Patience Pays Off
U.K. Bank Shuffle
Financial Engines CEO Diamond gets Barclays Maggioncalda finally crown, while Gulliver takes his company public restores order at HSBC
Power Broker
RBS banker Simon Wilde helps Hong Kong’s richest man get richer
OCTOBER 2010 WWW.INSTITUTIONALINVESTOR.COM
INSIDE The 2010 AllAmerica Research Team Page 35 Facebook for Finance Page 54
THE ANALYST IS SUE
The Mystery of Microsoft Page 58 Death of the IPO Page 62 Brazil’s Goldman Page 66
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FEATURES
CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOPLE THE A N A LYS T ISSUE
OCTOBER 2010
58
54
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62
54 Facebook
INVESTMENT RESEARCH
35
35
THE 2010 ALL-AMERICA RESEARCH TEAM
for Finance BY LEN COSTA
Blogs, online networks and other social media web sites are creating new opportunities for investment research. 57 TWEETING FOR TRADERS Twitter is a popular tool for the Chicago exchanges.
Research & Rescue BY LESLIE KRAMER
66 Brazil’s Goldman BRAZIL
58 The Mystery
CORPORATE FINANCE
of Microsoft BY STEPHEN DAVIS
Why does Wall Street continue to treat Microsoft like yesterday’s news? Don’t blame the analysts who track the company — they’re getting a little tired of recommending it.
BY JASON MITCHELL
Former bond trader André Esteves wants to build BTG Pactual into the preeminent investment bank in the emerging markets. Here’s why the Brazilian banker may well succeed.
62 Death of the IPO
In a year when macro concerns overshadowed stock picking, these analysts came to the aid of investors at sea in the market turbulence.
CAPITAL MARKETS
BY JULIE SEGAL
How Eliot Spitzer’s 2003 Wall Street research settlement killed capitalraising in the U.S.
VOLUME XLIV, NO. 8 • AMERICAS EDITION
BLOGS
Web institutionalinvestor.com
Check out our breaking news on who is up and who is down and out in the world of asset management.
WEB EXCLUSIVES
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RESEARCH
The All-America Research Team, our annual ranking of the nation’s best sell-side equity analysts. COVER ILLUSTRATION BY TBA+D
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WISDOM THE FUTURIST THE CHARTIST
CONTENTS INSIDE II TICKER FIVE QUESTIONS PEOP
7
ETC
OPENING
Ticker Barclays and HSBC tap CEOs • Settling trades in renminbi — through New York • Hedge fund managers are shorting Obama •Lithium gets charged up • Five Questions For Burton Malkiel People Faces in Finance • This Month in Finance
18
20 DONE DEALS
26 ALTERNATIVES
BY IMOGEN ROSE-SMITH AND XIANG JI
BY IMOGEN ROSE-SMITH
Rich at Sea
The bankruptcy of a luxury resort divides opinion about its prospects.
BY XIANG JI
BY KATIE GILBERT
24 THE BUY SIDE CAPITAL
18
RAINMAKERS
Long Circuit
BY ALLEN T. CHENG
Simon Wilde connected Hong Kong’s richest man with the lights of London.
Investors are taking a look at funds of hedge funds that boast a quant bent.
28 GREEN SHOOTS
Private equity firms are turning to dividend recaps.
Change Agent A Down Under fund has charted a backdoor route to green improvements.
Crossing the Line
30 CEO INTERVIEW
Inflation or deflation? Investors hedge their bets.
BY MICHAEL PELTZ
BY LAURIE KAPLAN SINGH
25 THE BUY SIDE
The New Normal BY DAVID ADLER
Asset allocation after the crisis: Is this time different?
The 2010 All-America Research Team
In a year when macro concerns overshadowed stock picking, investors say these analysts offered a world of good advice.
Bring on the Geeks
22 MARKETS
Debt Done Gently
71
5 Inside II 104 Inefficient Markets 105 Unconventional Wisdom 106 The Futurist 108 The Chartist
Third Time Is the Charm
It took ten years for Jeffrey Maggioncalda to take Financial Engines public.
