By Neil Chatterjee
    The U.S. has promised it will hunt down tax evaders.
    And it seems tax evaders are on the run.
    DBS bank, based in the growing offshore financial centre of
Singapore, told Reuters it had been approached by U.S. citizens
asking for its private banking services. But when told they would
have to sign U.S. tax declaration forms, the potential clients
disappeared.  
    Swiss banks also approached DBS on the hope they could
offload troublesome U.S. clients to a location that so far has
not been reached by the strong arms of Washington or Brussels.
    DBS said no thanks. In fact many private banks and boutique
advisors now seem to be avoiding U.S. clients.
    Will this spread to other nationalities, as governments
invest in tax spies and tax havens invest in white paint?
    Is this the end of offshore private private banking?

Even for an American who's not wealthy, Geneva has a reputation as a global centre for wealth management - the place the world's rich come to stash their money and (they hope) make it grow.

    But you don't necessarily expect it to be so aggressive -- after all, the rich tend to be demure when it comes to their banking.

    Imagine one reporter's surprise, then, on arriving in the airport in Geneva and seeing bank ads everywhere. Think of the casino adds in Las Vegas's McCarron Airport or the technology ads in San Jose's Mineta Airport: it's the exactly the same in Geneva, only with wealth managers.

    Look left - there's UBS. Look right - there's Julius Baer. Look up in the baggage queue - there's a Swiss bank that emphasises a focus on the Arab world. A complete unscientific guesstimate suggests the display ads in the terminal run about 75 percent wealth management and 25 percent fine watches. (No surprise that every other storefront in the Ville Centre area of Geneva has watches on offer.)

    There is one plus to all of the bank ads in the airport for the less wealthy though. Tell your cab driver to head toward their addresses and you're likely to find the city's best cafes.

Reuters has taken its monthly snapshot of the investment choices of leading fund management houses across the world. At the end of July, the picture painted was one of investors embracing risk and shutting down their safest holdings.

Equity holdings as a percentage of a typical balanced portfolio were at their highest since the end of August last year, just a couple of weeks before Lehman Brothers collapsed. Here is what has been happening to equity holdings this year: 

At the same time, cash holdings have been cut back drastically. They are now at a level last seen in May 2007.  Here’s what that looks like:

Bonds offers a more mixed picture, but the latest month still shows a retreat that would be typical of roaring risk appetite:

Now the big question. Does all this add up to the start of a meaningful, long-term bull market? Or is it just overly optimistic exuberance?

The mood in the asset management industry is ”very cautious, very realistic but not pessimistic” after the financial industry’s “Chernobyl” of Lehman Brothers collapse, according to Europe’s fund industry chief.

Peter De Proft, director general of the European Fund and Asset Management Association (EFAMA) told the Reuters Funds Summit, that the mood was now more optimistic.  At least, certainly more so than  4-5 months ago.

Lehman Brothers, though, was Chernobyl. ”Boom, it was the atomic bomb,” De Proft said, adding that many in the financial industry, including asset managers, appeared “shell-shocked” at the time.

Now he sees more optimism and backs it up with preliminary EFAMA data showing net inflows into investment funds  in January, reversing the trend of outflows seen in the last quarter of 2008. Not huge, but positive, he says. February, meanwhile, was “presumably positive or break-even.”

But De Proft was under no illusion that it will take time for investors to venture back in big time. Then again, if you were a fund manager, what else could you bee but optimistic?

(Reuters photo: Andrew Winning)

Jeff Shacket, vice president of Thomson Reuters’ Corporate Advisory Services, writes:

“With the Dow up nearly 180 points today (and up nearly 850 points from closing low on March 9), the bulls are hopeful that we are seeing the seeds of a sustained rally – one driven by long-term investors finding fresh values, not hedge funds covering their short positions.  

“Of course, one could argue that the market offered plenty of good values during late 2008 as the Dow hovered around 8500 following the 2500 point plunge in mid-October.  Exactly when a stock’s combination of valuation, fundamentals, and outlook will combine to trigger a decision to buy varies from firm to firm.  

