Europe’s Best CFOs A resurgence of the Hong Kong’s Chris

have cut costs and put their sukuk market raises hopes that Gradel has grown Pacific
firms in a position to profit Islamic finance could benefit Alliance into one of Asia’s
during economic hard times from the banking crisis hedge fund stars

INTERNATIONAL

JULY/AUGUST 2009 WWW.IIMAGAZINE.COM

PAGE 27

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S ALTERNATIVES NERD ON THE STREET CONTENTS INSIDE II TICKER PEOPLE FIVE QUESTIO
FEATURES

22 CAPITAL MARKETS
Last Man Standing
BY RICH BLAKE
Technological changes and
weak markets threaten floor
traders like Vincent Farina, but
the veteran broker says a
human touch still adds value.

27 SPECIAL REPORT
THE CLIMATE CHALLENGE
Climate change poses grow-
ing risks to the environment —
and the economy. We
examine how investors are
looking to profit from clean-
energy technologies.

28
Winds of Change
BY JEREMY LOVELL

32
From Smokestacks
to Greenbacks
BY KATIE GILBERT
“JUST
BECAUSE 38 ASSET MANAGEMENT
SOMETHING Manning’s Method
IS FASTER BY JULIE SEGAL
AND CHEAPER MFS is on the rebound thanks
DOESN’T to CEO Robert Manning’s
team-based approach.
MEAN IT’S
BETTER.” 42 ISLAMIC FINANCE
Can Islamic Finance
Profit from the Crisis?
BY HUGO COX
Islamic banks and the sukuk
market may benefit from the
West’s financial disarray.

48 HEDGE FUNDS
West Meets East
BY HENRY SCOTT STOKES
Chris Gradel and his team at
Pacific Alliance Group scour
Asia for mispriced assets.

VOLUME XXXIV, NO. 6 • INTERNATIONAL EDITION

54 58
JULY/AUGUST 2009
RESEARCH The 2009 Brazil 20 Europe’s Best CFOs
Limited exposure to equities muted the impact Earnings guidance is out, cost controls are in, as

••
and RANKINGS of the financial crisis on Brazil’s top money European financial chiefs steer their companies
managers. BY LESLIE KRAMER through the recession. BY WILLIAM BOSTON
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S ALTERNATIVES NERD ON THE STREET CONTENTS INSIDE II TICKER PEOPLE FIVE QUESTIO
DEPARTMENTS

BGI chief Blake Grossman says the

cultures of BlackRock and BGI
have some common elements

7 INVESTING

62 THE BUY SIDE

OPENING Staying the Course
• Ticker BlackRock says BGI was worth every cent • Paulson’s Midas BY MICHAEL SHARI
touch • An SEC fraud cop on learning from Madoff • Expect a flurry America’s Largest Overseas Inves-
of fines • People Faces in finance • Five Questions For David tors remain committed to interna-
tional growth, despite a sharp
Einhorn • New Zealand freezes pension contributions setback in 2008.
• Did II Say That? What we said about “swinging funds” in 1967
64 INEFFICIENT MARKETS
CAPITAL China Recovery

14
Doesn’t Add Up
17 SCORECARD BY EDWARD CHANCELLOR
Beijing’s stimulus plan risks aggra-
RAINMAKERS Hunting in a Difficult Year
Banker to the Banks J.P. Morgan grabs the lead in M&A by vating the economy’s imbalances.
BY HEIDI MOORE
When facing chaotic markets, nervous
advising buyers in a lean market.
66 ALTERNATIVES
investors and a wrathful government, 18 MARKETS Survivor Benefits
BY IMOGEN ROSE-SMITH
Morgan Stanley investment banker Trading Titans Fight Back
Jonathan Pruzan was well prepared. BY CHARLES WALLACE A relatively prosperous hedge
Established stock exchanges are trying to fund firm picks up the remains of
16 DONE DEALS compete with a growing flock of upstarts. a fading rival.
DANIEL ACKER/BLOOMBERG NEWS

Cash for Clunkers .

BY STEVEN ROSENBUSH 19 CEO INTERVIEW MISCELLANEOUS
For General Motors the road to insolvency Not Playing Around
has been littered with unhappy shareholders, BY CLAUDIA DEUTSCH 3 Inside II
but the automaker’s bankruptcy financing Mattel CEO Robert Eckert guides the toy 68 Nerd on the Street
is one sweet deal. company through the trials of recession.

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NTRIBUTORS INSIDWALL THE STREET CONTENTS INSIDE II TICKER PEOPLE FIVE QU

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EDITOR William H. Inman

INTERNATIONAL EDITOR Tom Buerkle Risk big, explaining academically rigorous top-
ics from quantile regression to clairvoy-

Raconteur
AMERICAS EDITOR Michael Peltz
ART DIRECTOR Nathan Sinclair
ant value teases. (See Bernstein tribute,
www.iijpm.com.) Peter was that rarity,
MANAGING EDITORS
Thomas W. Johnson (Production, Research) an economic scholar who wrote with the
Tracy Tjaden (International, Online) “ Irreversibility dominates decisions flair and precision of a great novelist. And
INTERNATIONAL EDITION ranging all the way from taking the he had a delightful sense of humor. “The
LONDON BUREAU Loch Adamson (Chief) subway instead of a taxi, to building world would be a dull place,” he wrote in
ASIA BUREAU Allen T. Cheng (Chief) an automobile factory in Brazil, to his landmark risk study, Against the Gods,
CONTRIBUTING EDITORS Vita Bekker (Tel Aviv),
changing jobs, to declaring war. ” “if people lacked conceit and confidence in
Lucy Conger (Lima), Craig Mellow
— Peter Bernstein, Against the their own fortune.”
INSTITUTIONAL INVESTOR.COM Gods: The Remarkable Story Fortunately for us, good writing mat-
EDITOR James Johnson
ASSISTANT WEB EDITOR Michelle Tom
of Risk tered to Peter. He told stories simply, with-
out pretense, building on strong verbs,
ASSISTANT MANAGING EDITOR
Steve Rosenbush (Wall Street, Corporate Finance) Imagine if banks had ignored subprime always in the active voice. There was a
SENIOR EDITORS Steven Brull (Los Angeles), temptations, Lehman Brothers had power and elegance in simplicity. Big things
Karl Cates, Jane B. Kenney (Editorial Research) survived or Bernie Madoff’s schemes can be accomplished with small words.
SENIOR WRITERS Frances Denmark, Michael Shari had unraveled sooner. Such possibilities — He admired Winston Churchill, no small
STAFF WRITERS Imogen Rose-Smith, Julie Segal irreversibly vanished now — were the stuff accomplisher, who wrote that “short words
SENIOR ASSOCIATE EDITOR Tucker Ewing
of routine supposition for Peter Bernstein, are always best, old words best of all.” If
ASSOCIATE EDITORS Denise Hoguet,
WeiQing Lu (Research Specialists), a master interpreter of the complex world ideas could not be clearly stated so they
Carolynn B. Tetro of probabilities and risk. could be understood, they were probably
SENIOR CONTRIBUTING EDITOR Len Costa Peter, who passed away in June, was not good ideas in the first place.
SENIOR CONTRIBUTING WRITERS Pam Abramowitz,
much more than that to this magazine.
Hugo Cox, Mary D’Ambrosio, Katie
Gilbert, Udayan Gupta, Fran Hawthorne, Working with founder Gil Kaplan, he gen-
John Hintze, Jonathan Kandell, Sara Kandler, erated ideas that nurtured the fledgling
Donald Kirk, Janice Koch, Leslie Kramer, Institutional Investor. He later founded
Ellen James Martin, Scott Martin,
Ben Mattlin, Nick Rockel, Jan H. Schut, the acclaimed Journal of Portfolio Man- — WILLIAM H. INMAN, EDITOR
Harvey D. Shapiro, Mike Sisk, Jinny St. Goar, agement, a small publication that thought iieditor@iimagazine.com
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 Itaú Unibanco
Blazing A New Trail
Itaú Unibanco puts its Latin American asset management expertise to work on global ambitions
D
emosthenes Madureira de Pinho Neto is a man on
a mission, just eight months after South America’s
largest financial institution - Itaú Unibanco - was
created from the merger of two of Brazil’s leading
privately owned banks. “Seizing the similarities in investment
philosophy between the two original asset managers, we’ve just
finished getting both teams under one roof,” says the head of
Itaú Unibanco’s new asset management company from his São
Paulo office. “Now we’re looking to consolidate our place as the
Latin American specialist investment manager with a relevant
presence in all Latin American markets – one that has its own
personality and identity in a huge financial group.”
Pinho Neto has the advantage of tackling this ambition from
an enviable position. The merger between Itaú and Unibanco
– first announced last November – created not only the largest
bank in the southern hemisphere with assets valued at R$632.7
billion at year-end 2008 but also the sixth
The merger largest bank in the Americas.
between Itaú Still, size isn’t the whole story. Last
and Unibanco year, financial institutions in the group
created the were named Best Brazilian Bank by
sixth largest Euromoney (for the 11th consecutive year)
and Global Finance magazines and the
bank in the
country’s best asset manager by the local
Americas. Exame magazine. This year, the FT voted
it the Most Sustainable Bank across Emerging Markets. The
asset management company’s current team – picked from the
cream of the crop from both firms – is unrivaled in its depth of
experience in the Brazilian market and is expert in covering other
Latin American countries including Chile, Argentina, Uruguay,
Paraguay and, most recently, Mexico.
Itaú Unibanco has the largest buy side equity team in Brazil,
composed of 10 portfolio managers and 14 analysts who take a
fundamental bottom-up approach to investing to optimize long-
term returns. The size and knowledge base of the team allow
Itaú Unibanco Team
Demosthenes Madureira Alexandre Zakia Albert Paulo Corchaki
de Pinho Neto
July/August 2009 • Institutional Investor Sponsored Statement
the company “to offer not just the most diversified strategies
among asset management companies in Brazil, but also the
ability to provide unparalleled service to investors who want to
know not just where their resources are being allocated but what
strategies are being employed and why,” says Walter Mendes,
the head of equities strategies.
Itaú Unibanco is also the leader among the private sector
asset managers in all client segments in Brazil. “We are the first
choice of Brazilian clients, so why should this be any different for
foreign investors?” points out Bruno Stein, head of international
business development for asset management. “This is why
leading global asset managers have chosen us as sub-advisors
and managers of their Brazilian and Latin American portfolios.”
Net portfolio investments of foreign investors into Brazilian
equities and fixed income markets already has reached more
than US$5.3 billion this year. Itaú Unibanco, the leading privately
owned asset manager in the region with US$130 billion under
management as of May this year, had US$2.0 billion of net inflow
from foreign investors in the same period.
Investor Interest Aided by Falling Rates
It helps that Brazil has emerged from the global financial
crisis with its financial system largely intact, aided by 15 years
of macroeconomic stability, an under-leveraged financial
system, and a highly regulated and robust banking system
that has not been afflicted with subprime mortgage problems.
This has spurred a wave of new investment in Latin America’s
largest economy even as the global crisis deepened late last
year, and not just from the traditional strongholds of US and
Europe. “Now, we’re seeing a lot of investors from the Middle
East as well as Asia, particularly Japan and South Korea,”
says Marcelo Fatio, the head of international distribution of
Itaú Unibanco. ““This may show that the decision of opening
offices in different locations outside Brazil was the right one.
Now we are part of this flow.” Itaú Securities has offices in
Walter Mendes Bruno Stein Marcelo Fatio
New York, London, Tokyo, Hong Kong, and Dubai.
Brazil is increasingly perceived today as one of the strongest
emerging market economies even among its BRIC (Brazil,
Russia, India and China) peers. “China has stayed at the top
of the heap of the BRICs, but Brazil is becoming far more
important in relative terms,” says Fatio, pointing to Brazil’s
stable political system, abundant natural resources and
burgeoning domestic market. “We have been participating in
several RFPs for mandates from US endowments, foundations
and pension funds around the world” adds Stein.
So far this year, the Bovespa index has risen 67.81 percent
in US dollar terms. Aiding the rise in
The bank’s equities is the Central Bank’s aggressive
long-short interest rate-cutting program that has
hedge fund, trimmed Brazil’s Selic interest rate
launched in to historic lows of 9.25 percent as
the midst of June. The fall in interest rates will
of a financial spur a migration to equities from local
investment funds that have traditionally
crisis, is a
parked 85 percent of assets in fixed
top performer. income and were as high as 90 percent
fixed income at the end of 2008, says Paulo Corchaki, Director
and CIO of Itaú Unibanco’s asset management unit. “This is a
trend that is inevitable and structural.” Adds Alexandre Zakia
Albert, head of asset management for institutional clients:
“Brazilian investment funds could double their participation in
equity funds in the next two to three years. In an industry that
today is valued at US$700 billion, this means that US$140 billion
could be directed into equities as investors move more funds out
of plain-vanilla funds into hedge funds or multi-strategy funds.”
Stellar Performance, Diverse Products
For international investors, Itaú Unibanco offers a diverse
range of traditional and boutique products including offshore
Brazilian long-only equity funds and fixed income funds
set up in Luxembourg, as well as Cayman Island-domiciled
hedge funds that rival small boutique hedge funds in their
sophistication and performance.
For example, the bank’s long-short hedge fund – launched
last August in the eye of the financial crisis – saw gains of 5.75
percent in US dollar terms through December last year, at a time
when the Bovespa index saw losses of a staggering 57.7 percent.
In the 10 months since its inception, the fund has been up 3.93
percent, outperforming the Bovespa index, which slipped by 30
percent in US dollar terms in the same timeframe.
Another top-performing product has been Itaú Unibanco’s fund
of hedge funds, which gained 15 percent in US dollar terms in the
first five months of this year. The fund, one of the longest-running
funds of its kind, was begun in 2005 but built upon research that
monitored 100 percent of the roughly 1,000 funds in the country
for more than a decade. Currently, the fund of funds team invests
in more than 150 portfolios, and the team also runs an incubator
fund of funds for emerging hedge funds managers.
“Itaú Unibanco is a full-service provider in Brazil,” says
Stein. “That allows it to offer managed accounts that can
replicate any of its domestic strategies for foreign investors.
The bank can also set up any type of advisory model related
to Brazilian investments.” Investor appetite has been robust
for these products since the fourth quarter of 2008, with US$5
billion raised from international investors as of May this year.
Cases include fixed income and thematic equity long-only
funds distributed locally in Asia, Europe and North America
for retail and institutional investors.
Ahead: More Global Allocation of Assets to Brazil
Though Brazil is likely to emerge from the current crisis in
good shape, Pinho Neto warns against excessive optimism.
“It’s ironic that Brazil is now much more solid than many
industrialized countries in terms of its fiscal and financial
situation, but I think international investors are overlooking
some potential problems that may occur, such as the quality
of government expenditures,” he says. Perennial Brazilian
problems such as infrastructure and much-needed tax and
social security reform must be addressed in coming years or
Brazil will find its competitive edge blunted.
That said, the most compelling Brazil trends today are
woven into a story that started in 2006, as falling interest rates
began to fuel the growth of consumer credit to Brazil’s rising
middle class. While the global financial crisis has interrupted
this story momentarily, Brazil’s economy is likely to grow at 4
percent from 2010 onward, or double the rate of developed
economies, according to the International Monetary Fund.
Moreover, says Stein, “if you believe the emerging market
story, and the shift of Brazil to a key emerging market, then
we’re still at the very beginning of the cycle of money being
allocated here on a global scale. A lot of investors are still
not accessing the market using local expertise, but this will
certainly change as the increase of the weight of the asset
class forces more resources to be dedicated to Brazil and
local managers continue to outperform global managers.”
CONTACT INFORMATION
Bruno Stein
+55 11 3073-3161
bruno.stein@itau-unibanco.com.br
Institutional Investor Sponsored Statement • July/August 2009
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D ON THE STREET CONTENTS INSIDE II TICKER PEOPLE FIVE QUESTIONS DID II SAY THAT? RAINM
OPENING July/August 2009 News and views from the world of finance
MONEY MANAGEMENT
THE PRICE IS RIGHT
DID BLACKROCK PAY
TOO MUCH TO BECOME
THE WORLD’S
LARGEST MONEY
FROM LEFT: DANIEL ACKER/BLOOMBERG NEWS; MIKE
MANAGER?
SEGAR/REUTERS; BRENDAN MCDERMID/REUTERS
BlackRock chief execu-
tive Laurence Fink has a
well-deserved reputation
as a shrewd deal maker. So
this spring, when Barclays was
desperate for money, markets
were still reeling from the
financial crisis and investors
were redeeming funds in a mad
I N S T I T U T I O N A L I N V E S TO R
Barclays Global Investors CEO
Blake Grossman (left) worked with
BlackRock COO Susan Wagner
and president Robert Kapito
to hammer out the deal
to create a $2.7 trillion giant
scramble for liquid- Investors was anything but a
ity, the conditions bargain.“BlackRock is paying
were ideal for Fink, full price for BGI,” says Robert
one of the most Lee, a research analyst at Keefe,
powerful CEOs in Bruyette & Woods in New
the U.S., to snap up York. Lee values the cash por-
the troubled U.K. tion of the deal at 11.1 times
bank’s money man- San Francisco–based BGI’s
agement business at a discount estimated pretax earnings for
and create a $2.7 trillion-in- 2010, the first full year after the
assets financial titan that would deal is expected to close. That’s
dwarf its competition and in line with the multiple for
control more cash than the U.S. asset management firms before
Federal Reserve. the market meltdown, which
Yet by some accounts, the was ten to 12 times earnings.
$13.5 billion that Fink agreed Considering that such shops
to pay for Barclays Global have sold at steep discounts in
recent months and that many,
including Bank of America’s
Columbia Management, have
languished on the market, the
question is: Did BlackRock pay
too much?
The team that pulled the deal
together says the price was right
and defends the $3 billion in
debt they assumed to buy the
business.“We need the scale to
support the global presence that
we think is going to be required,”
says Susan Wagner, chief operat-
ing officer of BlackRock.
Scale is no longer a problem.
BGI gives BlackRock the reach
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DE II OPENING TICKER PEOPLE FIVE QUESTIONS DID II SAY THAT? RAINMAKERS DONE DEALS
BlackRock Global Advisors
Golden Opportunity
it needs to keep costs down and
expands its global footprint at a
time when the money manage-
ment industry is desperate to
tap new markets like India and
China. The combined firm’s
arsenal will include a wide
range of products across the
risk spectrum. “BlackRock is
one of the few, if not the only,
firms that have the breadth of
product to accomplish this,”
says Joseph Hershberger, a
managing director at Credit
Suisse Securities, a lead adviser
for BlackRock on the deal.
“Except for Pimco, nothing of
this quality has ever traded.”
The new BlackRock Global
Advisors will oversee every-
thing from stocks, bonds and
money market instruments to
passive and alternative invest-
ments, for both institutional
and retail investors.
John Paulson is
moving into
gold stocks equity holding. Individual mining com-
panies Kinross Gold Corp. of Canada
and South Africa–based Gold Fields
also ranked among his top-ten hold-
ings. Paulson was even more aggres-
sive on the gold front in the second
quarter. On June 1 he boosted his stake
in Johannesburg-based AngloGold
Ashanti to 12.1 percent, mostly through
his Advantage Plus Master fund.
The 53-year-old manager has also
filed with the Securities and Exchange
Commission an intention to launch
INVESTING both onshore and offshore versions of
GOING the Paulson Gold Fund. The moves are
FOR GOLD a clear indication that Paulson, who
made a name for himself — as well as
PAULSON nearly $6 billion — by shorting the sub-
EXERCISES prime mortgage market early in the
HIS MIDAS credit crisis, is worried about inflation.
TOUCH His strategy has already paid off to
some degree. Most of Paulson’s funds,
which currently control about $36 bil-
John Paulson, king of the subprime short, has lion in assets, were up by 4 to 14 percent this year
become a goldbug. His metamorphosis can be through the end of May. This despite a money-losing
traced to the first quarter of this year, when the April, when Paulson was hurt by a bad short on U.K.
New York–based hedge fund manager moved bank Barclays after having made big bucks earlier in
roughly 44 percent of the $9 billion in U.S. equities he the year betting against British banks.
had held in Paulson & Co. into exchange-traded He is also looking to move into private equity and
funds specializing in gold-mining stocks and related recently told clients he was raising money for the Paul-
companies. This included $2.8 billion for an initial stake son Real Estate Recovery Fund. “We believe that there
in SPDR Gold Trust. Not only was that his largest equity will be many opportunities in distressed real estate, as
holding, but it also made Paulson the ETF’s biggest borrowers default and capital becomes scarce,”