To see the latest on these stories or provide feedback, visit institutionalinvestor.com
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DIAMOND: ANDREW HARRER/BLOOMBERG NEWS
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www.institutionalinvestor.com EDITOR-IN-CHIEF William H. Inman AMERICAS EDITOR Michael Peltz INTERNATIONAL EDITOR Tom Buerkle ART DIRECTOR Nathan Sinclair MANAGING EDITORS
Thomas W. Johnson (Editorial) Tracy Tjaden (International, Online) LONDON BUREAU Loch Adamson (Chief) ASIA BUREAU Allen T. Cheng (Chief) WEB EDITOR James Johnson
WEB PRODUCTION/DESIGN Michelle Tom SENIOR WRITER Frances Denmark STAFF WRITERS Imogen
Neil Sen (London) REPORTER Xiang Ji
Rose-Smith, Julie Segal,
SENIOR CONTRIBUTING EDITOR Firth Calhoun SENIOR CONTRIBUTING WRITERS Pam Baker,
Hugo Cox, Claudia Deutsch, Katie Gilbert, Fran Hawthorne, Jonathan Kandell, Leslie Kramer, Scott Martin, Ben Mattlin, Craig Mellow, Virginia Munger Kahn, Rosalyn Retkwa, Cherry Reynard, Nick Rockel, David Rothnie, Harvey D. Shapiro, Henry Scott Stokes, Paul Sweeney, Stephen Taub SENIOR EDITORS Tucker Ewing, Jane B. Kenney (Editorial Research) ASSOCIATE EDITORS Denise Hoguet,
Fritz Owens (Editorial Research)
COPY EDITORS Monica Boyer, Ruth Hamel,
Catheryn Keegan, Patrick Sheehan
DEPUTY ART DIRECTOR Diana Panfil ART DEPARTMENT Alex Agius, Israt Jahan,
Bethany Mezick, John Miliczenko
EUROMONEY INSTITUTIONAL INVESTOR PLC CHAIRMAN Padraic Fallon DIRECTORS Sir Patrick Sergeant, The Viscount
Rothermere, Richard Ensor (managing director), Neil Osborn, Dan Cohen, John Botts, Colin Jones, Simon Brady, Diane Alfano, Christopher Fordham, Jaime Gonzalez, Jane Wilkinson, Martin Morgan, David Pritchard, Bashar Al-Rehany INSTITUTIONAL INVESTOR, 225 Park Avenue South, New York, NY 10003; (212) 224-3300; Fax: (212) 224-3171. www.institutionalinvestor.com London Bureau: Nestor House, Playhouse Yard, London EC4V 5EX, U.K.; (44-207) 303-1703; Fax: (44-207) 303-1710 Hong Kong Bureau: 27/F, 248 Queen’s Road East, Wan Chai, Hong Kong; 852-2912-8030; Fax: 852-2842-7011 © 2010 Institutional Investor, Inc. (ISSN 0020-3580) No statement in this magazine is to be construed as a recommendation to buy or sell securities. Neither this publication nor any part of it may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system, without the prior written permission of Institutional Investor magazine. For reprints and Web links, contact: Dewey Palmieri (212) 224-3675; Fax: (212) 224-3563; e-mail:
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Street Smarts WILL ROGERS, UNSCHOOLED
and uncouth, was no sell-side analyst. But he had a certain financial wisdom, born of having lost his shirt more than once.“Don’t gamble,”he admonished readers of his newspaper column. “Take all your savings and buy some good stock, and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.” The Oklahoma humorist’s observations, published just weeks after the market crash of 1929, were meant to satirize speculators who had insisted that investing was easy and risk-free, provided you bought the right stocks (that is, the ones they were selling). Nearly four decades would elapse before brokerage firms began to publish research — based on fundamentals, not speculation — to guide investors to the right stocks and steer them from the wrong ones. Each year for the past 39 years we have asked money managers to tell us which U.S. sell-side analysts have been their best guides to Wall Street, and the names cited most often are inducted into our annual All-America Research Team. Over the past 12 months, the
stock market has soared, plummeted, surged and then dropped in a nauseatingly wild ride that has frayed many an investor’s nerves. Perhaps it’s no surprise that voter participation in this year’s survey jumped 20 percent over last year, as more buy-siders sought to show their appreciation for the analysts who’d piloted them safely through the turbulence. Producing this ranking is unquestionably a team effort. Senior Editor Tucker Ewing manages the mammoth project, with invaluable assistance from Associate Editor Denise Hoguet and Data Quality Manager Tina — Will Rogers McKenna in confirming the data on scores of firms, hundreds of analysts and thousands of voters. With their hard work and dedication, they make an extraordinarily difficult task look easy — not unlike the analysts on the 2010 All-America Research Team (page 35).