“Nevertheless, we dug into the portfolios held by a representative set of traditional value investors to see which stocks they purchased during 4Q08 and how they positioned themselves for 2009.  Specifically, we looked at six asset management firms (primarily pension managers) and four mutual funds.  Collectively, they controlled more than $90 billion in equity assets as of 12/31/08 with an average annual turnover rate of just 42 percent.  Here’s what we found:

“1.  The group’s aggregate investment decreased in six of the eleven major economic sectors.  The largest decreases in exposure (a combination of share purchases/sales and price movements) were in Financials (down $2.0 billion or 12 percent) and in Materials (down $1.4 billion or 29 percent).  The largest increases in net exposure occurred in Energy (up $1.6 billion or 19 percent) and Industrials (up $700 million or 7 percent).  Even with the net reduction, Financials remain the second largest sector in the portfolio at roughly 16 percent.  Consumer Discretionary stocks rank first, accounting for 17 percent.

“2.  The ten underlying portfolios are relatively concentrated, with most holding fewer than 150 stocks. However, among the more than 1300 stocks held by the group, there is very little overlap.  Only 43 stocks were held by at least four of the ten portfolios.  The most widely held were Viacom, JPMorgan, and Pfizer, but the group reduced its exposure to all three. Among the widely held names, the group aggressively increased its exposure to insurance provider MetLife and two oil services companies, Halliburton and BJ Services.  Two regional bank stocks, Fifth Third and Wells Fargo, also ranked among the popular names that saw net increases. 

“3.  Many Dow stocks ranked among the widely held names, but the group slashed its investments in GE, Pfizer, JPMorgan, Home Depot, AT&T, Microsoft, Citigroup, and Exxon by 20 to 55 percent.  The group also reduced its exposure to Bank of America and Kraft.  Merck was the only widely-held Dow component that saw a significant net increase in exposure. 

“4.  The group reduced its exposure to stocks listed on European exchanges, but increased exposure to Asia and Latin America.  However, exposure to each of those regions is minimal. 

“5. Generally, the group made focused investments.  Consider the traditionally defensive healthcare sector.  Collectively, the group owns roughly 75 healthcare stocks, and it reduced net exposure by roughly $1.0 billion.  However, in five stocks (Abbott Labs, Merck, Novartis, Aetna, and WellPoint), the group increased its exposure by nearly $800 million.  In Consumer Discretionary, where the group owns more than 200 stocks, an aggregate net decrease of $700 million includes five stocks (JCPenney, Liberty Media, Marriott, Phillips, and Omnicom) that saw a net increase of nearly $1.0 billion.  In the Energy sector, ten of the roughly 150 stocks held by the group saw net increases of more than $100 million, led by Chesapeake Energy (+$500m).  Together, these ten Energy stocks account for the entire aggregate net sector increase ($1.9 billion > $1.6 billion).

“Stitching these elements together, we can create a profile of the average value investor.  First, and not surprisingly, the average value investor is making some contrarian bets, keeping money in the battered financial sector, or expecting the consumer to come back, or looking past falling commodity prices.

“The average value investor likely moved into the Dow stocks early in 2008 when the subprime crisis first pulled the broader market lower.  The biggest blue chips looked stable and relatively cheap.  However, when the housing troubles triggered the credit crisis which in turn slammed the brakes on the global economy, thus hurting revenue and earnings forecasts for large multi-nationals, then the average value investor moved out of the Dow and into second-tier names, looking for temporarily tarnished gems.   

“The average value investor is a stock picker who maintains a concentrated portfolio.  A widespread pullback in stock valuations did not spark widespread buying.  Instead, the average value investor aggressively purchased a select few stocks that were suddenly trading well below their intrinsic worth and seemed best poised to get back on track.  

“In the end, though, there is no average value investor.  The lack of overlap among these firms and funds confirms what we in Corporate Advisory Services have long counseled our clients – namely, that buy/sell decisions are not explained solely by general investment style.  Instead, each investor employs a distinct approach that is defined by preferences for certain stock fundamentals and by qualitative factors (e.g., management quality, industry position, etc.) particular to the company in question.  

“Understanding where (in sector terms) value-oriented assets are flowing can provide wide guideposts for investor outreach.  However, the most effective investor relations programs seek to understand the specific dimensions of each portfolio and the discipline of each portfolio manager.  Let us know if we can help you reach the right investors.”

Footnote:
For this study, the six asset managers were: Dreman Value Management; Institutional Capital; NWQ Investment Managers; Pzena Investment Management; Southeastern Asset Management; and Sound Shore Management. The four mutual funds were: the Keeley Small Cap Value Fund; the Lord Abbett Mid Cap Value Fund; the Mutual Shares Fund; and the T. Rowe Price Value Fund.

Master-fraudster Bernie Madoff is the invisible guest at an annual fund fest in Luxembourg, the European capital for fund administration.