“
BlackRock’s shareholder. His stake exceeded that of the next- Paulson wrote in a year-end letter. “Investing near the
largest investor by five times. trough of this cycle should provide superior risk-
top execu- A similar fund — Market Vectors Gold Miners ETF — adjusted returns while providing an inflation hedge.”
tives say the accounted for nearly $638 million of Paulson’s assets at There’s life, perhaps, in the real estate sector too.
big prize was the end of the first quarter, making it his fourth-largest — STEPHEN TAUB
This iShares, BGI’s
deal exchange-

becomes traded funds

business, but grew at a 26 percent annual- the defined contribution space, the combined firm. “The big
a strate- Fink wanted to ized rate, compared with 2 as ETFs are likely to increase question is what happens to
gic gut get his hands percent for BGI’s overall busi- their penetration into the the culture of BGI, the invest-
check on the rest of ness. Experts estimate iShares’ 401(k) market. The deal will ment teams that have driven

for the its huge pas-

sive portfolio
profit margin to be as much
as 90 percent, not counting
make BlackRock the fourth-
largest manager of DC assets,
its success over the years,” says
Scott Powers, CEO of State
major as well. The distribution and other costs. says Douglas Sipkin, an analyst Street Global Advisors, one
money $325 billion- Robert Kapito, president of at Pali Capital. of BGI’s close competitors in
manag- in-assets
iShares has
BlackRock, won’t reveal mar-
gins but claims the 90 percent
BGI also adds strength to
BlackRock’s non-ETF passive
indexing and ETFs.
The cultures of BGI and
ers. been on a tear figure is on the high side. He fund management. “There’s BlackRock are similar in that
— Jes Staley
that industry does say the potential is huge: been a fairly large movement to both are strong quant manag-

”
J.P. Morgan Asset
Management heavyweights “There will be significant passive because of the volatil- ers, but there are also key dif-
say shows no growth in the ETF business.” ity in the stock market in the ferences, says Blake Grossman,
sign of letting ETFs can also easily cross last couple of years,” notes CEO of BGI, which was Wells
up. “Fink has borders. “If you’re talking to a Kapito. With the acquisition, Fargo’s asset management arm
bought the ‘secret sauce’ for the family in Switzerland, France or BlackRock’s passive portfolio before Barclays acquired it in
next generation of the mutual Cincinnati, you’re dealing with climbs from $45 billion to an 1996. The firm had already
BLOOMBERG NEWS

fund,” says Donald Putnam, different regulatory regimes,” estimated $1.05 trillion. developed its academic bent,
managing partner at merchant notes Putnam. “ETFs have the But being a giant is no easy adopted from nearby Stanford
bank Grail Partners. Between potential to level that playing task — integration may be the University, where Grossman
2004 and 2008, iShares’ assets field.” There’s upside as well in most serious risk hanging over was a protégé of Nobel Prize–
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SIDE II OPENING TICKER PEOPLE FIVE QUESTIONS DID II SAY THAT? RAINMAKERS DONE DEALS
SEC Crackdown
Brokerage Fines
winning economist William
Sharpe; today BGI is still
packed with researchers who
hold Ph.D.s in mathematics
and economics.
BlackRock’s work envi-
ronment, by contrast, is
entrepreneurial and grew out
of the expertise Fink gained
in the brokerage industry in
the early years of structur-
ing mortgage products in
the 1970s. It became more
corporate when the firm
merged with Merrill Lynch
Investment Managers in
2006. “Larry’s drinking his
own Kool-Aid when he says
there is only one culture at
BlackRock,” says Putnam.
“The critical culture question
becomes how the individual
teams will be integrated, and
Larry is no better than any-
body else at that.”
Then there are the financial
risks. BlackRock is sandbag-
ging itself with $3 billion
in debt, about $1 billion of
which it plans to repay from
existing lines of credit while
seeking short-term loans from
other lenders, one of which
is Barclays. In June, citing
refinancing risk, Standard
& Poor’s cut BlackRock’s
counterparty credit rating to
A+/A-1 from AA-/A-1+, with a
negative outlook.
Grossman predicts that the
deal will have a “transforma-
tional” impact on the industry,
possibly triggering a wave of
consolidation. Many concur.
“Passive investing is going to
have a role in the institutional
market and the consumer mar-
ket,” says Jes Staley, CEO of
PAPER: RICHARD MEGNA
J.P. Morgan Asset Manage-
ment.“This deal was less about
the financials — it becomes
a strategic gut check for the
major money managers.”
— Julie Segal and Michael Shari
REGULATION occasional surprise
THE SEC FIGHTS exams, by outside
BACK A TOP COP accountants. Regula-
SAYS IT’S TIME tors believe that Mad-
TO GET PAST THE off’s combined role as
MADOFF HORROR custodian and fund
The SEC’s
manager enabled him Robert Plaze
As one of the U.S. Securities to pull off his scam. is focused
and Exchange Commis- Plaze presented the draft on controls
sion’s longest-serving cops regulation at a recent meeting
on the beat, Robert Plaze has of the five SEC commissioners strengthen custody controls.
seen his share of booms, busts led by chairman Mary Scha- How many investigations into
and frauds. In an exclusive piro, who opened it to public money management frauds are
interview, he tells Institutional comment until July. Plaze also under way now?
Investor how the agency is detailed a new SEC reporting I can’t comment on ongoing
tightening rules to prevent system, the Investment Adviser investigations. But it’s clear
future scams like the Bernie Registration Depository, that that even a few lawbreakers
Madoff swindle. generates spreadsheets listing, can cause tremendous damage.
The SEC’s reputation was for example, every firm that The people I talk to are terribly
tarnished by its failure to fails to properly inform the upset by what happened. After
detect a $50 billion-plus Ponzi agency of changing or termi- you get past the horror and the
scheme despite detailed warn- nating its accountants. “In the breast-beating, then you have
ings from investigator Harry past when we’ve seen fraud,” to really focus on your core
Markopolos. Criticism of its Plaze said during remarks at responsibility: identifying the
faulty oversight has spurred the SEC hearing, “an accoun- controls that can prevent it
the agency to take action, and tant is nowhere is in sight.” from happening again.
Plaze, 53, is helping to lead He spoke to Contributing How does the IARD work?
the charge. As associate direc- Writer Rich Blake recently in All advisers report informa-
tor of the SEC’s Division of Washington. tion to us electronically in the
Investment Management, the IARD. We want to amend the
division’s No. 2 official and Institutional Investor: Is the form to capture more informa-
chief rule writer, Plaze recently custody measure a direct tion — better information
proposed an amendment that response to the Madoff case? — to lengthen our regulatory
would require investment Plaze: Yes. When Mary Scha- reach and leverage our existing
advisers who maintain cus- piro came to office, she asked resources. If we can identify
tody of client assets to undergo our division for options on people who are not in compli-
more-stringent reviews, and what the SEC could do to continued on page 12
REGULATION
A FLURRY OF FINES IN THE FORECAST
For all the rhetoric about beefing up oversight of the money management business, there are
signs that enforcement may actually be sliding. The Financial Industry Regulatory Authority, which
oversees U.S. broker-dealers, fined firms and individuals roughly $35 million in 2008, down 55 per-
cent from $77.6 million in 2007, according to a report by Atlanta-based law firm Sutherland Asbill &
Brennan. To be fair, last year was FINRA’s first full year in operation — it was created in July 2007 through
a merger of the National Association of Securities Dealers and the regulation, enforcement and arbi-
tration arm of the New York Stock Exchange. The report compares FINRA’s total 2008 fines to the com-
bined published levies from the NYSE and NASD in 2007. Simple integration pains likely played some
role in the 2008 dip in punitive fees, but experts say it was the calm before the storm.
“It does not take a genius to predict that actions will be substantially higher than in the past,”
says John Hewitt, a partner in the financial services practice of McCarter & English in New York.
“Given the credit crisis, we expect activity to pick up considerably.”
When they’re making money investors tend not to file complaints with regulators. And because
there’s typically a one-year lag between the time a complaint is filed and when a penalty is levied,
it looks like FINRA could be heading for a banner year. — S.T.
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KER OPENING PEOPLE FIVE QUESTIONS DID II SAY THAT? RAINMAKERS DONE DEALS SCORECAR

PEOPLE
MAKING THE MOST
OFA CRISIS; HONG
KONG EXCHANGE
TAPS NEW CEO
DISTRESS POTENTIAL
Michael Holmberg, the founder
of Newberry Capital Manage-
ment in Chicago, closed down
the distressed-debt investment
shop recently, returned assets to
its mainly institutional clients
and joined the Windy City office
of the fixed-income operation
of Neuberger Berman Group,
bringing his team of four vet-
eran bond managers with him.
Holmberg, 48, will manage
publicly traded senior secured
debt of companies in default, a
market he says is worth about
$225 billion. By hiring him,
New York–based Neuberger,
the former investment manage-
ment division of the bankrupt
Lehman Brothers Holdings
that successfully staged a man-
agement buyout less than six
months ago, seems to be making the exchange consistently Chinese government over the lent securities markets will be
the most of the U.S. financial ranked in the top three glob- years,” notes Albert Louie, a no mean feat. The 49-year-old
crisis by expanding into an asset ally for initial public offerings risk management consultant in is confident, however, that with
class that’s drawing investors. for the past three years. From Beijing. — Allen T. Cheng Ford’s cash reserves and liquid-
“From where we sit that is a January to mid-June of this ity, he will be able to take
compelling market opportu- year, HKEx listed eight IPOs LAWYER TO LEADER advantage of some of the pric-
nity,” Holmberg says. — raising $1.6 billion, second When Eric Doppstadt joined ing dislocations in the months
— Michael Shari only to the New York Stock the Ford Foundation nearly 20 ahead. What he won’t do is
Exchange’s volume, accord- years ago as an in-house coun- emulate his mentor’s legendary
HONG KONG HUB ing to research firm Dealogic. sel to the investment team, he passion for scuba diving with
Hong Kong Exchanges and Beijing-born Li, 48, earned a wasn’t planning to abandon sharks in the open ocean. “All I
Clearing is strengthening doctorate of jurisprudence at the law and pursue a career in can say is that there are enough
its ties to Beijing by tapping Columbia University and then portfolio management. But 14 predators in the financial
CHARLES LI: NELSON CHING/BLOOMBERG NEWS

JPMorgan Chase & Co.’s
point man in China as its new
CEO. The appointment of
Charles Li Xiaojia, who starts
in October, marks the first time
the exchange will have a CEO
who was born on the mainland.
He replaces Paul Chow Man-
yiu, a Hong Kong native who
strengthened HKEx’s position
as a global financial hub, with
worked as a lawyer on Wall
Street in the 1990s. Li became
president of Merrill Lynch
in China before taking over
as chairman of JPMorgan in
China in 2003. He’s reputed
to have strong ties to senior
officials, especially those at
the China Securities Regula-
tory Commission. “Li built up
significant relationships in the
years after switching from a
legal to an investment role — a
transition he made with the
help of his mentor, then-CIO
Linda Strumpf — Doppstadt
assumes responsibility for the
$9.2 billion endowment as
Ford’s new CIO. Guiding the
nation’s second-largest private
foundation by assets under
management through turbu-
world,” he quips. “I prefer to
spend my leisure time doing
things that don’t involve risk-
ing my life.” — Loch Adamson
ASIAN ALLIANCE
Anthony Miller, a private equity
manager in Asia over the past
two decades, will now be min-
ing for gems among distressed
assets in Japan for Hong Kong–
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RD MARKETS CEO INTERVIEW CAPITAL MARKETS COVER STORY ASSET MANAGEMENT ISLAMIC FI

Counterclockwise from upper left:

Neuberger Berman taps Michael
Holmberg, Charles Li Xiaojia joins HKEx,
Eric Doppstadt takes on a new
investment role at the Ford Foundation,
the managing partner, says,
Anthony Miller joins Pacific Alliance,
Bob Treue manages Barnegat, “China is rising, but its growth
Jack Perkowski launches a PE fund, is still embryonic.” JFP will
Josh Ellis investigates at the U.K.’s Serious focus on the environmental
Fraud Office
technology, health care,
distribution-logistics, retail,
value-added manufacturing
and financial services
industries. Perkowski, who
penned Managing the Dragon:
How I’m Building a Billion-
Dollar Business in China,
published last year, began his
career on Wall Street in 1973
and started Asimco, which
boasted sales of $600 million
last year, in 1994. — A.T.C.