“If it don’t go up, don’t buy it.”
— WILLIAM H. INMAN EDITOR-IN-CHIEF
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OPENING
October 2010 News and views from the world of finance
Stuart Gulliver (left) and Robert Diamond Jr.
GULLIVER: KEREM UZEL/BLOOMBERG; DIAMOND: DANIEL ACKER/BLOOMBERG NEWS
U.K. BANK CEOS
Buckingham Palace. Well, the U.K.’s two leading banks have changed their stripes. Last month Barclays announced a seamless succession plan, while HSBC, caught off balance by the departure of chairman Stephen Green for a government post, didn’t seem to know who was running the shop for a few days. That both banks made their investment banking chiefs
CHANGE AT THE TOP BARCLAYS AND HSBC PUT INVESTMENT BANKERS IN CHARGE In the 1990s, Barclays almost needed a revolving door on its C-suite, so frequently was it replacing its CEO, whereas crosstown rival HSBC Holdings has customarily rotated its top management with the predictability of the changing of the guard at INSTITUTIONALINVESTOR.COM
CEO speaks volumes about the importance of the business to their bottom lines, even as a government-appointed Banking Commission looks into possibly separating investment and commercial banking as part of the U.K.’s response to the crisis. The news that Barclays’ president and investment banking boss, Robert Diamond Jr., 59, would succeed John Varley, who is retiring at 55 after seven years as CEO, underscored the dramatic transformation in the
bank’s fortunes over the past decade. While Varley revived Barclays’ U.K. retail and commercial banking franchise and expanded overseas, notably through the 2005 purchase of South Africa’s Absa Group, Diamond turned the bank’s Barclays Capital subsidiary from a second-tier fixed-income shop into a global bulge-bracket investment bank, capped by his bold acquisition of Lehman Brothers Holdings’ U.S. business after it went bankrupt two years
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“
We believe passionately that Barclays and the universal banking model are a strong positive for the U.K. —Bob Diamond Barclays
”
combination of so-called casino banking with a deposit-taking institution. With the Banking Commission considering that very issue, such views can’t be lightly dismissed. Yet in elevating Diamond, who will take over in March, Barclays is making a confident statement about its new profile. “We believe passionately that Barclays and the universal banking model are a strong positive for the U.K.,” Diamond tells Institutional Investor. The bank remained profitable throughout the financial crisis and didn’t need a government bailout, unlike U.K. rivals Royal Bank of Scotland Group and Lloyds TSB Group, he notes.