Even though the former Nasdaq chairman is under arrest thousands of miles away from this discreet financial centre nestled between Belgium, France and Germany, his presence was omnipresent. Fund managers just can’t stop mentioning him.

 One example: “The hedge fund bubble has popped. The market bubble has popped, and to put a cherry on the top you had the Madoff probe in December,” said Ken Kinsley-Quick from hedge fund Thames River Capital.

Other speakers have gone into deep soul-searching, accepting that more transparency and due diligence is needed. But few would openly beat their chest and admit any wrongdoing as they all seemed to agree that if the Securities and Exchange Commission could not catch Madoff’s wrong doing over 20 years, no-one could.

“Except for a few whistle blowers no-one had expected anything. I really do not think that custodians did not take their role seriously. But it’s not helping the industry,” Yves Francis, a partner from Deloitte said.

Even Luxembourg’s budget minister, Luc Frieden, got into the act, suggesting that a deal should be made out of court to compensate Madoff investors who had gone through Luxembourg-based investment vehicles.

He clearly wanted Madoff to just go away.

(Reuters photo: Mike Segar)

Financial markets might be in distress and stocks are falling through the floor, but according to James Montier, global strategist at Societe Generale, we are not in the final stage of bubble burst yet. For one thing, the Financial Times is still too big.

At a fund managers conference in London today, Montier — a renowned bear — noted a thesis by economists Hyman Minsky and Charles Kindleberger that bubbles go through five stages — displacement, credit creation, euphoria, critical stage/financial distress and revulsion.

Currently, he says, financial markets are going through the critical/distress stage but we are not in revulsion yet.

“In revulsion, the Financial Times will be three pages long and we will all be ashamed to be working in finance. Stocks will be unambiguously cheap,” he told a group of financial professionals.

So star hedge fund manager Greg Coffey has opted to join established firm Moore Capital.

In April, when high-performing, high-earning Coffey resigned from GLG, the market was awash with rumours that he wanted to start up his own firm, pulling in billions from investors.

However, times have changed in the hedge fund industry.

The average fund is down nearly 20 percent so far this year, according to Hedge Fund Research’s HFRX index, while emerging markets funds have taken a particular battering as markets such as Russia and China have fallen.

Fund of funds managers say that top funds that were once able to turn investors away are now open again as investors across the industry withdraw their assets.

So perhaps for Coffey, who forfeited a bonus reportedly worth around $250 million when he resigned from GLG, a start-up has just become too risky for now.

If the shrinkage of the hedge fund industry is giving someone as well-regarded as Coffey reason to think again, then for those without a strong track record times could be very tough indeed.

Nobody knows quite what the landscape for financial services will be after the mayhem of the last three weeks. There is much talk of the investment banking model being dead in the water and swingeing regulation aimed at firmly bolting the door of a horseless stable, but few are ready to hazard at the details.

One aspect on which we have seen almost universal agreement, however, is that investors have cottoned onto the immense risk of bankrolling investments they don’t quite understand. The trend for increasing pension fund investments in alternative strategies starts to look like a busted flush, and you have to question whether demand for the UK’s planned retail funds of hedge funds will sustain the new industry.

Schroders CIO Alan Brown told us this week: “People will be taking a long hard look at complex financial products.”

“If you see a creative investment banker head towards you, you are likely to develop short arms and deep pockets.”

It’s clearly an issue which encourages investors towards the poetic; Colin Melvin, CEO at the equity ownership service at Hermes told a sustainable investment briefing on Wednesday: “What we’ve seen perhaps is a multiplicity or complexity of investment products and services which has grown up in order to maintain unusual profitability of the industry. As you shine a light on it, it will simper off into the dark again.”

And Robert Talbut, CIO of Royal London Asset Management lends further weight to the argument.

He told us: “We see a return to simplicity in products - complexity is out. The absolute return-type product is significantly under threat - clients will be wary of the opacity and prime broking is getting much harder to come by.”

Some industry players talk about a return to favour for old-fashioned, long-only balanced funds, with some interest for high-grade investment bonds, or perhaps global equities. The trouble at the moment is that many investors see few viable bolt holes for their cash. Just ask Andrew Chapman, pensions manager at the 2 billion pound John Lewis pension scheme.

“There is nowhere to hide,” he said. “This is a whole new paradigm and there are too many uncertainties out there - you make one move and you might be worse off than what you are doing now.”

 – Joel Dimmock, Claire Milhench, Raji Menon