based Pacific Alliance Group.
In June the Chicago native
assumed the post of president
and CEO at Pacific Alliance’s
new Japan subsidiary. He’ll be
investing up to $200 million in
real estate and distressed assets
in the coming 12 months, and
as much as $1 billion over five
years.“Many institutional
investors invested in Japan, and
many are leaving,” notes Miller,
52.“The most attractive [plays
are] real estate and distressed
real estate.” Miller was presi-
dent of the RCG Japan unit of
New York–based multistrategy
hedge fund firm Ramius before
joining Pacific Alliance, which
has $3 billion in assets spread
among hedge funds, private
equity and real estate (see
“West Meets East,” page 48).
— A.T.C.
RIDING THE WAVES
The difficult money-raising
environment is déjà vu all over
again for Bob Treue, CEO of
Hoboken, New Jersey–based
Barnegat Fund Management.
Soon after he set up his hedge
fund in November 1998, Long-
Term Capital Management
collapsed, spooking investors.
“Everyone was scared,” Treue,
40, tells II. As a result, he was
unable to attract fresh money
until March 2000 and ran the
fixed-income hedge fund with
$500,000 of his own cash. In
2001 three global investors
put in a combined $25 million,
which Treue used to create
a new offshore fund that he
capped at $500 million two
years later. Last year’s market
turmoil pushed assets down to
just over $200 million, after the
fund fell 37 percent. Barnegat is
up 81 percent this year through
May 31, and its assets have
rebounded to $413 million.
— Suzy Kenly
SHIFTING GEARS
Jack Perkowski, a former Wall
Street banker who founded the
largest foreign-owned auto-
parts maker in China, has
started a private equity firm in
that country. Using some of his
own money and that of a few
partners, the former chairman
and chief executive of Beijing-
based Asimco Technologies
launched JFP Holdings in
March. The new firm will assist
foreign companies in finding
co-investors in China, as well as
help Chinese companies lock
onto acquisition targets
abroad. Perkowski, 60, who is
TECHNO TRACKER
Like a latter-day Eliot Ness,
Josh Ellis enjoys nothing better
than a good investigation —
especially one where he can flex
his skills in forensic accounting
and track down bad guys by
tracing their electronic foot-
prints. The technologist will
get a chance to do just that as
the first-ever chief information
officer for the U.K.’s Serious
Fraud Office, an independent
government department that
prosecutes cases of complex
deception. In an economic
downturn, the incidence of
fraud tends to rise, especially in
financial services, making his
role as head of a team of tech-
savvy investigators in the SFO’s
digital forensic unit critical.
The former regional director
of forensic services for Price-
waterhouseCoopers in Central
and Eastern Europe is excited
about returning to the U.K. to
help tackle white-collar crime.
“People can be remarkably
astute and slick in how they
perpetuate a crime,” Ellis notes.
“But an astonishing number of
them are technologically illiter-
ate, so they don’t do a good job
of covering their tracks.” You
have been warned. — L.A.
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OPLE OPENING FIVE QUESTIONS DID II SAY THAT? RAINMAKERS DONE DEALS SCORECARD MAR-
Market Regulation
Brokerage Fines Greenlight
Capital CEO
David Einhorn
is shorting
continued from page 9 Moody’s risky variable- tural to the credit rating
ance by simply running a report and fixed-rate oligopoly and the issuer-
on this system, then we can better bonds and other pays system and cannot
deploy our resources. fixed-rate instru- be fixed through symbolic
You’ve mentioned dusting off an old ments helped internal steps.
proposal related to public pension fuel the crisis by 3 If triple-A ratings were
funds. Can you expand on that? allowing busi- apportioned more judiciously,
The Municipal Securities Rule- nesses to borrow wouldn’t the U.S. government
making Board has a regulation, excessive capi- be due for a downgrade?
G37, that prohibits broker-dealers tal. He bluntly When giving a triple-A-rated
and underwriters from making announced that entity too much cheap credit,
contributions to people who are his firm was there is a risk to lender and
in a position to select them as shorting Moody’s borrower alike. Sovereign
bond underwriter. In 1999 the Investors Service, issuers are certainly not
commission proposed standards explaining, “If exempt from that hazard.
that would have extended G37 FIVE QUESTIONS FOR your product 4 Given the enormous political
to investment advisers registered DAVID EINHORN is a stamp of interest in maintaining the
with the SEC. If you make a politi- CREDIT COP approval where status quo, how can regulators
cal contribution to a state or local your highest fix the rating process?
official who’s in position to influ- rating is a curse Elimination of the rating
ence the awarding of a pension David Einhorn, founder to those who receive it and agency oligopoly and issuer-
fund advisory contract, then you of $5 billion-under- shunned by those who are pays system is one of the
would be disqualified from man- management New York supposed to use it, you have crucial distinctions between
aging that municipality’s money hedge fund firm Greenlight a problem.” Einhorn recently claiming a reform agenda and
for two years. Schapiro has called Capital, has become a spoke to Institutional Inves- actually reforming the sys-

“
on the division to look at that pro- familiar and provocative tor London Bureau Chief tem. But the administration’s
posed rule with — if often prickly — speaker Loch Adamson about the proposal announced on June
an eye to making at the annual Ira W. Sohn ratings agencies and their 17 doesn’t eliminate the rat-
recommendations Investment Research Confer- power to stifle any attempt ing agencies or the issuer-pays
Even a this summer.
What has changed
ence. The fabled gathering
brings together some of the
at reform. system or break the oligopoly.
So it is probably not a good,
few law- the most about the best investment managers to 1 Why target Moody’s? genuine reform.
break- SEC since you support a foundation, named Einhorn: I felt that talking 5 How would you deal with the
ers can arrived? for a Wall Street trader who about a pure-play American problem?

cause In October 1987,

on Black Mon-
died of cancer at 29, that rating firm would be more
funds treatment for kids with interesting to the audience,
We don’t need rating agencies
as part of the official process.
tremen- day, we were at the disease. but I don’t believe Moody’s The market evaluates credit
dous work all day and In a prescient speech ratings are worse than those every day and often ignores
damage. didn’t know what
was going on. We
delivered at the conference
last year, Einhorn warned
of Standard & Poor’s or
Fitch Ratings.
what the rating agencies say,
so we could do fine without

”
— Robert Plaze
SEC didn’t have com- that Lehman Brothers Hold- 2 Do you buy Moody’s claims them. The situation is analo-
puters back then, ings was overexposed to that it is taking steps to manage gous to equity research; it
and nobody had toxic assets and urged regu- conflicts of interest and should become an investor-
a TV in his or her lators to force it to recognize improve the quality of its driven process. I can go to
office. It wasn’t until someone’s losses and raise capital. ratings? Bank of America today and
wife called up after the market They did not. Less than four What else can it say? Rating ask its analysts their opinions
DANIEL BARRY/BLOOMBERG NEWS

had closed that anyone here knew months later, Lehman col- agencies’ misbehavior is at about certain stocks, and
we were in the middle of a crash. lapsed. At this year’s event, the center of the financial they’ll either tell me or I can
Now if something’s going on, in late May, the 40-year-old problem, and the Securities read their research. If people
we know immediately. We have Einhorn called on regulators and Exchange Commission want to hire rating agencies
a market-watch room down the to dismember the “govern- showed last year that this to help them assess credit,
hall and around the corner where ment-created oligopoly” was not the result of inno- they can and they should.
we can go and see the screens. of credit rating agencies, cent mistakes. That said, the But I don’t think agencies are
— Rich Blake whose inflated grades for basic problems are struc- needed.
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STIONS OPENING DID II SAY THAT? RAINMAKERS DONE DEALS SCORECARD MARKETS CEO INTE
Public Pensions

NEW ZEALAND of NZ$134 billion.

PENSION New Zealand,
SUSPENSION which earns foreign
HAPPY TO BORROW currency from tour-
AND SPEND, NEW ism and exports
ZEALAND BALKS AT of meat and dairy
BORROWAND SAVE products, ranks
alongside Estonia
New Zealand has joined and Greece at the bottom of
nations including Latvia the savings ladder among
and Ireland in putting a countries in the Organization
spotlight on pension payments for Economic Cooperation
in the wake of soaring budget and Development. Household
deficits. Comparing the South net savings as a percentage of Finance Minister Bill
Pacific country’s behavior to disposable income is –3.8 per- English suspended
“a person trying to save money cent, more than 9 percentage pension contributions

by using their credit card,” points lower than the OECD

Finance Minister Bill English
suspended contributions to a
fund established to help meet
the retirement needs of future
generations.
“Shifting money from one
jam jar to another does not
make you wealthier,” English
tells Institutional Investor.
“We don’t have surpluses to
put into the fund.”
He plans to suspend annual
contributions of about NZ$2
billion (US$1.3 billion) to the
New Zealand Superannuation
Fund for at least ten years start-
ing with the 2009 budget, leav-
ing NZ$13 billion invested in
global stocks and fixed interest.
The fund amounts to about 10
percent of New Zealand’s GDP
PAPER: RICHARD MEGNA; BILL ENGLISH: MARK COOTE/BLOOMBERG NEWS
average of 5.4 percent. (U.S.
households save, on average, 2
percent of income.)
Critics say the move by New
Zealand sends the wrong mes-
sage to a population nursing a
hangover from a debt-fueled
spending binge. “Ten years —
that’s a long time, that’s a lot
of funding,” says Martin Lew-
ington, New Zealand business
leader at Marsh & McLennan
Cos.’ Mercer subsidiary. When
the budget moves back into sur-
plus, “there will be other calls
on the national purse.”
Latvia plans to cut pension
payments by 10 percent, as part
of painful budget measures
aimed at winning the next
tranche of a US$10.4 billion
International Monetary Fund
package as its economy slumps.
In Ireland, the government is
transferring ailing public sector
pension funds into the National
Pensions Reserve Fund, creat-
ing a future cost for taxpayers.
English projects a deficit of
NZ$12 billion for next year. In
addition to suspending pension
contributions, he has deferred
tax cuts that were slated for the
next two years. His steps helped
steer New Zealand away from a
credit rating downgrade. Stan-
dard & Poor’s lifted the outlook
on the AA+ rating to “stable”
from “negative” on the day the
budget was announced.
The credit crisis and simulta-
neous recession in the world’s
biggest economies exacerbated
the impact of high interest
rates and a record-high New
Zealand dollar, which sapped
export returns. The central
bank has slashed interest rates
to a record low and the kiwi
dollar has returned to nearer its
long-term average.
The global credit squeeze has
hurt a nation where property
has been the most popular
investment, typically financed
via mortgage funds sourced
overseas. During the property
boom of the early 2000s, New
Zealanders felt wealthier and
ramped up their credit card
debt on consumer goods. The

current account deficit sits at

8.5 percent of GDP, up from 4.8
DID II SAY THAT?
percent in 2003–’04.

’67
WHAT WE SAID ABOUT “SWINGING” FUNDS If payments had continued,
APRIL 1967 — The roots of the current economic crisis may be traced the fund — designed to meet 20
back to the late 1960s. That’s when the financial industry’s emphasis
percent of the nation’s pension
on capital preservation gave way to a new credo of risk and reward.
The shift was captured in the second issue of II in a story by one of the payments — would have been
magazine’s first editors, George Goodman, the journalist, author and worth NZ$124 billion by 2031,
public television personality better known as Adam Smith. In “Perfor- when it was to begin making
mance: The New Name of the Game,” Goodman wrote that the term “performance” has “come to
payments. Now there will be a
mean a kind of investment policy that seeks rapid appreciation, leaving dividends, safety and diver-
sity behind. . . . The effect is to downgrade the preservation of capital as a goal.” As Richard Jenrette, NZ$37.5 billion shortfall.
a founder of investment bank Donaldson, Lufkin & Jenrette, noted in the same article, this trend away — Jonathan Underhill
from capital preservation included pension funds “so large that only a small fraction [of them] has to
change direction to give a whole new tone to the investment scene.” How many dollars have been
sacrificed at the altar of performance over the past 42 years? Too many, at least for such market play-
Comment? Let us know
ers as New York–based Cantillon Capital Management, a $4.5 billion asset manager that told its cli- what you think:
ents on June 17 that it was closing two hedge funds and shifting assets into safer long-only vehicles. iieditor@iimagazine.com.
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 5

TICK

Morgan Stanley North American financial institutions group co-head

Jonathan Pruzan says market perception has a way of becoming reality
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E
KER PEOPLE FIVE QUESTIONS DID II SAY THAT? RAINMAKERS DONE DEALS SCORECARD MARKE

CAPITAL

lion for SunTrust Banks and $750 million for Fifth Third Bancorp.
The firm moved fast in every case. About one fifth of Fifth Third’s
dribble-out had been completed when a sudden burst of inves-
tor demand set Morgan Stanley running to sell the remaining
$600 million through block trades on June 1. The head of Morgan
Stanley’s equity syndicate, Mohit Assomull, gave the sale order
over the squawk box at 4:20 in the afternoon. By 5:00, Pruzan had
called Fifth Third to let it know there was buying interest for more
than $1 billion.
Pruzan grew up in New York City, but well outside the world
of Wall Street. His father and grandparents worked in the gar-
ment industry. Pruzan followed the lead of his two brothers, who
worked at McKinsey & Co. and Goldman Sachs, respectively, in
the swaggering, deal-making era of the late 1980s.
Pruzan joined PaineWeb-
ber & Co.’s financial institu-
tions group in 1990, the year

Banker to he graduated from Tufts Uni-

versity with a degree in politi-

EVEN BEFORE THE OBAMA ADMINISTRATION SUBJECTED

the Banks
When facing chaotic
cal science and economics.
His first job was as an analyst
working for James Kilman, a
19 major banks to stress tests this spring, Jonathan Pruzan and his markets, nervous investors banker whom Pruzan helped
colleagues in Morgan Stanley’s financial institutions group were and a wrathful hire at Morgan Stanley last
working on how to help lenders replenish their equity coffers. Last government, Morgan year to head its specialty
summer, Morgan Stanley created a team of about 20 people, includ- Stanley investment finance advisory group.
ing bankers as well as professionals from fixed income, structured banker Jonathan Pruzan Pruzan moved to Morgan
finance and equity capital markets, that began meeting three times was well prepared. Stanley from PaineWebber
a week to brainstorm. It was led by Pruzan, the co-head of North BY HEIDI MOORE in 1994. He advised on a
American FIG, and two key senior colleagues, John Esposito and flurry of bank deals, from
Taylor Wright. the seminal merger of Chase
In May, when the results of the stress tests were announced and Manhattan Corp. and
the banks were ordered to raise capital, Morgan Stanley sprang into Chemical Banking Corp. to
action. The playbook developed by Pruzan and his group included Deutsche Bank’s purchase
overnight deals, which are pulled together quickly to take advan- of Bankers Trust Co. to Bank of America Corp.’s acquisitions of
tage of sudden market opportunities; marketed deals, which are FleetBoston Financial and LaSalle Bank Corp.
sold over a period of days; and “dribble-outs” — quiet, steady In 2006 he was promoted by Derek Kirkland, then head of FIG
block trades in which a bank can sell as much as 10 percent of and now a senior adviser at Morgan Stanley, to oversee its U.S. group.
its monthly stock volume. “We were advising all our clients to be Pruzan took up his new post last year just in time for the biggest
ready at a moment’s notice,” says Pruzan, 41. The results have not bank crisis in more than 70 years.“One of the lessons is that market
been too shabby. As of June 22, Morgan Stanley had surged to perception becomes reality,” he notes. “You might not agree with it,
No. 2 in bank equity deals for the year, up from No. 9 at the same but it’s best to accept it and move on.”
time in 2008, according to Dealogic. The firm has advised 11 U.S. GMAC Financial Services chief finance officer Rob Hull has
banks on raising $11.98 billion in equity capital, just behind Gold- appreciated that no-nonsense view as Pruzan has helped the finance
NOAH KALINA

man Sachs Group, which has advised 12 banks on $12.11 billion company wrest its independence away from General Motors Corp.
in such deals. Pruzan led the Morgan Stanley team that generated “Jon has been able to distill strategic options when they’ve not been
$2.7 billion for U.S. Bancorp, $1.7 billion for BB&T Corp., $1.6 bil- easily discernible,” Hull says. ••
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ERS CAPITAL DONE DEALS SCORECARD MARKETS CEO INTERVIEW CAPITAL MARKETS COVER ST
Cash for Clunkers
For General Motors the road to insolvency
has been littered with unhappy
shareholders, but the automaker’s
bankruptcy financing is one sweet deal.
BY STEVEN ROSENBUSH
A
S GENERAL MOTORS CORP.
drove into a financial ditch, its trip to bankruptcy court was greased
by $33 billion in loans from the U.S. Treasury and from Export Devel-
opment Canada, a state-owned enterprise. Such loans to bankrupt
companies, known as debtor-in-possession financing, can be notori-
ously expensive. Rates, including fees, reached as high as 20 percent
in February and generally remain in the low to mid-teens.
GM won’t be paying nearly market rate on its credit, though. The
U.S. and Canadian governments, which will own a combined 70 per-
cent of the new auto company expected to emerge from bankruptcy,
perhaps as early as July, have provided it with some of the cheapest
DIP financing in history. Neither the company nor the Treasury
would comment on the details. The Treasury referred all inquiries
from Institutional Investor about the cost of the loan to GM, which in
turn addressed questions by referring II to its 166-page DIP filing. The
document includes a formula for calculating the floating-rate loan.
According to that formula, the nondefault rate for the bulk of the deal
has a floor of about 5 percent. The rate is calculated by adding LIBOR
or 2 percent — whichever is higher — to a base of 3 percent.
“The interesting question is whether the rate on the DIP loan was
lower than appropriate,” says S. David Cohen, professor of law at
Pace Law School in White Plains, New York, who is writing a book
on the GM bankruptcy.
GM filed for protection on June 1, reporting assets of $82.3 bil-
lion and liabilities of $172.8 billion. Based on assets it’s the fourth-
largest bankruptcy filing in U.S. history, after those of Lehman
Brothers Holdings, Washington Mutual and WorldCom. The
reorganization will be financed with $19.5 billion that the Treasury
issued earlier this year and $30 billion that it will issue later. That
$49.5 billion, along with $9.5 billion from the Canadian EDC,
which provides credit to exporters, will be rolled into $59 billion
in equity in the reborn company. Most of the funds have been
distributed, in the form of about $15 billion in bridge loans and the
$33 billion DIP financing.
Only one other company has been able to negotiate DIP funding
at such a low rate. That’s bankrupt automaker Chrysler Group,
which secured $3.3 billion in DIP funding from the U.S. govern-
ment. Other recent bankruptcies financed by private lenders have
been much more expensive. Lyondell Chemical Co., which filed for
bankruptcy protection in February, is paying 13 percent in interest
and 7 percent in fees to lenders. Shopping mall operator General
Growth Properties, which filed for Chapter 11 protection this spring,
secured $400 million in DIP financing from half a dozen investment
companies in early May with a rate of LIBOR plus 12 percentage
points. At the end of June, most DIPs still had rates of LIBOR plus
10 to 14 percentage points.
General Motors’ DIP loan was arranged with the help of William
Repko, head of the restructuring practice at Evercore, the New
York–based investment bank founded by former Clinton adminis-
tration deputy Treasury secretary Roger Altman. According to an
affidavit, Evercore was paid $25 million for its work on the deal.
Repko declined comment. Weil, Gotshal & Manges provided legal
counsel for GM.
GM will derive a competitive advantage from its cheap govern-
ment financing, asserts Dan Ikenson, associate director of trade
policy at the Cato Institute, a libertarian think tank in Washington.
“No one else has access to capital at that rate,” he says. Allows Pace
Law School’s Cohen: “It is a significant advantage for GM. But at
the same time, GM is giving up control.”
DIP lending is a lucrative business for private investors. But it’s
not clear how much return taxpayers will see on their DIP financing,
which will be converted into equity in the new GM. If the new owners,
including the U.S. and Canada, can’t operate GM in the black or sell
it for a profit, the return on the DIP loan could be zero. ••
BARRY FALLS
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DEALS CAPITAL SCORECARD MARKETS CEO INTERVIEW CAPITAL MARKETS COVER STORYASS