FOREIGN EXCHANGE
SETTLINGTRADES IN RENMINBI — THROUGH NEW YORK During the financial crisis several of China’s biggest banks unobtrusively opened swanky offices in Manhattan. Today their timing looks especially prescient. They’re ideally positioned to establish an important frontier for Beijing in its bid to internationalize the renminbi, on its terms. China’s second-largest bank, China Construction Bank Corp., has conducted more than $200 million worth of renminbi trade-financing and settlement transactions in New York (technically, the settlements take place in China) since
Diamond intends to continue expanding Barclays’ global footprint. The bank is well-positioned to benefit from growth in Africa through Absa, as well as from the weakness of many banking rivals in Europe. “The environment will be opportunity-rich,” he says. Not as rich for Diamond himself, though. The banker, who took home £34.7 million ($54.5 million) last year — much of it from the sale of Barclays Global Investors, in which he held shares — will receive a £1.35 million salary in his new role, with potential bonuses worth a further £3.4 million. In contrast to the smooth handoff at Barclays, HSBC stumbled after Green announced that he was leaving to become U.K. Trade and Investment minister. An uncharacteristic struggle
for the chairmanship broke out between nonexecutive director John Thornton and CFO Douglas Flint after it became clear the board would not allow CEO Michael Geoghegan to step into the job as his predecessors have done. HSBC initially denied that Geoghegan was threatening to quit, but soon afterward announced he would be retiring early, in January, and would be succeeded by investment banking chief Stuart Gulliver.“I came to a very quick decision that it was time to hand over to the next generation,” Geoghegan said. Gulliver, like Flint a longtime HSBC executive, received a £9 million bonus last year. He, too, will take a pay cut in his new position, to £1.25 million plus a bonus of up to £5 million. A well-traveled extrovert who has spent much of his career in Asia,
he will provide a complement to new chairman Flint’s U.K. experience and technocratic manner. Gulliver’s investment banking unit delivered half of the bank’s $11.1 billion in pretax profits in the first half of this year, but the business is geared toward emerging markets and isn’t as extensive as Barclays’. The 51-year-old banker was promoted to oversee all of HSBC’s banking operations in Europe and the Middle East earlier this year, grooming him for a wider role. Like Geoghegan, he will be based in Hong Kong. In promoting Flint, who will stay in London, HSBC emphasized his expertise in regulatory policy, something that will be important as the Banking Commission prepares to issue its report next year. — Tom Buerkle and Neil Sen INSTITUTIONALINVESTOR.COM
NELSON CHING/BLOOMBERG NEWS
ago. Barclays, which generated nearly 90 percent of its profits from the U.K. in the mid-’90s, today makes roughly two-thirds of its profits overseas. Barcap generated 48 percent of group revenues and 86 percent of pretax profits in the first half. The promotion of Diamond — an investment banker, and an American to boot — rankles some in the U.K. The government’s Business secretary, Vincent Cable, said the move underscored concerns about the
June, reports John Weinshank, head of trade finance and corporate banking for CCB in New York. “This business will grow in importance over time, and this is just the beginning,” he says. Weinshank sees the potential to increase CCB’s New York–based renminbi trade financing and settlement business to $1 billion a year in two years. Since June, when China’s central bank expanded its pilot renminbisettlement program worldwide, the U.S. has become a key venue. Chinese exporters are eager to settle in renminbi to guard against foreign exchange risk and to benefit from potential gains against the dollar. “It’s going to grow and be a significant business over time, and the renminbi will be an important currency for trade settlement,” predicts Daniel Scanlan, head of transaction banking for the Americas at Standard Chartered, one of several global banks vying with Chinese banks. HSBC estimates that $2 trillion in annual trade flows — or up to half of China’s total — might be settled in renminbi in three to five years. “China is now the second-largest economy in the world,” notes Wu Bin, general manager of Industrial and Commercial Bank of China’s New York branch. “So why would you bet against the renminbi?” — XIANG JI
