BOE41BSFSFHJTUFSFEUSBEFNBSLTPG4UBOEBSE1PPSnT'JOBODJBM4FSWJDFT --$ o41p BOEIBWFCFFOMJDFOTFEGPSVTFCZ4UBUF4USFFU$PSQPSBUJPO/PƀOBODJBM QSPEVDUPGGFSFECZ4UBUF4USFFUPSJUTBGƀMJBUFTJTTQPOTPSFE FOEPSTFE TPMEPSQSPNPUFECZ41 ALPS Distributors, Inc. is distributor for SPDR S&P 500 ETF Trust, a unit investment trust. *As of October 3, 2014 IBG-11599 TYPE SPDR
Smell the Coffee BY DEBBIE MASSIELLO AND BETH HAUSMANN
ONE SUNNY SPOT in a year of collapsing com- modities prices was southwest Brazil. If anything, it was too sunny. Rainfall in the region, where 90 percent of Brazil’s coffee is grown, was the lowest in 80 years in early 2014. Brazil is the world’s larg- est producer of Arabica coffee, so the drought had a big im- pact on the crop. Brazil’s Na- tional Coffee Council, known as CNC, said that the 2015 harvest could drop below 40 million 60-kilogram (132-pound) bags, the lowest since 2009. As a re- sult of the short supply, coffee Type CRR
97 STRATEGIES FOREIGN EXCHANGE
Looking for Clues in Saudi Riyal Forwards
BY CHRISTOPHER WEISS
SAUDI RIYAL CURRENCY forwards spiked af- Arabia has racked up a huge current-account sur- ter King Abdullah’s death was announced on Jan. plus. You can use the International Reserve As- 23. The instruments can be an important barome- sets (WIRA) function to track such data. Type ter for monitoring stress in the kingdom—and in WIRA
98 MARCH 2015
against the dollar, which may sug- gest downward pressure for the oil price. The higher level of forwards SET ALERT suggests net outflows from Saudi Right click on the price line and select Arabia as the oil price fell below Create Price Alert. $80 a barrel and contagion caused a parallel drop in Saudi equity markets and investor confidence. To keep an eye on the often- overlooked Saudi riyal currency market, you can set an alert that will notify you when one-year forwards trade above Type SAR12M a certain level. First, let’s take a look at a graph of
99 STRATEGIES WHAT’S NEW MARCH 2015
How can I track implied volatility for the stocks in a monitor?
The Launchpad Monitor was recently enhanced to make it easy to display that data. Type BLP
LONG/SHORT MAPPING DATA Revenue and press the Option Monitor Click on update. For PORTFOLIO VALUES STATE BY STATE
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CME Group is a trademark of CME Group Inc. The Globe logo is a trademark of Chicago Mercantile Exchange Inc. All other trademarks are the property of their respective owners. Copyright © 2015 CME Group. All rights reserved. WHY BUY A SINGLE STOCK WHEN YOU CAN INVEST IN THE ENTIRE SECTOR?
Financial Sector SPDR ETF Top Ten Holdings* XLF - FINANCIAL Company Name Symbol Weight 1 Berkshire Hathaway B BRK.b 9.01% 2 Wells Fargo WFC 8.52% 3 JP Morgan Chase JPM 7.70% 4 Bank of America BAC 6.19% 5 Citigroup C 5.40% 6 American Express AXP 2.73% 7 US Bancorp USB 2.65% 8 American Intl Group AIG 2.58% 9 Goldman Sachs GS 2.58% 10 Metlife MET 2.02% * Components and weightings as of 12/31/14. Please see website for daily updates. Holdings subject to change.
Time For A Potential benefits of adding Sector SPDR ETFs to your portfolio include: Stock Alternative • Undiluted exposure to a specific sector of the S&P 500 • The all-day tradability of stocks • The diversification of mutual funds • Total transparency Visit www.sectorspdrs.com • Liquidity or call 1-866-SECTOR-ETF
Consumer Discretionary - XLY Consumer Staples - XLP Energy - XLE Financial - XLF Health Care - XLV Industrial - XLI Materials - XLB Technology - XLK Utilities - XLU
An investor should consider investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus, which contains this and other information, call 1-866-SECTOR-ETF or visit www.sectorspdrs.com. Read the prospectus carefully before investing. The S&P 500, SPDRs®, and Select Sector SPDRs® are registered trademarks of Standard & Poor’s Financial Services LLC. and have been licensed for use. The stocks included in each Select Sector Index were selected by the compilation agent. Their composition and weighting can be expected to differ to that in any similar indexes that are published by S&P. The S&P 500 Index is an unmanaged index of 500 common stocks that is generally considered representative of the U.S. stock market. The index is heavily weighted toward stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. Investors cannot invest directly in an index. The S&P 500 Index figures do not reflect any fees, expenses or taxes. Ordinary brokerage commissions apply. ETFs are considered transparent because their portfolio holdings are disclosed daily. Liquidity is characterized by a high level of trading activity. Select Sector SPDRs are subject to risks similar to those of stocks, including those regarding short-selling and margin account maintenance. All ETFs are subject to risk, including possible loss of principal. Funds focusing on a single sector generally experience greater volatility. Diversification does not eliminate the risk of experiencing investment losses. ALPS Portfolio Solutions Distributor, Inc., a registered broker-dealer, is distributor for the Select Sector SPDR Trust. TYPE STSP