Bank of America
holds steady by
helping itself. It used
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bank as a co-lead
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T
HE FINANCIAL CRISIS HAS SHAKEN UP case, it represented the acquirer. Goldman Sachs was a lead adviser on
leadership of the U.S. mergers and acquisitions six of the ten top deals, but always on the side of the targeted company.
market. At a time when buyers are hungry for J.P. Morgan had a 9.06 percent share for the 12 months ended June 26,
capital, J.P. Morgan Securities, backed by the bal- up from 8.53 percent for the comparable period of last year, according
ance sheet of corporate parent JPMorgan Chase to research firm Dealogic. Goldman Sachs had an 8.61 percent share,
& Co., was able to grab first place from rival down from 10.41 percent during the year-ago period. M&A activity
Goldman Sachs Group. J.P. Morgan worked as a lead adviser on four for the past 12 months fell 40 percent, to $760.3 billion, a far cry from
of the ten biggest deals completed during the past 12 months. In each the $1.5 trillion level of the previous year. ••
 J U LY / AU G U S T 2 0 0 9 I N S T I T U T I O N A L I N V E S TO R
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ARD CAPITAL MARKETS CEO INTERVIEW CAPITAL MARKETS COVER STORY ASSET MANAGEMENT

Trading Titans
Fight Back In addition to Nasdaq, the Kansas City, Missouri–based BATS
Established stock exchange last month introduced BOLT, a flash-trading system
exchanges are trying to intended to protect its market share — 9.6 percent in April — from
compete with a growing further incursions by ECNs. NYSE Euronext has chosen to mount
flock of upstarts. a legal challenge. In a letter to the Securities and Exchange Commis-
BY CHARLES WALLACE sion, says NYSE Euronext executive vice president Joseph Mecane, it
complained that flash trading is “creating a two-tiered market, with
some participants having privileged access to orders and informa-

N
tion.” SEC chairman Mary Schapiro announced that her agency
would be “taking a serious look at what regulatory actions may be
warranted in order to respond to the potential investor protection
and market integrity concerns raised by dark pools.”
According to Adam Sussman, head of research at TABB Group,
a New York–based market research and consulting firm, Nasdaq’s
current market share is a far cry from the 30 percent it once enjoyed.
Meanwhile, dark pools have seen their portion rise, going from 6
percent in December 2008 to 7 percent in April; in the same period
ASDAQ OMX GROUP’S SHARE that of ECNs climbed from 9
of the U.S. equity trading market is percent to 12 percent.
in serious decline. Since the begin- Although share trading has
ning of the year, the New York– become a low-margin, high-
based institution, the largest U.S. volume business, some dark
exchange by share volume, has seen pools owned by big brokers
its piece of the pie plummet by 6 have an advantage because they
percentage points, to 21 percent, thanks to competition from dark don’t charge anything to trade
pools and electronic communications networks. ECNs and dark off the exchange. Direct Edge
pools are both alternative trading platforms, the chief difference has been particularly successful

“
being that the former display prices and the latter do not. These in attracting business, with a
increasingly potent rivals have forced incumbents such as Nasdaq proprietary enhanced-liquidity
to respond with similar products of their own. program that takes orders from
“It’s fair to say that we’re feeling the pain,” says Brian Hyndman, a private network of 25 to 30
senior vice president for transaction services for Nasdaq OMX. The SEC will be broker-dealers.
The exchange is not alone. NYSE Euronext saw its market share
taking a serious “This is a critical issue for the
drop to 14 percent this April from 15 percent in December 2008.The
two exchanges have had to defend themselves against more than 40 look at what exchanges, because Direct Edge
has been such an effective com-
dark pools, electronic venues where institutional investors can trade regulatory petitive weapon,” notes Justin
large orders anonymously. Broker-dealers have increasingly been actions may Schack, a market structure
bypassing exchanges to execute trades using their own dark pools, a
process known as internalization, which reduces transaction costs.
be warranted analyst at Rosenblatt Securi-
ties in New York (and a former
In addition to dark pools, Nasdaq and NYSE Euronext face stiff in order to Institutional Investor editor).
competition from ECNs like Jersey City–based Direct Edge, which respond to mar- Beyond developing its flash-
is owned by Citadel Derivatives Group, Goldman Sachs Group, ket integrity trading products, Nasdaq is
International Securities Exchange Holdings, J.P. Morgan Securities
and Knight Capital Group.
concerns raised expanding in Europe, where
a similar battle is shaping up
Nasdaq is fighting back. Last month it introduced two new types by dark pools. between the long-standing

”
of electronic flash trading that it hopes will help it reclaim some of — Mary Schapiro, SEC exchanges and newcomers
the institutional trader business it has lost. The first, INET Flash, like Nomura Holdings’ dark
JOSHUA ROBERTS/BLOOMBERG NEWS

beams an order on the exchange’s proprietary data network to its
broker-dealer customers and dark pools, where it is flashed for 500
milliseconds; if the order goes unexecuted, it is canceled. The second
type, known as Routable Flash, checks Nasdaq’s proprietary data
network of broker-dealers for an execution; if none is found, the order
can either be canceled or routed back to the public exchanges. Flash
orders are already generating 60 million to 70 million trades daily.
(Nasdaq OMX trades more than 2 billion shares a day overall.).
pool, Chi-X. “We are the most
competitively priced of the dark
pools in Europe at the moment,” asserts Charlotte Crosswell, presi-
dent of Nasdaq OMX Europe. The hope is that by coming to market
early, the exchange will gain the kind of advantage that dark pools
have achieved in the U.S. ••
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ARKETS CAPITAL CEO INTERVIEW CAPITAL MARKETS COVER STORY ASSET MANAGEMENT ISLAM

I’ve ever seen. Could the whole industry

really be in trouble?’” Eckert, 54, says.
He moved quickly to gird the company,
based in El Segundo, California, for the
slowdown. Eckert laid off almost 1,000
people late last year and cut prices on many
toys before the holiday rush. Still, the reces-
sion hit hard. Sales declined by 11 percent
in the fourth quarter from the same period
a year earlier, to $1.94 billion, and earnings
tumbled 46 percent, to $176.4 million.
Toy companies tend to do badly after the
holidays, but this year’s first quarter was
particularly gruesome. Mattel’s revenue
dropped 15 percent, to $785 million, reflect-
ing decreased toy sales and the translation
effects of a stronger dollar. International
sales, which generate roughly half of the
company’s revenue, were down 23 percent,
with the dollar accounting for 13 percent-
age points of the decline. Mattel posted a
$51 million loss, compared with a year-
earlier loss of $46.6 million. Its stock closed
at $15.79 on June 17, down from a 52-week
high of $21.95 on August 11.
The company did receive one boost this
spring, when a federal judge upheld a 2008
ruling that awarded Mattel $100 million in
damages and gave it control of rival MGA

Not Playing Around

Mattel CEO Robert Eckert guides the toy
Robert Eckert, CEO of Mattel, is
hopeful that the economy will
company through the trials of recession.
maintain its current level of BY CLAUDIA DEUTSCH

R
activity throughout the year

OBERT ECKERT, CHIEF EX-

ecutive of Mattel, the world’s big-
gest toy marketer, remained rela-
tively sanguine as the U.S. economy
weakened last year. He knew that,
historically, even the most cash-
strapped adults have been inclined
to spring for a Barbie doll or a Hot
BRENDAN SMIALOWSKI/BLOOMBERG NEWS
Entertainment’s Bratz line of dolls, which was based on drawings
by a former Mattel employee.
Eckert met recently with Institutional Investor Contributing
Writer Claudia Deutsch and discussed how he plans to manage
his way through the economic downturn and other challenges
facing the company.

Wheels car for their kids at the
holiday season, when as many as half of all toys are sold. “People
will self-sacrifice if they have to, but they don’t want their children
to realize that times are tough,’’ Eckert notes.
Yet when the global economy went into free fall in the fourth
quarter of last year, following the collapse of Lehman Brothers Hold-
ings, Eckert finally felt his share of angst. Industry numbers show
that domestic toy purchases fell 5 percent from the same period of
the previous year. “I remember thinking, ‘This is the worst number
Institutional Investor: Do you see any signs that the current recession
is abating?
Eckert: I won’t say the industry is optimistic, but we’re hopeful that
the economy can hold at the current level between now and the end
of the year. We’re not seeing positive news, but we’re finally seeing
the absence of constant negative news. For a couple of months, all
we kept seeing was more bad news, record unemployment, record
profit declines — I’m hopeful that we’ve leveled off. Long term,
history has proved that recessions end.
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KETS CAPITAL CEO INTERVIEW CAPITAL MARKETS COVER STORY ASSET MANAGEMENT ISLAMIC F

How important was the Bratz victory? capitalize on the relationship between moms and
Winning that case was important on principle kids — in one case through nutrition, in the other
— the people who design toys here should know through education and entertainment.
that we will protect what is ours. If you design So what needed to be fixed at Mattel, and how did
a toy here, we want to make sure that this com- you fix it?
pany gets the benefit. Well, we immediately sold the Learning Co.,
Iconic brands like Hot Wheels and Barbie have for virtually nothing. And we got rid of Mattel’s
served Mattel well over the years, but they must cultural silos. The company had been structured
seem old hat to today’s Internet-savvy kids. so that groups were competing instead of coop-
Are you developing a Barbie equivalent for erating. There was a manufacturing organiza-

the Internet age?
In fact, the advent of digital games and the Internet
has broadened Barbie’s appeal. Our sweet spot
used to be five-year-olds, because as girls got older,
they didn’t want to be caught playing with dolls.
But now we’ll get eight-year-olds or even older
girls visiting Barbie.com and Barbiegirls.com and
playing with the doll online. So the Internet has let
us double Barbie’s life span with girls.
Boys can now play with Hot Wheels online too.
Even Fisher-Price, our line for infants to four-year-
olds, has gone interactive. You can plug its newest
exercise bike for three-year-olds into a TV set, and
as kids pedal they can also play learning games on
the video screen.
In 2007, Mattel had to recall some toys that were
“
tion that worried about processes, a distribution
group that worried about shipping, a sourcing
organization that bought toys or parts from
other plants and so on. You couldn’t make a fully
The Internet informed decision on whether to make or buy a
toy, for example, because manufacturing and
has let us sourcing had different interests. We now have a
double system where a group is responsible for making
Barbie’s and distributing specific toys, not carrying out
life span specific functions.
And we instituted some real management
with girls. training and development programs. I guaran-
Boys can now tee that when I finally leave, the board will have
play with good internal candidates to consider.
Mattel has always emphasized the value of good
Hot Wheels corporate citizenship. Are philanthropic giving
online too.

”
made in China, because they turned out to be
unsafe. Yet you still do most of your manufacturing
in China, Indonesia and Thailand. Why should
parents believe that it won’t happen again?
We reorganized the company in 2007 for just
that reason. We have teams of safety engineers who report directly
to me. We created the job of senior vice president for corporate
responsibility, who also reports to me. And we’ve strengthened our
testing protocols and added more redundant checks. It’s a lot harder
for anyone to circumvent our rules for how you make a Mattel toy,
and it’s a lot harder for a defective toy to get through our system.
Mattel owns and operates many of its plants in China. Since you feel
so confident of your testing protocols, wouldn’t it be easier, and
even cheaper, to simply hire local manufacturers to make toys?
It’s a question of volume and a toy’s life span. We’ve made Barbies
for decades — we’re way up the experience curve. And we make
maybe 600 million Hot Wheels cars every year, so we know how to
design and manufacture them at highest quality standards at lowest
costs. But we’ll usually use outside plants to make new toys. It’s a
fluid system — we constantly review each toy to see if it should be
and the green movement luxuries that Mattel can
afford in this economy?
As I’m talking to you, I’m drinking plain tap water
from a cup that says it’s made of compostable
corn. The difference is, I had to consciously
change my behavior. The younger generations fully understand
the interplay of the planet and profits. The point is, greener can be
cheaper. We’ve gotten rid of a lot of excess packaging, and we’ve
gotten more efficient at utilizing space in shipping containers so
that we can ship more toys per trip. We just remodeled our design
center. It’s now lit by skylights. It’s a friendlier place to work and a
lot more fuel-efficient.
Have you had to cut back on philanthropy?
When I joined this company in 2000, we were losing $1 million a
day and we still fulfilled a $25 million commitment we’d made to
the UCLA medical school. Tough times come and go, but we don’t
renege on our commitments. Our rule has traditionally been to
give 2 percent of pretax profits to charity. That won’t be a huge
number this year, so we’re relaxing the rule to maintain our giving
levels. Charities have told us that if we can be predictable, they can
BRENDAN SMIALOWSKI/BLOOMBERG NEWS

made in a Mattel plant or a vendor plant.
You were running Kraft Foods when Mattel asked you to be
its chief in 2000. Why didn’t Mattel promote from within, or at least
tap another toy industry executive?
Mattel had fallen on hard times. It had spent $3.5 billion to buy an
educational software company called the Learning Co. It lost lots
of money. The board held existing management responsible for that
decision and was ready for change.
Kraft and Mattel are in incredibly similar businesses. Both
build infrastructure around us, so maybe we’ll change the rule to 2
percent of profits over the past five years or so.
And what about executive pay? Has Mattel relaxed the rules
on that as well?
My compensation dropped 38 percent in 2008. I don’t have a com-
pany car anymore, and Mattel didn’t pay bonuses to executives.
Mattel walks the walk when it comes to pay for performance. ••
Comment? Click on the Capital Markets tab at iimagazine.com.
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Vincent Farina of Farina and Associates has

spent more than four decades working on the
floor of the New York Stock Exchange
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CAPITAL MARKETS

Last Man
Standing?
Technological changes and weak
markets are threatening the
livelihoods of the NYSE’s
dwindling band of floor traders.
But veteran broker Vincent Farina
is determined to carry on.
By Rich Blake
PHOTOGRAPHS BY MICHAEL EDWARDS
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CAPITAL MARKETS