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devoted Republiin the business community, this Point’s Dan Loeb. In his secondcans, like Caxton’s manager asserts. At the time, quarter letter to clients, Loeb Bruce Kovner and he called Obama’s pursuit of asserted that the Securities and Elliott Associates’ universal health care an “ego Exchange Commission suit against Goldman Sachs over Paul Singer, won’t exercise.” And though this mortgage-related activities was waver in their loymanager endorsed some of the a tipping point. Already shaky alty to the other side president’s financial reforms, investor confidence, he argued, of the aisle, either. he says that “the time wasted all but collapsed in the face of But what is and the uncertainty this caused worrisome new laws and regulainteresting is the businesses is unforgivable.” tions that many saw as intended degree of disillusionObama’s foreign policy more to redistribute wealth than ment with Obama also upset several hedge fund to promote growth, and to be among hedge fund managers who’d donated to Loeb: Not holding contrary to free-market ideals. managers who his campaign. They brand the his breath “Washington has taken regard themselves as push to rid the world of nuclear political free agents. weapons, talk to sworn enemies actions over the past months, POLITICS HEDGE FUNDS like the Goldman suit, that seem Not only have many such as Iran, and withdraw SHORT OBAMA from Afghanistan “naive.” designed to fracture the populace lost confidence in FORMER BOOSTERS One manager was stunned by pulling capital and power Obama, they’ve FEEL BETRAYED when last June Obama canceled from the hands of some and lost faith in the president George W. Bush’s putting it in the hands of others,” Democratic Party. plan to install a missile-defense wrote Loeb. In the same letter, For example, When he ran for president system in Poland and the Czech however, he also criticized “inept SAC Capital Advisors’ Steve in 2008, Barack Obama executives in regulated financial Cohen, who supported Obama Republic chiefly to safeguard enjoyed especially enthuinstitutions who bury their sharein 2008, recently hosted a fund- against attack from Iran. “This siastic support from liberals, raiser for Republicans. Sources was a shocking turn,” the hedge holders and then walk away with college kids and, surprisingly, say Cohen is alarmed about the fund manager said at the time. ill-gotten sacks of loot.” many hedge fund managers. nation’s swelling deficits. Loeb’s peroration would He was also upset by Obama’s But as the country gears up for Another very well-known have done Glenn Beck proud. “blowing off” Israeli prime one of the most crucial — and hedge fund manager became “Perhaps our leaders will minister Benjamin Netanyahu cantankerous — midterm elecdisenchanted when the awaken to the fact that free maron a White House visit. tions ever, several of the smartpresident tackled health care ket capitalism is the best system Perhaps the most outspoken money set who say they’re not head-on. The long and conten— and public — critic of Obama to allocate resources and create beholden to any party have tious debate over Obamacare innovation, growth and jobs,” among heretofore sympathetic pledged allegiance to the GOP. created too much uncertainty he told his clients.“Perhaps hedge fund managers is Third One household-name hedge fund manager who considers himself a “middle-of-the-road COMMODITIES guy” insists that “people who A JUMP-START FOR LITHIUM voted for Obama are disilLithium, the critical ingredient in the long-lasting batteries used to power hybrid cars, has lusioned.” As Kenneth Gross, been sparking interest among institutional investors. Launched on July 23, Global X a Skadden Arps partner who Management’s lithium exchange-traded fund attracted nearly $25 million in six weeks leads that firm’s political law — the fastest growth of any of New York–based Global X’s 14 commodity and country ETFs. practice, points out, “Hedge “What was surprising and very different about lithium,” says Bruno del Ama, Global X CEO, “was that we received a huge amount of inquiries [even before the launch], mostly funds tend to be more ideologifrom hedge funds.” cal, but even ideological money Lithium, of course, isn’t only for propelling energy-efficient vehicles. Lithium salts are the has moved away from the active ingredient of a mood-stabilizing drug. And because it is the lightest metal and has Obama Administration.” great energy-storage properties, lithium is a key element of batteries for laptops and cell To be sure, staunch phones. The bright prospects of hybrid vehicles are fueling heightened interest in the metal. Global X’s lithium ETF is not a pure play on the commodity. Half of its 20 constituents are minDemocratic supporters like ing and refining companies, such as FMC Corp., while the other half are such lithiumGeorge Soros and Avenue battery makers as Advanced Battery Technologies. As with many ETFs categorized as Capital Group co-founder green, “you have to be careful,” warns Deborah Fuhr, global head of ETF research for BlackMarc Lasry will probably Rock. “People think they’re buying a [pure] commodity exposure.” — FRANCES DENMARK remain Obama supporters. And INSTITUTIONALINVESTOR.COM
PAPER: RICHARD MEGNA; LOEB: DANIEL ACKER/BLOOMBERG NEWS
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KER OPENING FIVE QUESTIONS PEOPLE THIS MONTH IN FINANCE RAINMAKERS DONE DEALS MA Hedge Fund Politics
“
Just don’t spring [a tax hike] on me. I need time to make a plan. I’m not moving to the Caymans. —David Tepper Appaloosa Management