E
EACH WEEKDAY JUST BEFORE 8:00 A.M., VINCENT FARINA
arrives at his office on the tenth floor of 20 Broad Street in lower Man-
hattan, upstairs from the New York Stock Exchange. He pours himself
a cup of coffee, reads his e-mail and checks the overnight markets on
his Bloomberg Terminal. Then at about 9:00 a.m., half an hour before
the opening bell, Farina goes down to his firm’s station on the NYSE
trading floor and greets the six other members of his trading crew.
For most of his 40-plus-year career, Farina would spend the bulk
of the trading session on the floor, personally executing his clients’
most sensitive orders. In recent years, though, as the Big Board and
its customers have shifted more and more of their orders to faster,
electronic trading systems, Farina has been heading back upstairs
earlier and earlier. On a recent Friday morning, with no orders to
handle, he was back at his desk by 10:45 a.m.
“Slow today?” asked Farina’s sole upstairs employee, daughter
Danielle, who oversees operations and administration.
“Slow would be nice,” sighed a frustrated Farina, glancing up at
a television tuned to CNBC.
Farina has seen plenty of ups and downs since he first stepped
onto the exchange floor as a clerk in the mid-1960s. From the
ending of fixed commissions on
May Day in 1975 to the October
1987 stock market crash to the
tech stock bubble of the late ’90s
“I’m not averse to technology – I just think
to the attacks of September 11,
2001, the 61-year-old broker has
lived and traded through tumultuous events at the heart of the U.S. The floor is a victim of technology. Electronic exchanges such
financial system. But technology now threatens to do what bear as longtime rival Nasdaq Stock Market and recent upstart BATS
markets, recessions and terrorists failed to do in the past: end a way Exchange have siphoned off much of the activity from the floor by
of life for Farina and his dwindling cohort of floor traders. creating ultrafast trading networks. The NYSE responded to the
“The buy side wanted fast, cheap execution,” Farina tells Insti- pressure in 2006 by acquiring an electronic exchange of its own,
tutional Investor. “Well, they got it. Now everything is algorithms, Archipelago Holdings; the following year it snapped up Euronext,
crossing networks, dark pools. Humans have been almost completely the multinational European exchange that had itself gone largely
replaced by machines. I keep waiting for the market to realize the electronic, to create holding company NYSE Euronext. Now, of the
upside of having a human involved in the process. For a throwback roughly 6.5 billion shares of U.S.-listed stocks that change hands
like me, that’s my only hope.” each day, the NYSE handles only about a third of the total, accord-
These days fewer and fewer traders share that hope. As recently as ing to industry estimates. Even for NYSE-listed stocks, the exchange
December 2005, the floor was home to 1,244 equity members — spe- has a market share of just 42 percent, according to its most recent
cialists, now called “designated market makers,” and brokers — and statistics. A substantial percentage of the volume that does make it
2,087 clerks, according to the exchange. Today there are 442 equity to the floor, moreover, is executed via a single click on NYSE Arca
members and 627 clerks. Farina and Associates is one of the last of the without the need for two human beings — a floor broker and a
NYSE’s independent floor brokerage houses, firms once known as specialist — to interact. Floor brokers accounted for just 5 percent
“$2 brokers” because of the fixed per-trade commission they used to of overall volume in April, exchange data show.
charge. The number of independents has fallen to fewer than a dozen Determined to keep swimming against the tide, Farina makes
from 50 or more two decades ago, Farina estimates. sure that his floor team is equipped with state-of-the-art systems for
5 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63
Vincent Farina on the floor of the once-congested New York Stock Exchange, where machines now outnumber people and floor traders fight for survival
this trend toward the machines has gone too far.”
— Vincent Farina, Farina and Associates
carrying out smarter and faster executions. They use an expensive,
powerful order management system called Mixit that gives them
access to practically every liquidity venue on the planet.
“I’m not averse to technology — I just think this trend toward
the machines has gone too far,” Farina says.“People who fought for
these changes used to say that the guys on the floor picked them off.
Do they really think the guys upstairs running those dark pools aren’t
picking them off? People want transparency — you get that here on
the floor, not in a dark pool.”
GROWING UP IN THE BENSONHURST SECTION OF BROOK-
lyn, then largely a working-class Jewish and Italian neighborhood,
Farina knew exactly how he wanted to spend his days: as a longshore-
man, like his father, Vincenzo. A first-generation Italian immigrant,
Vincenzo worked brutal hours unloading freight cargo on Piers 57
and 59 on the West Side of Manhattan. “He always worked Monday
through Saturday, and sometimes Sunday,”Farina recalls.“There were
even times when he worked for several days on the docks without leav-
ing — eight hours on, four hours off — until a ship was emptied.”
Grueling as that life was, the younger Farina wanted in. “When
I graduated high school in 1964, I asked my dad when I could start
down on the docks, and he told me in his broken English, ‘No way,
son, you gonna work in an office!’ ”
So Farina, at 17, found a summer job as an office boy in the
Rockefeller Center offices of brokerage firm Bache & Co. He tran-
scribed handwritten tickets into a ledger, fetched coffee — “basically
anything that needed doing,” as he puts it. After a year’s active duty
in the U.S. Army Reserves, Farina came back to New York and to his
old job at Bache. He also worked nights as a bouncer at a nightclub
in Queens, where he met his future wife, Lorraine.“I checked her ID,
and the rest is history,” he says.
One of Bache’s office managers assigned Farina to the floor of the
NYSE, where the action was. Bob White, who at the time oversaw
Bache’s floor operation, helped him make the transition, and eventu-
ally, Farina landed a job as a clerk at now-defunct brokerage firm
Lockwood Peck. Later he moved to E.H. Stern & Co., which would
become Lasker, Stone & Stern.
Lasker Stone comprised three units: a commission-based broker-
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CAPITAL MARKETS
age, a specialist group and a proprietary arbitrage desk. “When
I started clerking on the floor, we sent handwritten trading slips
upstairs using pneumatic tubes,” Farina says. “Later we used big
computer punch cards — that was considered modern.”In December
1974, Farina became a licensed floor broker, which allowed him to
trade directly in the market.
Farina’s supervisor was a no-nonsense, widely admired trader
named Bobby Oscher. Nicknamed “Bobby O,” Oscher was Lasker
Stone’s head of execution and worked under Bernard (Bunny)
Lasker, an arbitrage legend and a former chairman of the NYSE.
(Lasker was the “bunny” invoked in Martin Siegel’s infamous
Boesky-era quip, “Your bunny has a good nose.”)
Oscher, a fellow Brooklynite, became Farina’s mentor and role
“You have to try to do your best.
I’ve watched a lot of guys throw in
the towel. I’ve chosen to stick it out.
We have long-standing clients
who rely on us.”
— Vincent Farina, Farina and Associates
model. Together they handled orders for many of the biggest, best-
known Wall Street traders during the heyday of merger arbitrage.
“If, at the start of the day, I wanted to sell 95,600 shares by the
end of a session, there were two guys on that floor — and I mean
only two guys — I would trust with the order,” notes Warren Cho-
set, a pioneer on Merrill Lynch & Co.’s risk arbitrage desk in the
mid- to late 1970s who currently works at New York hedge fund
firm Havens Advisors. “Bobby and Vinny. No one else. And believe
me, for Vinny to be mentioned in the same breath as Bobby O —
both in terms of market skills and integrity — that’s saying a lot.”
In 1980, at the age of 53, Oscher was diagnosed with pancreatic
cancer. He went into the hospital and never left. His sudden passing
was a tough loss for the firm, and for Farina. “He taught me the
business,” he says. “Not just how to trade, but how clients, their
needs, always came first.”
By the end of the fast and furious ’80s, Bunny Lasker was looking
to slow down and trade just his own capital. Lasker Stone split in
1989, with Donald Stone taking the specialist piece and Farina tak-
ing the brokerage business, injecting his own capital and forming
Farina and Associates with ten employees in January 1990.
He enjoyed some great years in the ensuing decade (“I made
enough to put two daughters through college,” he says) but contin-
ued to face obstacles, most formidably the introduction of decimal
pricing, a major market structure change that was ordered by the
Securities and Exchange Commission in the late ’90s and put into
effect at the NYSE in the summer of 2001. The new rule “killed
us,” insists Farina. “A hundred price points, as opposed to eighths
or sixteenths, made it harder for guys like me to make money and
easier for the machines, so we lost large orders.”
Increased volume slightly offset the drastic narrowing of spreads,
and Farina maintained a small but loyal client base. But business, he
says, has never been the same. Still, whereas some of his contempo-
raries have taken to watching DVDs during business hours, Farina
soldiers on, staying as positive as he can. “You have to try to do your
best,” he explains.“I’ve watched a lot of guys throw in the towel. I’ve
chosen to stick it out. We have long-standing clients who rely on us.”
Farina realizes that if he is to stay in business, he and his team have
to find a way to convince traders and portfolio managers that certain
large or time-sensitive orders are better handled by human traders.
“Just because something is faster and cheaper doesn’t mean it’s
better,” notes daughter Danielle, a Villanova University graduate
who clerked several years for specialist firms Van der Moolen
Holding and Spear, Leeds & Kellogg before joining the family busi-
ness last year. (Vincent’s other
daughter, Nicole, doesn’t work
there, though her husband, Billy
Sachs, does, as a floor broker.)
She adds, “We give our traders
access to all the same technologi-
cal tools as anybody upstairs, but
ultimately, what we bring to the
table is superior service, the com-
fort and security of knowing an
order is in good hands and that
it’s going to get done.”
The human touch can come in
handy at other times also.“Machines malfunction,”Vincent Farina
likes to point out. Now and then his phone rings because somebody’s
automated system has gone down. “Not too many guys can figure
out an arb-spread trade with pen and pad,” he notes.
“Everybody talks about customer service and best execution, but Vin
takes it personally,”says Christopher Crotty, 40, a veteran floor trader
of convertible securities who joined Farina five years ago from a com-
petitor.The NYSE member firms, broker-dealers and small to midsize
money managers that deal with the firm do so because “they trust us,”
he asserts.“In some ways the Street hasn’t changed after all these years.
Guys still want to know exactly who they’re trading with.”
Guys like Choset. During one recent session the arbitrageur had a
35,000-share order he considered time-sensitive because of possible
“headline risk,” as he puts it.“I called down to the floor to make sure
that Vin was in the crowd and that he would personally handle the
order,” he recalls.
Farina sprang into action. He thought about using an algorithm
but instead decided to break the order into small lots and trade it
directly on the floor. Within half an hour the deal was done.
“I’m not averse to the modern way of trading,” Farina says.“But
at heart, you can say, I’m old school.”
It’s an open question whether floor traders can continue to
survive, considering the onward march of technology. But Farina
is determined to carry on.
“This is the kind of market where the people who know what they
are doing — who have been through tough times — can add value,”
he says.“I love this business. It got into my blood when I was young,
and it’s still there.” ••
Comment? Click on International Markets at iimagazine.com.
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COVER STORY

SPECIAL REPORT
GLOBAL WARMING

Climate
The

Challenge

C
Climate change poses growing risks to
the environment — and the economy. As governments
negotiate a successor plan to the Kyoto Protocol,
we examine how investors are addressing these
risks (page 28) and looking to profit from a new generation of
clean-energy technologies (page 32).
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COVER STORY

SPECIAL REPORT
GLOBAL WARMING

As countries step up efforts to combat climate change,

investors are increasingly looking to exploit the opportunities —
and minimize the risks — of a low- carbon future.

Winds
Change
of
By Jeremy Lovell

Is climate change the next new thing in invest-

ing? The issue of global warming is moving up the political agenda as the Obama administra-
tion pushes for the introduction of a cap-and-trade scheme to limit U.S. carbon emissions and
governments around the world seek to reach a new agreement by the end of this year to contain
greenhouse gases. There is no guarantee that these initiatives will succeed, especially in the
short run. But climate change promises to exert a growing influence on investment decisions,
from whether to fund the development of alternative-energy sources like wind and solar power
to how to value the big carbon-emitting industries like automobiles, steel and utilities.
“Technology is something that has impacted every single industry on the planet,” says Jan
Babiak, global head of climate change and sustainability services at Ernst & Young. “Low-
carbon transformation is very similar. Every industry, every household, every government,
every country, every part of society will be impacted by it.”
Some 800 funds worldwide, managing $95 billion, focus on climate change or clean
energy, according to New Energy Finance. The London-based consulting firm, along with
DB Climate Change Advisors, an arm of Deutsche Asset Management, recently surveyed
more than 100 institutional investors managing a total of more than $1 trillion and found

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COVER STORY

that 75 percent of them expected to increase investments in clean Carbon trading volume rose 37 percent in the first quarter of this year
energy by 2012. from the previous quarter, to 1,927 million tons, but the value of those
Recent programs undertaken by many countries to restart their trades declined by 16 percent, to $28 billion, reflecting weaker energy
economies are giving an added boost to the sector. Deutsche estimates prices, according to data from New Energy Finance.
that $106 billion of the U.S.’s $787 billion stimulus package is ear- “Climate change has hit first in companies that have significant
marked for spending on energy conservation, renewable energy, mass direct emissions — particularly in Europe, because of the Emissions
transit, a smart energy grid and related areas. The European Union Trading Scheme — so we are talking about utilities, steelmakers,
has committed $60 billion to similar initiatives. cement and so on,” says F&C Investments associate director Vicki
To be sure, investment opportunities in climate change depend Bakhshi, who covers the oil and gas and insurance industries for the
significantly on the price of energy. The surge in oil prices to more London-based money management firm and heads its climate change
than $145 a barrel last year made many alternative-energy sources program. “Every equities analyst worth their salt who is analyzing
economically viable and conservation measures compelling. Car- one of these companies will, as a matter of course, incorporate carbon
bon’s impact on corporate bottom lines dwindled when oil prices emissions as part of their evaluation.”
collapsed, though. The HSBC Climate Change index, which tracks Rory Sullivan, head of responsible investment at Insight Invest-
about 350 stocks that are expected to benefit from climate change, ment Management in London, argues that it is misguided to assume
outperformed the MSCI World index by more than 60 percentage that the size of a company’s carbon footprint equates directly to its
points between January 2006 and May 2008, but it gave up most of climate risk and ability to profit from climate change — and, there-
its gains over the following five months. The rebound in oil prices to fore, to its share price. “Where climate change or carbon liabilities
$70 a barrel in recent months promises to provide a fresh impetus. are material, it is already in the numbers,” he asserts. “The really
More and more, governments are seeking to impose rules curbing interesting issue is the strategic one — to what extent are companies
carbon emissions at national, sectoral and even corporate levels through looking further into the future and looking at their supply chains?
measures ranging from cap-and- That is where it is less clear-cut. It is an open question as to how much
trade plans to energy-efficient investors are really analyzing those issues at the moment.”
building requirements to vehicle
exhaust limits.
The EU led the way, with the
Climate Talks
introduction of its Emissions Heat Up as the world’s biggest emitter of 1990 levels by 2020 and has
carbon dioxide, aren’t covered by offered in the UN talks to raise that
Trading Scheme in 2005. Austra- Nations remain the agreement. target to 30 percent.
lia and New Zealand are also con- A hardening scientific consen- China and India blame the
sidering cap-and-trade systems divided on sus about the risks of climate developed West for causing the
change has given an impetus to climate problem and insist that
to limit carbon emissions. In the details of a new the Kyoto follow-up negotiations. those nations should lead the way
U.S., where Congress is debat-
ing such a program as part of an global pact. The scientists at the Intergovern-
mental Panel on Climate Change
in cutting greenhouse gases —
and foot the bill for efforts by
energy bill, ten Northeastern and warn that unless urgent action is developing countries. China,
taken to halt and reverse the which aims to achieve GDP
Midwestern states have already The return of the U.S. as an active
participant has invigorated global buildup of carbon dioxide and growth of 8 percent this year and
introduced carbon trading and negotiations on combating cli- other greenhouse gases in the relies mostly on carbon-intensive
emission limits under the Regional mate change, but just months atmosphere, average world tem- coal for its energy, has refused to
Greenhouse Gas Initiative. ahead of the talks’ supposed peratures will rise by between 1.8 offer any emissions reduction tar-
deadline, governments remain far and 4.0 degrees Celsius (3.2 to 7.2 gets in the global talks.
“When a price gets put on apart on targets for reducing car- degrees Fahrenheit) by the end of Yvo de Boer, the chief UN offi-
carbon, what we do for a liv- bon emissions — and on who the century, causing species cial at the talks, acknowledges
ing is going to be important in should pay the enormous tab. extinctions, rising sea levels and that ministers are unlikely to reach
bringing capital to solutions,” The United Nations Climate dramatic changes in rainfall and a detailed agreement in Decem-
Change Conference will gather storm patterns. ber. Still, he hopes for a framework
says Kevin Parker, CEO of environment ministers from more President Barack Obama, who deal that includes tough emissions-
Deutsche Asset Management in than 190 nations in Copenhagen advocates a U.S. cap-and-trade reduction targets for developed
New York. Deutsche, which sees in December in an effort to agree system to contain carbon emis- countries, binding commitments
climate change as a megatrend on a successor plan to the Kyoto sions, has vowed to push for a deal by major developing nations to
Protocol, the 1997 accord that at Copenhagen. U.S. negotiators take action on emissions and
that will have a major effect on called for reducing global carbon have so far offered to reduce the sources of long-term financing to
investment activity in coming emissions to 5 percent below 1990 country’s emissions to 1990 levels promote cleaner technologies.
decades, drew attention to the levels by 2012. by 2020 — in effect a 15 percent Michael Zammit Cutajar, the
issue in June by launching a Kyoto has been honored more cut from current levels — and then Maltese diplomat chairing the
in the breach than in the obser- slash them by 80 percent by 2050. negotiations, is optimistic about the
carbon counter — a real-time vance. Although the Clinton The European Union, among Copenhagen talks despite a lack
indicator showing the estimated administration signed it, the U.S. the most enthusiastic backers of of progress in preparatory meetings
levels of greenhouse gases in the Senate refused to ratify the pact, Kyoto, is almost on track to in Bonn last month. “This is like the
achieve its target of an 8 percent evolutionary process in reverse,” he
atmosphere — on a giant bill- and the Bush administration effec-
tively discarded it. Developing decrease by 2012. The bloc has notes. “The Big Bang comes at the
board outside New York City’s nations, most significantly China, already agreed internally to bring end. We hope it is going to be a
Pennsylvania Station. which last year surpassed the U.S. emissions to 20 percent below very big bang.” — J.L.
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A recent report by the Carbon Trust, an inde- a long-term environment where the cost of carbon
pendent agency set up by the British government to
advise businesses on climate change, underscored
the potential for carbon to have a big impact on
corporate valuations. The report focused on seven
global sectors, with a current combined market
value of some $7 trillion, where it said that climate
change regulation had the potential to either gener-
“We are start-
ing to get to
the point
where an
is likely to be higher and there will be political and
policy imperatives to reduce emissions, and what
that means for them,” explains David Russell, co-
head of responsible investment at the fund.
USS is currently talking with a company in India
about plans for the possible introduction of car-
bon emission regulations in that country. “We are
ate new profits or impose new costs. For example, asking the company how it is looking at this issue
in the aluminium sector, it said, companies that
invest- over the next ten, 15, 20 years, where infrastruc-
took early action to reduce their carbon footprint ment man- ture developed now will be around for potentially
could increase their market valuations by as much ager can decades; how they are factoring in the implications
as 30 percent, whereas those that did not risked
seeing their valuations drop by 65 percent. For
quantify of a cost of carbon and emission reductions, or
the physical impacts of climate change, into their
the auto industry the range extended from +60
the carbon developments now,” says Russell, who declined to
percent to –65 percent; in building materials the exposure. identify the firm.
potential value change ranged from +80 percent — Tom Curtis
DB Climate Change Advisors
Although some organizations are taking steps
to –20 percent. to limit their carbon footprints, others are doing
“In most cases, carbon is just one factor among
many in an investment decision,” points out Tom
Curtis, global co-head of DB Climate Change Advi-
sors. “A lot of it comes down to data, and that is
getting better all the time. We are starting to get to