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“doesn’t care” if he has to pay the president’s proposed tax hikes on “higher earners” if that would help the overall economy. Likewise, Appaloosa Management’s David Tepper recently said on CNBC that he would support Democratic proposals to tax carried interest (a share of profits in a partnership, such as a hedge fund) as ordinary income rather than capital gains — which could considerably increase Tepper’s tax bill — as long as he was given ample warning. “Just don’t spring it on me,” he said. “I need time to make a plan. I’m not moving to the Caymans.” — Stephen Taub
typical U.S. family went from 30 to 40 cents for every dollar of income to $1.30 to $1.40. In addition, our financial institutions got way overleveraged, and so did our government. America’s debtto-GDP ratio is projected to get to 80 to 90 percent. By contrast, FIVE QUESTIONS FOR BURTON MALKIEL China’s ratio is RANDOM WALKING just 19 percent. IN CHINA So with respect to balance sheets — and this is in With the publication of some sense a balance-sheet A Random Walk Down recession — China looks very Wall Street in 1973, Burton much better. Malkiel set off a debate on How would you passive versus active investing rank China among that still rages. More recently, emerging markets? the famous espouser of indexI’m very positive on emerging ing — a professor of econommarkets in general. But having ics at Princeton University said that, there’s no doubt in my — provocatively argued in mind that China is the best of his latest book, From Wall them. It has grown a lot faster Street to the Great Wall, that and is likely to continue to do so investors should devote a far larger proportion of their port- for at least the next decade. folios to China. Malkiel, who What about India? himself invests in China as a I wouldn’t want to live co-founder and CIO of Alphain any country that wasn’t Shares, discusses the case for a democracy like India. But China with Senior Contributthere’s a real advantage that ing Editor Firth Calhoun. China has over India. If China Did the financial crash wants to build a power plant, it make China more, or less, goes ahead and builds a power attractive to investors? plant. In India you try to build More attractive. First, China a power plant and somebody has had a much better ecosays,“Not in my backyard.”As a result, India has a power grid nomic performance. Exports that doesn’t work. fell off a cliff in China, as they did in all exporting countries, What about risks? but China was the first to The world has been recover. Second, the genesis caught up in a huge economic of this crisis was too much imbalance. Essentially, the debt. Consumer debt for the
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global economy was growing nicely because the U.S. was the consumer for the world — taking on more and more debt — and China and maybe India and Brazil were the producers. Well, that ain’t gonna work anymore. The U.S. consumer is tapped out. China has much too little consumption and much too much investment in terms of GDP. Chinese premier Wen Jiabao himself called this “unbalanced and unsustainable.” So China has got to consume more, and they will. The government has plans — and they usually carry out plans — to encourage more spending and less saving, including building a social safety net.
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Should pension funds and endowments invest more of their portfolios in China?
Institutional investors are underweighted in China. But determining the proper weight gets complicated. I’m an indexer, of course. So somebody might say,“Okay, why don’t you buy a world index?” Here’s the difficulty with that. Indexes are float-weighted. The peculiarities of China mean that a significant portion of the market value of Chinese equities is not in the float. If you do a float-weighted world index, China ends up at about 2 percent. But China is 7 percent of the world’s GDP at official exchange rates. So investors should have at least 7 percent of their portfolios invested in China. You’ve got the most rapidly growing country in the world, with lots of labor resources, and Chinese equities are extremely attractive on a price-toearnings-growth-ratio basis. So why would you ever want to be underweighted in China? INSTITUTIONALINVESTOR.COM
W.W. NORTON & COMPANY VIA BLOOMBERG NEWS
they will see the folly of generating greater deficits by ‘investing’ in programs that lead to corruption and distortions of the system. Perhaps too, a cloven-hoofed, bristly haired mammal will become airborne and the rosettelike marking of a certain breed of ferocious feline will become altered. In other words, we are not holding our breath.” Yet at least one well-known hedge fund manager who expresses deep disappointment in Obama says that he may not vote Republican in November. “I vote for the person who is better for the country at the time,” he says. By the same token, he insists that he
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