carbon exposure.”
” more talking than acting.“Companies are starting to
market themselves around their environmental per-
formance,” notes Seb Beloe, director of responsible
investment at Henderson Investments in London.
“Three or five years ago, that wouldn’t have hap-
the point where an investment manager can start to quantify the pened. The need to look behind the message has always been there,
but it is much more of an issue now.”
Some of the best potential investments may be in the U.S., accord- Henderson has avoided investing in corporations whose green
ing to a recent research report by Joaquim de Lima and Vijay Sumon, spin it deemed to be well ahead of commercial reality, says Beloe.
quantitative equity analysts at HSBC in London. (That’s ironic, given One such case is Japan’s GS Yuasa Corp. The company’s share price
the U.S.’s checkered history in the debate about climate change.) soared recently after it drew attention to its production of lithium ion
“The U.S. now has an opportunity to become the engine for batteries for electric cars, but Beloe point out that the overwhelming
growth in climate change investing,” they wrote. The U.S. accounted majority of GS Yuasa’s output is lead acid batteries. And despite the
for 18 percent of global climate revenue last year, and that figure has fact that Brazil’s Cemig is part of the Dow Jones Sustainability index,
been growing at a compound annual rate of 26 percent since 2004 Henderson has steered clear of it as well because of its involvement
even though the country did not ratify the Kyoto Protocol or enact in a controversial dam in the Amazon.
federal climate change legislation. Henderson is also prepared to lobby businesses for changes in
The report identifies energy efficiency and low-carbon energy behavior. Beloe cites the case of China’s Suntech Power, a maker
production — in particular solar power — as key potential growth of solar power equipment whose share price tanked last year after
sectors, because they are the biggest beneficiaries of the Obama the Washington Post reported that the company was dumping its
administration’s economic stimulus package. It also highlights waste on farmland. Henderson prodded Suntech to address the
potentially key drivers of activity, such as the need to smarten the issue, and it responded by putting tough environmental clauses in
electricity grid and improve the energy efficiency of buildings. its supply contracts.
Analysts at Deutsche forecast that investment in clean energy, Investors need to keep a close eye on regulatory and political
energy efficiency and other climate change sectors could hit $650 bil- developments. Ernst & Young estimates that 250 pieces of major
lion a year over the next 20 years, up from $150 billion in 2007. climate-related legislation have been introduced around the globe
“We are actively engaging in developing the low-carbon technolo- in the past year alone. The outcome of the United Nations talks in
gies,” says Curtis.“We are also quite excited about energy efficiency. Copenhagen this December could also have a significant impact on
We think it is low-hanging fruit.” Deutsche believes that the most markets in the short term. But whatever happens in coming months,
promising investment targets are makers of insulation and smart the effect of climate change on the market is likely to grow.
meters as well as developers of new window technology, all of which “We are well positioned for whatever happens at Copenhagen,”
increase energy efficiency in buildings; low-carbon transportation, says Henderson’s Beloe. “If it succeeds, then tougher targets will
such as electric car technology; and renewable energies like solar come in over a shorter time period. If Copenhagen fails to come up
and wind power. with a strong agreement, international renewable companies would
The Universities Superannuation Scheme, the second-largest be hit, and some of the carbon traders would definitely be hit. But
U.K. pension fund, with £23 billion ($38 billion) under manage- it is not going to derail the whole thing.” ••
ment, takes carbon emissions into consideration when making
investments. “We look at how companies are managing a shift to Comment? Click on International Markets at iimagazine.com.
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COVER STORY

SPECIAL REPORT
GLOBAL WARMING

The alternative-energy sector has suffered along with the

broader economy of late, but patient money managers see profits on
the horizon as the quest for environmentally friendly
sources of power generation intensifies.

From
Smoke-
stacks to
Green-
backs By Katie Gilbert

Last summer, as the price of oil was peaking at more

than $145 a barrel, legendary oilman T. Boone Pickens Jr. emerged as an unlikely clean-energy pitchman. The
81-year-old investor was trumpeting a novel plan to build a wind farm in his home state of Texas that would
produce 4,000 megawatts of electricity, enough to power 1.3 million homes, which he figured would free up
natural gas to run cars more cleanly and help slake Americans’ seemingly unquenchable thirst for foreign oil.
Just a few months earlier, Pickens had put his money where his mouth was: His Dallas-based company, Mesa
Power, paid $1.5 billion for 667 General Electric Co. wind turbines, slated for delivery in 2011 and expected to
generate 1,000 megawatts of clean energy. By 2014, Pickens reckoned, the additional turbines he needed would
be in place and the initiative, dubbed the Pampa Wind Project, would be fully operational.
Unfortunately for Pickens, gale-force economic winds began blowing in the wrong direction. Credit markets,
the lifeblood of large-scale alternative-energy projects, all but locked up. Difficulties in finding a grid to distrib-
ute the farm’s electricity and the plunge in oil prices, which sapped investor interest in the project, also created
unexpected problems. Pickens was soon compelled to declare his timetable unrealistic.
The feisty Texas billionaire isn’t the only alternative-energy investor whose plans have been disrupted by market
turbulence. Although the sector attracted $155 billion in capital in 2008, up fourfold from 2004, investment flows
fizzled in the second half of last year as the credit crisis intensified, according to data from London-based research

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COVER STORY

firm New Energy Finance. From the second quarter of 2008 to the
first quarter of 2009, asset financing dropped by nearly 60 percent,
to $11.5 billion. Venture capital and private equity investments fell
by more than half, to $1.8 billion. And public market investment fell
off a cliff as valuations collapsed: The WilderHill New Energy Global
Innovation index, which tracks 85 clean-energy companies with mar-
ket caps north of $100 million, fell 61 percent last year, far outpacing
the 38.5 percent drop in the Standard & Poor’s 500 index.
“There are going to be good companies with promising tech-
nologies that can’t get financing,” says Brian Fan, senior director of
research for Cleantech Group, a research firm in San Francisco.
Even so, the economic shakeout may ultimately prove to be
healthy. “The downturn has felt terrible — in the long run it’s likely
essential,” says Russell Read, former chief investment officer of Cali-
fornia Public Employees’ Retirement System, who left the pension
fund in 2008 to co-found C Change Investments, a private equity
firm based in Cambridge, Massachusetts, that invests in clean-energy
companies. The current economic environment reminds him of
the early 1980s, which marked a major turning point for several
emerging industries and ushered in roughly two decades of sustained
growth. “I believe we’re at such an inflection point today,” explains
Read, who expects the alternative-energy sector to be among the
biggest beneficiaries.
The fundamentals underlying investor interest are hardly a pass-
ing fad. Global warming, once the province of obscure scientific
debate, has become a mainstream concern, driven by a growing
consensus that the world’s dependence on fossil fuels isn’t ecologi-
cally — or economically — sustainable. This consensus has sparked
new entrepreneurial ferment in the energy sector and attracted a
variety of name-brand investors, including venture capital pow-
erhouse Kleiner Perkins Caufield & Byers, which in late 2007
teamed up with Generation Investment Management, a money
management firm co-founded by former vice president Al Gore, to
“find, fund and accelerate green business,” and Khosla Ventures,
a venture capital fund run by Sun Microsystems co-founder and
Kleiner Perkins alum Vinod Khosla. Many other investors in the
venture capital, private equity and hedge fund arenas have followed
their lead in search of profit.
Now a wave of government stimulus money is poised to wash
over the alternative-energy industry. Of the $2.6 trillion in funds
pledged by the Group of 20 nations to revive their faltering econo-
mies, roughly $400 billion is earmarked for alternative-energy
projects, according to Cleantech.
The $787 billion U.S. stimulus package, which will funnel more
than $70 billion into alternative energy, is the largest national outlay
in absolute terms, slightly outpacing China’s $67.2 billion in “green
stimulus.” Signed into law by President Barack Obama on February
17, the spending package allocates $11 billion for modernizing
the electricity grid, $6.3 billion in grants to help local governments
increase energy efficiency, $2.5 billion for energy-efficiency and
renewable-energy research and $500 million for training workers in
renewable-energy-related fields. The stimulus package also offers a
30 percent investment tax credit to alternative-energy manufacturers
and homeowners who install energy-efficient technology.
Observers expect renewable-energy mandates to also spur growth
in the sector. Late last year the European Union finalized a binding
commitment to generate 20 percent of its power from renewable
sources by 2020. In the U.S. the American Clean Energy and Security
Act was passed by the House of Representatives in June. The legisla-
tion mandates an 80 percent cut in U.S. greenhouse gas emissions by
2050 and requires electricity providers supplying more than 4 million
megawatts of power to produce at least one fifth of it from renewable
sources by 2020. It also establishes a cap-and-trade system that grants
emissions allowances to companies, which can then trade them. The
legislation now faces a contentious battle in the Senate, where several
other climate bills are also being crafted.
“Environmental regulation is the new alpha,” asserts Peter Fusaro,
chairman and founder of energy consulting firm Global Change
Associates, based in New York City, and founder of the Energy Hedge
Fund Center, a Web site that maintains a directory of hedge funds
investing in the alternative-energy sector. “The regulatory certainty
provides the financial certainty, and then a lot more people deploy
capital in the sector.”
There are some promising signs that the worst of the downturn
may be over. Even though investment has slowed dramatically, 2008
marked a tipping point: For the first time power capacity projects
sourced from clean energy attracted more capital than did fossil
fuel technologies ($140 billion versus $110 billion). In addition,
investment flows may have bottomed out. In early June, New Energy
Finance reported that second-quarter global clean-energy invest-
ments had already outpaced those in the previous quarter. The jump
in activity was fueled in part by successful secondary stock offerings
worth $2 billion from a number of leading companies, including
Denmark’s Vestas, the world’s largest maker of wind turbines, and
SunPower Corp., based in San Jose, California, which develops solar
energy technology.
Pickens, for one, is ready to get back to work on his wind project,
although the plan has been “scaled back and put into phases,” says
Ray Harris, Mesa Power’s president and CEO. General Electric has
agreed to delay delivery of the wind turbines, but Harris won’t say
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when he expects them to be up and running. Still, he is working with
GE to look for other, smaller wind projects around the U.S. to support
together. Notes Harris,“We’re seeing lots of projects out there in need
of turbines and in need of capital.”
Alternative energy first burst into the U.S.
consciousness in the wake of the OPEC oil embargo in 1973. The
sector got a boost a few years later when the journal Foreign Affairs
published an influential essay by a young physicist and environ-
mentalist named Amory Lovins, who articulated a vision of what he
called a “soft energy path” — a future where renewable resources
would replace the U.S.’s “hard energy path,” defined by its reliance
on foreign fossil fuels and nuclear power.
Jimmy Carter, elected president a year after Lovins’s essay
appeared, embraced these ideas. In a televised speech on the energy
crisis, wherein he laid out his plan to create the U.S. Strategic Petro-
leum Reserve and the U.S. Department of Energy, Carter famously
called for shared sacrifice and conservation, but he also vowed to
harness “permanent renewable-energy sources, like solar power.”
Two years later he installed solar panels on the roof of the White
House and unveiled a plan to power 20 percent of the U.S.’s elec-
tricity needs using renewable sources by the year 2000. But as the
oil shocks receded and Ronald Reagan entered the White House,
Carter’s clean-energy policies — along with the White House solar
panels — were dismantled.
Over the next couple of decades, the nascent solar and wind
power industries went through a series of booms and busts as tax
incentives came and went. At the same time, according to research-
ers at Resources for the Future, a Washington think tank, the
deregulation of natural gas and oil, the falling costs of conventional
energy production and the competitiveness of the world petroleum
market all contributed to a decline and stabilization in oil prices,
which hindered the adoption of alternative-energy technologies.
Even so, a consensus was building among scientists and policy-
makers that global warming posed a threat to the environment, cul-
minating in the creation of the Kyoto Protocol, which was adopted in
1997 and became legally binding in 2005. The climate pact imposed
limits on emissions of carbon dioxide and other harmful gases,
marking a watershed moment even though the U.S. was notably
absent from the list of signatories, with the Bush administration
arguing that the agreement was flawed. (The U.S. will be at the table
this December, however, when signatories are supposed to agree on
a successor plan to the Kyoto Protocol at a United Nations confab
in Copenhagen.)
Large corporations also led the charge. A few months after the
Kyoto Protocol took effect, GE rolled out its “ecomagination” ini-
tiative, vowing to decrease pollution generated by its products and
increase spending on clean-technology research and development.
That same year retailing giant Wal-Mart Stores unveiled an ambitious
plan to “green up” its operations, promising to spend $500 million
a year to reduce greenhouse gases by 20 percent within seven years,
shrink energy use in its stores by nearly a third and double the fuel
efficiency of its truck fleet in ten years, among other goals.
With eco-conscious governments and corporations eager for new
technologies, investors leapt into action. In 2005, $60 billion in new
capital was dedicated to the alternative-energy sector, a 73 percent
jump from 2004 and nearly three times the average increase over the
previous two years. “There was a recognition by entrepreneurs and
investors that we had a couple of big problems to solve,” says Clean-
tech’s Fan.“How do we wean ourselves off coal for power generation?
And how do we reduce our dependence on oil for transportation?”
The still-fledgling solar sector was among the biggest beneficia-
ries of this newfound interest. In several European countries, most
notably Germany, solar power got a lift from the adoption of “feed-in
tariffs,” which require an electric utility to spread the higher cost of
renewable energy across its entire customer base, making switching to
clean-energy sources cost-effective for end users. Germany’s Q-Cells,
today the largest producer of photovoltaic cells, went public in 2005
with backing from New York–based Good Energies, a private equity
firm focused on renewable energy that oversees $2.4 billion.
Over the next two years, growing political and environmental
awareness and plentiful investment capital yielded a veritable clean-
energy boom. In 2007 investment in the sector jumped to $148 bil-
lion, more than double the total just two years earlier. That same
year 19 percent of all new power capacity added globally came from
renewable sources, nearly twice the level in 2005.
Even though investment in alternative energy began slowing in
the second half of last year as the financial crisis heated up, 2008 was
still a banner year. Wind energy, the most mature alternative-energy
source, attracted $51.8 billion, including nearly half of all the asset
finance capital deployed in the sector last year. Solar energy, which
is slightly less mature, attracted $33.5 billion in venture capital and
private and public equity. Through last summer capital was plentiful:
William James, co-founder and co–managing director of RockPort
Capital Partners, a clean-tech venture capital firm in Boston, says
that when his firm set out in mid-2008 to raise a new fund to invest
in alternative-energy technologies, it intended to shut the door at
$400 million but instead took in $453 million.“We could have raised
$700 million or $800 million, we were so oversubscribed,” he says.
Capital may be a lot scarcer these days, but inves-
tors are undeterred. James, for one, has seen tough times before: When
he and his five co-founders launched RockPort in 2000, the term“clean
tech” hadn’t yet been coined. All of the partners had backgrounds in
energy, renewable power or commodities finance and were inspired
to invest in the sector by the growing environmental consciousness
sweeping Europe at the time. They decided to focus their capital and
know-how on three areas: energy and power, advanced materials,
and process and prevention technologies — and branded their niche
“anchor technology.” Not only did the name not stick, it also failed to
inspire interest from institutional investors.
“If we went to any endowments or big investors, they would say,
‘No, this is never going to work; we’re not believers in the green
movement,’” recalls James. But the partners stayed with it, ultimately
growing their firm to $850 million in capital as their enthusiasm
caught on in the investment community. Today the firm ranks with
Kleiner Perkins and Khosla Ventures as one of the most active clean-
energy investors, with the bulk of its money in solar and wind power.
In 2008, for instance, the firm invested in Fremont, California–based
Solyndra, which has developed photovoltaic systems that are cheaper
and more powerful than rival solar technologies.
Specialty firms aren’t the only big players that have been attracted
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COVER STORY
to the sector. Bryan Martin, co-head of the U.S. private equity unit at
D.E. Shaw & Co., a global hedge fund firm that oversees $30 billion
across a variety of strategies, says that his group dedicates about one
third of its time to alternative-energy investing and has been active
in the sector for more than five years. Martin welcomes what he sees
as a return to a more rational environment.“The fast money and the
hype are not always helpful,” he notes.
Although D.E. Shaw also invests in the public equities, debt and
convertible bonds of alternative-energy companies, Martin believes
that private financing offers the most attractive risk-adjusted returns.
His team focuses on finding projects that offer a bigger payoff
because they appear difficult to execute. “We try to do the work to
understand whether the difficulties can be overcome,” he explains.
A case in point is a wind farm project that D.E. Shaw recently
agreed to finance on Maui in Hawaii, where energy must be shipped
in and is thus relatively expensive, helping make wind power attrac-
tive. The project hadn’t yet been financed because locals feared that
the turbines would imperil Hawaii’s state bird, the nene. But the firm
studied the geese’s flight patterns and determined that the species
wasn’t prevalent enough near the proposed site to be at risk.
D.E. Shaw is a big backer of wind power in both Hawaii and the
lower 48. The firm is an investor in First Wind, a Newton, Massa-
chusetts–based wind energy company. Among its 36 projects in ten
states, First Wind recently completed $375 million in financing for
a 200-megawatt wind venture in Utah that will supply electricity to
Southern California. Another of D.E. Shaw’s portfolio companies,
Deepwater Wind, is focused on developing offshore wind farms in
markets where it is difficult to construct new power plants.
“This is not a traditional leveraged buyout where one can work
on a deal for six months, close and own a big company,” points out
Martin, reflecting on the challenges of financing large-scale wind
energy projects. “It may take three to five years to develop.”
Gaps in market prices and imbalances in
supply and demand are what attracted Boston-based Denham
Capital Management to the alternative-energy sector. Riaz Siddiqi,
managing partner at the $4.3 billion private equity firm, says he
was drawn to the profit that could be made from what he calls a
“value-dislocation paradigm.”
The South African energy market is a case in point. Last year the
supply of coal energy in that country hit a wall and South Africa was
forced to cut industrial energy consumption by as much as 15 percent.
In late 2008, sensing an opening for renewable power, Denham
Capital invested in BioTherm Energy, a South African company that
builds and operates renewable- and clean-energy projects. BioTherm
converts waste gases from industrial processes into electricity, which
can be sold or fed back into the national power grid, and plans to build
a number of small power plants in South Africa in the coming years.
Like Denham Capital, C Change is looking to profit by backing
technologies that can shift consumption from traditional to renewable-
energy sources. Co-founder Read first became interested in alternative
energy during the Carter era, when he was in high school and studying
photovoltaics, which focuses on converting sunlight into electricity, a
cornerstone of the solar industry. Read ultimately pursued a career in
finance but has returned full circle to his earlier passion. C Change is
looking to invest from $20 million to $80 million in alternative-energy
companies and hopes to take an active role in the engineering and
development of the underlying technologies. The goal, Read says, is to
help portfolio companies scale up and achieve critical mass.
Last November, C Change announced its first major investment,
in a firm called NC12, which formed a joint venture with an as-yet-
undisclosed utility company to convert coal and petroleum coke from
oil refineries into natural gas using a proprietary process that is essen-
tially free of harmful emissions. When the final phase of the project is
completed in 2012, the facility will produce the equivalent of 7 percent
of current U.S. natural-gas imports, according to C Change.
The firm is also positioning itself as an adviser to cities and on
green projects worldwide. For example, it is in discussions with the
South Korean Ministry of Knowledge Economy about partnering
to create a private equity vehicle that will help internationalize the
country’s technologies and bring the most promising non-Korean
technologies to the nation, whose heavy industries have an intense
demand for energy and materials. Read says that C Change will
likely invest several hundred million dollars in South Korea–related
projects over the next few years.“We are looking at similar arrange-
ments with local partners in other regions,” he adds.
Smaller hedge funds have gotten into the clean-energy investing
game too. The Energy Hedge Fund Center lists 97 pure-play funds
that invest primarily in the space. Rob Romero, founder of Connec-
tive Capital Management, a hedge fund that oversees $108 million
in assets, 40 percent of which are dedicated to alternative energy,
says that the sector’s volatility plays to hedge funds’ strengths. In
2001 a voice mail company that he had co-founded, eVoice, was
sold to America Online, and he began exploring venture capital
opportunities in alternative-energy technologies such as solar power
and advanced batteries.
“What I found was that with venture you can only go long,”
explains Romero, who founded Connective Capital in 2003.“Frankly,
many of the things that I saw I would rather have shorted.”
In October 2007 he launched the Connective Capital Emerging
Energy fund, which focuses solely on alternative energy. The small
fund, which manages just $7 million and is still being incubated
internally, lost 21.4 percent last year, versus a 3.6 percent gain for
the firm’s flagship fund. Still, the new fund has rallied in 2009, climb-
ing 10.3 percent in the first five months of the year. Romero says
that Connective Capital’s investments in wind turbines and solar
technology have been the most fruitful. For example, his position in
Nasdaq Stock Market–listed A-Power Energy Generation Systems,
which supplies wind turbines to China, has more than tripled since
he bought the stock in March, although the shares fell after worse-
than-expected first-quarter results were released in June.
To the casual observer alternative energy may appear to exhibit
all the foibles of a textbook boom-and-bust industry, taking off as
investor excitement catches fire only to overextend itself and crash.
But many longtime industry observers see the current downturn dif-
ferently, as a mere blip on the road to wider acceptance of alternative-
energy technologies — and bountiful profits for early backers.“Some
thought the sector was going to blow up and go away,”notes RockPort
Capital’s James. “But it’s our guess that clean tech is going to eclipse
other spaces like information technology and biotech.” ••
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ASSET MANAGEMENT

Manning’s
Method

r
Eighty-five years after it launched the first mutual fund,
MFS is on the rebound thanks to CEO Robert Manning’s
team-based approach to performance.
By Julie Segal
PHOTOGRAPHS BY CHRISTOPHER CHURCHILL

OBERT MANNING KNOWS ALL ABOUT HANDLING

crises. When the veteran fund manager was promoted
to CEO of MFS Investment Management five years
ago, the Boston-based firm was reeling from years of
bad leadership and performance. MFS, the 15th-largest U.S. mutual fund manager, with $150 billion under management, had invested
heavily in growth and technology stocks in the late 1990s only to be pummeled by investor redemptions when the tech bubble burst.
Then MFS got caught in the market timing scandal of 2003, which cost the firm $225 million and the loss of two top executives, CEO
John Ballen and president and CIO Kevin Parke.
Manning, 45, a veteran MFS analyst and portfolio manager, vowed to turn the company around by overhauling the investment
process and instilling a more disciplined culture of performance. He abandoned the firm’s reliance on star managers and instituted a
system based on teamwork, research and careful diversification rather than big bets. The aim was to balance performance with safety:
MFS funds would seek to consistently beat their benchmarks rather than take on large, risky positions that might pay off in a big way
but could also generate hefty losses.
The CEO’s method has worked handsomely. MFS, a unit of Canadian insurer Sun Life Financial, ranked fourth among fund companies

Robert Manning has empowered MFS’s analysts and portfolio managers to move quickly
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ASSET MANAGEMENT

in asset-weighted performance last year, behind State Farm Mutual in 2008, to $186 million, and its operating profit
Funds, Northern Trust Corp. and State Street Corp., according to margin slipped 6 percentage points, to 30 percent.
research company Lipper. The firm’s analysts recognized trouble By contrast, BlackRock posted a 48 percent decline
early on in the subprime mortgage market, and its fund manag- in pretax profits in 2008.
ers sold stocks with heavy mortgage exposure well before the “MFS has a strong culture, and Manning has
equity and credit markets tanked. As of April 30, Morningstar helped the organization get its confidence back,”
had awarded either four or the maximum five stars to 62 percent says John Casey, chairman of investment manage-
of MFS’s retail assets, up from 33 percent a year ago. Only Pacific ment research firm Casey, Quirk & Associates.
Investment Management Co. has higher ratings, with 70 percent “We might see behemoths like BlackRock/Barclays
of its assets enjoying four or five stars. Fully 94 percent of MFS’s Global Investors try to be all things to all people, but

i
institutional separate accounts beat their benchmarks during the there’s room for an MFS that picks its spots.”
three-year period ended March 31, 2009.
Now, with markets having suffered their worst losses in decades,
Manning wants to exploit MFS’s track record and put his firm back on N AN AGE WHEN FINANCE SPANS THE
a growth path. He is beefing up its team of 49 portfolio managers and globe, Manning stands out as a small-town
75 analysts, particularly in overseas markets, where the firm now has boy who made good without ever really
the majority of its equity exposure. He is also broadening distribution leaving home. One of three children, he
to include more brokerage firms and independent advisers, as well as grew up in a modest one-story house in Methuen,
working with advisers to help them build their businesses and gener- Massachusetts, a working-class former mill town
ate leads. The executive is confident that MFS can thrive by gaining about 25 miles north of Boston. The first in his
market share even at a time when poor stock performance and a weak family to go to college, he attended the University
economy have led many retail investors to pull back from equities. of Massachusetts in nearby Lowell, majoring in
“You don’t often get to stress test what you built. But we got that technology and computers. In 1986 he married his
stress test, and it worked,” Manning told Institutional Investor in a high school sweetheart, Donna, now an oncology
recent interview. “We really rebuilt this company to withstand the nurse at Boston Medical Center who takes care of
highest level of pressure, and the firm separated itself from the pack.” terminally ill patients. Manning has remained a
Manning’s strategy is nothing if not bold. The financial crisis loyal supporter of UMass. He was appointed to the
dealt a blow to many leading names in the mutual fund business. board of the Massachusetts state university system
Firms such as Legg Mason, OppenheimerFunds and Putnam by then-governor Mitt Romney in 2006 and was
Investments have struggled with poor performance and have been elected chairman — a position he still holds — in
cutting staff and support for advisers. Even stalwarts like Capital 2007. Robert Pozen, the MFS chairman, who served
Research & Management’s American Funds have suffered investor as secretary of economic affairs under Romney,
defections and laid off employees. introduced Manning to the former governor.
There are no guarantees that Manning will succeed, but his plan Manning joined MFS straight out of university,
is in tune with the risk-averse attitude of today’s shell-shocked at the age of 20, working as a cable-television and
investors, analysts say. “Over the past few years, distributors have steel analyst in the company’s junk bond group. In his spare time
been seeking investments managed by teams rather than stars,” he went to night school at Boston College and earned an MBA in
says Aaron Dorr, managing director at Jefferies Putnam Lovell. finance. He rose through the ranks at MFS, working on a fund that
“They don’t want performance to be possibly hijacked by one invested in distressed debt, becoming chief strategist of fixed income

manager, who could get hit by a bus or decide to
leave. Following this major downturn a lot of retail
and institutional money will be up for grabs over the
next 12 to 24 months. It will be a performance story.
If MFS has the performance, it will be a winner.”
Manning has already had a fair degree of success
in diversifying MFS, increasing exposure to fast-
growing overseas markets and building up its insti-
tutional business. At the end of March, 57 percent
of the firm’s assets were retail and 43 percent institu-
tional, compared with an 80-20 split in 2001. MFS
had 34 percent of its assets invested in international
stocks, 28 percent in U.S. stocks, 26 percent in fixed
income, 10 percent in balanced funds and 2 percent
in money markets. By contrast, it had 73 percent of
its assets in U.S. stocks as recently as 2001.
— John Casey
The company’s net income declined 29 percent Casey, Quirk & Associates
“
and ultimately head of fixed income in 2001.
Just like the mill town where Manning grew up,
MFS enjoyed a rich heritage but had fallen on hard
times in recent years. It launched the first mutual fund
MFS has — Massachusetts Investors Trust — in 1924 and in
a strong subsequent decades developed a reputation for steady
if staid returns. The company thrived in the 1990s by
culture, and betting heavily on technology and growth stocks, and
Manning its performance attracted plenty of investors eager to
has helped partake in the boom. MFS boasted $147 billion in
the organiza- assets at the end of 2000. The firm was whipsawed by
the tech bust at the start of this decade, however, and
tion get its saw investors flee to rivals with more consistent per-
confidence formance, such as American Funds and the Vanguard
back. Group. The market-timing scandal, in which MFS
allowed hedge funds to trade in and out of its mutual
funds to the disadvantage of long-term investors,
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U.S. investment chief Michael Roberge sees a “historic opportunity” for MFS to use
its improved investment returns to grab market share
compounded the damage. Assets had dwindled to $113 billion
by the end of 2002. After the firm settled charges with regulators,
former CEO Ballen and CIO Parke resigned; the company also paid
a $50 million fine and $175 million in restitution to investors and cut
its management fees by $125 million over five years.
When Manning took the top job in February 2004, MFS’s assets
had recovered to some $140 billion, but morale remained low. He
insisted on taking over a combined role of CEO and CIO, a move
that underscored his belief that MFS needed to change its investment
process if it was to recover.“Separating yourself from the investment
side as a CEO of an asset manager is not only dangerous, I think
it’s disastrous,” he says. “MFS prides itself on the ability to manage
other people’s money, and my greatest skill, having grown up as an
investment person for 25 years, is on the investment side.”
Manning also surrounded himself with a cadre of trusted colleagues.
He tapped Robin Stelmach, who had been director of fixed-income
quantitative research, as chief operating officer, a new position to
help oversee the firm and its infrastructure. And he lured back Maria
Dwyer to serve as the firm’s chief regulatory officer; she had been with
MFS in the early 1990s but had left to become president of Fidelity
Funds. “We’ve got our team in place. We’ve figured out what we’re
good at. And given our performance, we’ve got a historic opportu-
nity,” says Michael Roberge, head of U.S. investments.
In overhauling MFS’s investment procedures, Manning wanted
to retain the firm’s traditional strength in stock selection while
eliminating its reliance on star portfolio managers, which had
allowed stock pickers to gun for performance without adequately
taking account of risk. He assembled teams of portfolio managers
to oversee funds so investment decisions would reflect multiple
opinions, rather than an individual’s gut instinct. He also elevated
the role of the firm’s analysts, creating a career track in eight sectors
and basing compensation on the success of their stock choices.
“Analysts were almost like second-class citizens to portfolio man-
agers,” he says.“We wanted a foundation of having a very seasoned,
experienced analyst follow a sector for years and years and pick the
best securities that the firm could use in all portfolios.”
Manning supplemented bottom-up stock picking with quanti-
tative tools. The company tracks how managers generate returns
and makes sure that portfolios are weighted to an index and aren’t
overly concentrated in particular sectors or individual stocks. The
aim is for returns to be a function of good stock selection rather
than sector, currency or macroeconomic bets.
The new approach proved its mettle as credit markets started to
deteriorate in early 2007. When HSBC Holdings announced a big
jump in loan-loss provisions because of its exposure to U.S. subprime
mortgages in March of that year, a team including Boston-based
financials analyst Kevin Conn, London-based financials analyst
Florence Taj and fixed-income analyst Gerald Pendleton took it as a
signal that worse was to come. They called for MFS funds to adjust
by dumping holdings of mortgage lenders, including Fannie Mae and
Freddie Mac, and commercial banks with big subprime positions and
by focusing financial exposure in safer areas, like custody banks.
“When you get into a stressed environment like we’ve had,
things begin to move quickly,” says Manning.“If you’re not talking
to the credit person in the financial area about what’s going on with
the banks and understanding what’s on their balance sheets that
can trigger problems for the equity value, and conversely things on
the equity side that can affect the credit, you won’t be making good
decisions in portfolios for clients.”
Analysts say Manning’s shift in strategy is appreciated by many
investment advisers. “Intermediaries, whether pension consultants
or brokerage firms, talk about hot returns, but in the end they are
interested in dependability and reliability,” says Casey. Manning is
now looking to sustain growth at MFS. He is not keen on acquisitions,
notwithstanding all the industry talk of consolidation in the aftermath
of BlackRock’s decision in June to purchase Barclays Global Investors.
“We don’t see how one would fit,” he says of potential acquisitions.
“We might acquire assets if they are attractively priced, but our focus
has been on maintaining our culture and on organic growth, and
acquisitions present challenges to that.”
Manning believes MFS’s revamped infrastructure is capable of
managing up to $300 billion in assets, more than twice its current total.
Achieving that won’t be easy, but the CEO is up for the challenge.“I’m
programmed for that environment. I grew up a scrappy kid. Nothing
ever came easy.” ••
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ISLAMIC FINANCE

Can Islamic finance

Islamic banks and the sukuk

market have been hit by the economic
downturn, but the sector may

A
benefit from the West’s financial disarray.

FTER A DECADE OF GROWTH THAT TRANSFORMED ISLAMIC

finance from an obscure niche into a mainstream alternative, the
industry has suffered its first major setback. The market for sukuk,
LEFT TO RIGHT: CHARLES CROWELL/BLOOMBERG NEWS;

or Islamic bonds, tanked last year, as the global economic slowdown

hit the Gulf region hard and forced governments to bail out many
lenders, including Islamic financial institutions.
These problems, although very real, haven’t diminished bankers’ enthusiasm about the sector’s long-term prospects.
DIMAS ARDIAN/BLOOMBERG NEWS

Indonesia and Bahrain have issued major new sukuk in recent weeks, raising hopes for an imminent rebound in issu-
ance. Islamic banks and mutual funds are expected to continue to grow at a rapid rate in the Gulf, driven largely by
increasing customer demand and the region’s expanding wealth. And new initiatives, such as efforts to develop Islamic
mortgages for home ownership in Saudi Arabia, promise to broaden the industry and enable banks to diversify their
income streams.
Perhaps just as important, bankers say, the global financial crisis promises to boost the Islamic sector by prompting
investors to look for alternatives to now-tarnished conventional Western banking products and institutions.
“The financial crisis has challenged the assumption that conventional financial solutions are the most desirable,” says
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profit from the crisis?

By Hugo Cox

Hussein Hassan, head of structuring MENA for Deutsche Bank.“Many experts in the conventional space are looking
seriously at alternative approaches. The principles of Islamic finance look very strong.”
Spurred by the Middle East’s oil-fueled economic growth and fast-rising wealth, the trickle of money into Islamic
LEFT TO RIGHT: GOH SENG CHONG/BLOOMBERG NEWS;

finance products has become a flood. Bankers at State Street Corp. estimate that the industry has grown at a compound
annual rate of about 15 percent over the past five years, with total assets under management at Islamic institutions now
exceeding $600 billion. Before the 2008 slump in the sukuk market, issuance had grown more than sixfold in recent
years, from $5 billion in 2004 to $33 billion in 2007, according to Moody’s Investors Service.
VICTORIA HAZOU/BLOOMBERG NEWS

The Gulf has also witnessed an explosion in the number of Islamic banks, whose assets totaled a combined $60 billion
at the end of last year. The United Arab Emirates, which had only two Islamic banks as of 2002, Dubai Islamic Bank
and Abu Dhabi Islamic Bank, now boasts six after the launches of Al Hilal Bank, Emirates Islamic Bank, Noor Islamic
Bank and Sharjah Islamic Bank. In Saudi Arabia — the largest market for Islamic products after Iran — the National
Commercial Bank, the country’s largest lender with 250 billion riyals ($67 billion) in assets, started out as a conventional
bank in 1953 but has expanded its retail Islamic banking services aggressively in recent years.
The industry has tapped into genuine demand for products that adhere to shari’a, the Islamic law that prohibits the
payment of interest and bars investment in companies that are involved with alcohol, tobacco, gambling, pornography
 J U LY / AU G U S T 2 0 0 9 I N S T I T U T I O N A L I N V E S TO R
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ISLAMIC FINANCE

or speculation. Islamic finance can’t escape the laws of economics, Disagreements about what constitutes an Islamic product are
though. Much of the industry is based on real estate, and values in likely to persist because of the decentralized nature of Islam. Judg-
the Gulf have suffered from the global recession and the bursting of ments about shari’a compliance are typically made by a board of
local property bubbles. at least three religious scholars employed by the issuer. Such judg-
The impact on the sukuk market has been particularly severe. ments about how to apply the Koran are always open to debate.
Global issuance of sukuk fell by more than 50 percent last year, to In the six-nation Gulf Cooperation Council — which includes
$15 billion, reports Moody’s, and the supply of new paper slowed Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab
dramatically in the first half of 2009. There were only four sukuk Emirates — countries impose an almost universal ban on short-
issues, worth a total of $5.4 billion, in the first six months of this year, selling, revolving credit cards and overdraft facilities. However,
according to data provider Dealogic. In addition, spreads on out- those products are permitted in Malaysia, where a more relaxed
standing issues have widened dramatically. Spreads over LIBOR on interpretation of shari’a prevails. In some instances variations exist
the HSBC/DIFX sukuk index increased to a peak of more than 1,200 even within the GCC. Total-return swaps are well established in the
basis points in February; although those spreads
came down to less than 800 basis points in May, they
are still three times as high as a year ago.
At the heart of the problem is the dependence of
sukuks on the regional real estate market, which has
been hurt by overbuilding and the fallout from the
global credit crunch.“The majority of sovereign and
corporate ijaras were backed by real estate assets to
finance the construction boom in countries like the
UAE, so at the heart of the widening spreads and fall-
off in demand for sukuks was the stark correction in
these markets,” explains Mariam Boulbol, an Islamic
fund specialist at HSBC Global Asset Management in
London. An ijara is a commonly used sukuk structure
that resembles a lease agreement and can be used to
finance property or equipment.
The collapse of the sukuk market was followed by HSBC Amanah’s Mukhtar Hussain (left) and State Street’s Rod Ringrow
the first major default in May, when Investment Dar
Co., an Islamic financial institution that is one of Kuwait’s largest asset UAE and Bahrain, but when several banks tried to introduce the
managers, failed to make payments on its $100 million global sukuk. product in Saudi Arabia in 2007, shari’a boards there refused to
The company, which recently completed the £479 million ($790 million) approve it. Although the boards deemed the swap structure itself to
acquisition of U.K. performance car company Aston Martin, is still in be legitimate, they ruled that the basket of stocks from which a swap
talks with bankers and investors regarding Investment Dar’s restructur- derived its return was not screened for shari’a compliance.
ing. It was the region’s first default of a large public Islamic instrument. Notwithstanding these differences, the industry is making prog-
A dispute about the legitimacy of certain sukuk structures has ress in developing common standards. The AAOIFI and the Islamic
also undermined confidence in the market. In February 2008 the Financial Services Board, based in Kuala Lumpur, have helped rec-
religious board of the Accounting and Auditing Organization for oncile accounting and regulatory standards across different jurisdic-
Islamic Financial Institutions, a Bahrain-based shari’a standards tions and worked to develop international best practices. AAOIFI’s
setter, ruled that two sukuk structures — musharaka and mudaraba sukuk standards are now accepted by Bahrain, Jordan and Sudan,
— violated shari’a principles because they contained repurchase with Qatar and Pakistan likely to sign up soon. In Malaysia, Asia’s
guarantees. Such guarantees are deemed contrary to the Koranic largest market for Islamic products, the government has centralized
principle that investors should share in the profits or losses of any the process of certifying that products are shari’a-compliant.
venture they back, rather than make money through usury. “There has been considerable progress around the standard language
The ruling shook confidence in the sukuk at a time when the market used over sukuks,”notes Mukhtar Hussain, CEO of Dubai-headquar-
was already reeling from the impact of the global credit crisis and tered HSBC Amanah, the Islamic subsidiary of HSBC Holdings.“Banks,
economic slowdown. “Suddenly, people are talking about shari’a scholars and regulatory bodies are pulling together so that over the next
risk — the risk that the product you thought was shari’a-compliant year, I think, we’ll see real strides toward a common standard.”
may turn out not to be,” explains Rushdi Siddiqui, global head of Bankers hope the two recent sukuk offerings by Indonesia
Islamic finance at Thomson Reuters in New York. and Bahrain signal a broader recovery in the market. In April the
Data show the extent of the damage. Issuance of musharaka, a Indonesian government raised $650 million with its first dollar-
type of profit-sharing joint venture that was the most popular sukuk denominated sukuk, a five-year offering that was priced to yield
structure, with more than $12 billion of new offerings in 2007 — about 720 basis points over U.S. Treasuries. Book runners Barclays
declined by 83 percent in 2008, and issuance of mudaraba, another Capital, HSBC and Standard Chartered Bank claimed that the offer-
type of profit-sharing, dropped 68 percent, according to Moody’s. ing was well oversubscribed, with orders totaling $4.7 billion. In
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 J U LY / AU G U S T 2 0 0 9 I N S T I T U T I O N A L I N V E S TO R
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ISLAMIC FINANCE
June, Bahrain issued $750 million of five-year sukuk priced at 340
basis points over Treasuries. Investor subscriptions for the offering
totaled $4 billion, according to HSBC Amanah, which managed
the issue along with Calyon and Deutsche Bank.
Sovereign issues are likely to continue to dominate the flow of
issuance, bankers say.
GCC governments have committed to spending some $1.3 trillion
on infrastructure over the next five years, according to Moody’s, and
they will look to finance a chunk of that with sukuk. Many bankers,
including HSBC’s Boulbol, believe that issuance during the second
half of this year will exceed total 2008 volume.
Anticipating the resurgence of these markets and a continued
narrowing of spreads, leading Western banks are looking to launch
After the financial crisis we
saw a lot of market makers and
investors from the region
repatriate assets to the GCC.
— Rossana Abueva
Bank of New York Mellon
sukuk funds. In July, HSBC Global Asset Management launched a
$100 million closed-end sukuk fund for UAE and Saudi investors.
The market for Islamic equity mutual funds also continues to grow
strongly. Consulting firm Booz & Co. predicts that 925 Islamic mutual
funds will exist worldwide by the end of this year, more than double
the number in 2006.
This is one product area that stands to reap clear benefits from the
financial turmoil in the West. Islamic mutual funds screen out stocks
that aren’t shari’a-compliant. Doing so means excluding stocks
of Western financial institutions because they charge interest. The
absence of such financial holdings is a major reason that the Dow
Jones Islamic Market index, which consists of more than 2,500 stocks
in 50 countries, has outperformed the Dow Jones world stock index
over the past five years, declining 4 percent over the period compared
with a loss of 8 percent for the conventional index. The tenets of
Islamic investing — lower leverage, transparency, no speculation —
are particularly attractive in the wake of the global meltdown.
“After the financial crisis we saw a lot of market makers and
investors from the region repatriate assets to the GCC,” says Ros-
sana Abueva, head of global conventional debt strategy and product
management at Bank of New York Mellon in London.
Thanks to the surge in oil prices in recent years, the number of
people in GCC countries with liquid assets in excess of $50,000
grew at a compound annual rate of 6 percent from 2003 to 2007,
according to accounting firm Ernst & Young. And those individuals
are allocating more wealth to the region. Consulting firm McKinsey
& Co. reports that the percentage of the Gulf’s private wealth that is
invested in the region, rather than in U.S. or European markets, say,
has risen to 25 percent from 15 percent in 2002.
Islamic banks have also suffered from the credit crisis less than
many of their conventional rivals. Shari’a prohibits Islamic institu-
tions from investing in companies that charge interest or engage in
significant leverage — typically defined as debt amounting to more
than a third of the firm’s stock market value. Consequently, they
have avoided investments in financial stocks and in such complex
securities as collateralized debt obligations, which are at the heart
of the global financial crisis.
Certainly, several Islamic banks have faced major problems, some
requiring government bailouts. The most notable are Dubai’s two
largest mortgage lenders, Amlak Finance and Tamweel. The two
banks are in the process of being merged and restructured under the
supervision of the UAE government. Other regional Islamic lend-
ers, such as Bahrain-based Gulf Finance House, Emirates Islamic
and Dubai Islamic, have continued to see significant losses this year
because of investment hits and bad loans.
Bahrain-based Gulf International Bank has posted losses of
$1.1 billion during the past two years because of exposure to U.S.
banks and a large book of asset-backed securities. In March the bank
sold $4.8 billion of toxic assets — roughly two thirds of its entire
investment portfolio — to the six GCC governments that own it.
Kuwait’s Gulf Investment Corp. and Bahrain-based Arab Banking
Corp. have also suffered heavy losses from subprime investments.
The difficulties of such conventional Middle Eastern institutions
help to bolster the image of Islamic banks and the wider Islamic
finance industry, in the eyes of many local investors.
If the industry is to benefit, however, it needs to make considerable
progress in managing market, liquidity and credit risk, bankers say.
In particular, banks must develop an expanded range of shari’a-
compliant risk management instruments such as derivatives, which
are virtually nonexistent.
“Funding and liquidity risk are among the most critical issues for
Islamic financial institutions now,”notes Rod Ringrow, head of State
Street’s Doha, Qatar–based Islamic finance division.
Secondary markets for Islamic products are few, owing to a combi-
nation of shari’a limits on reselling and the relative scarcity of products
like sukuk. In addition, Islamic banks typically aren’t allowed to invest
in fixed-income instruments for Treasury management.
Islamic institutions also need to diversify their asset base to control
credit risk. Most of these firms’ assets are highly concentrated in real
estate, private equity and commodity investments. “Credit risk at
Islamic institutions is still high. All products must be backed by tan-
gible assets to be shari’a-compliant; for many banks that means real
estate,” explains Emmanuel Volland, senior director of financial insti-
tutions ratings at Standard & Poor’s Paris office.“Dubai Islamic Bank,
with over 30 percent of its assets in real estate, is not exceptional.”
Some hope for industry diversification comes from the prospect of
mortgages being legalized in Saudi Arabia — currently the region’s
second-largest market for Islamic products. The Saudi Consultative
Council recently approved a draft of the long-awaited mortgage law
that will allow banks to help finance homeownership for the first time.
The Kuwait Financial Centre, an asset management and investment
banking outfit, estimates that a Saudi mortgage law, if enacted, would
increase demand for residential property by as much as 50 percent
over the next five years.
The challenges are significant. But given the rapid growth of the
past decade or so, most bankers are confident that the market will
continue to expand. ••
Comment? Click on International Markets at iimagazine.com.
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 J U LY / AU G U S T 2 0 0 9 I N S T I T U T I O N A L I N V E S TO R
19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 01 02 03 04 05 06 07 08

HEDGE FUNDS

Chris Gradel and

his team at Pacific
Alliance Group
in Hong Kong
have delivered
consistently strong
returns by scouring
Asia for mispriced
assets and other
opportunities.

West
CHRIS GRADEL IS A ROMANTIC AT HEART
By Henry Scott Stokes — at least when it comes to office buildings. For
the past seven years, the co-founder, managing
partner and chief investment officer of Hong Kong–based Pacific Alliance Group has been operating his
growing hedge fund empire from St. John’s Building, an unremarkable 22-story rectangle of glass and steel
in the city’s Central business district that is overshadowed by much newer and taller towers. As other hedge
fund managers in Hong Kong have flocked to such glitzy buildings as the 62-story Cheung Kong Center,
whose tenants include U.S. multistrategy giant Eton Park Capital Management, Gradel has stuck with
St. John’s, where he started his firm in July 2002 with just $10 million in assets and a lone secretary,
subletting a single room.
“We have a slight sentimental attachment,” says Gradel, 37, whose firm now occupies three floors, has
$3 billion in assets under management and employs 120 people spread among its original Hong Kong
headquarters and posher digs in Beijing, Shanghai and Tokyo. “We also don’t like following the crowd in
anything that we do.”
No one can accuse the Ulster-born Brit of following the crowd. Unlike most of the big multistrategy shops
and smaller hedge fund managers that have rushed into Asia this decade and made largely long-only bets on its
promise of rapid economic growth, especially in China, Gradel and his team at Pacific Alliance have placed a

PHOTOGRAPHS BY PHILIPP ENGELHORN

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MeetsEast

Chris Gradel doesn’t like to bet on the direction of the market

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HEDGE FUNDS
decidedly directionless wager on the region. Although they are gener-
ally bullish on Asia’s long-term prospects, it doesn’t matter to them
whether markets there go up or down. In true hedge fund fashion,
they scour their world for mispriced securities, identifying innovative
ways to arbitrage them or catalysts to unlock their value. During its
short lifetime, Pacific Alliance has invested in everything from listed
closed-end country funds trading at deep discounts and nontradable
Chinese C shares to asset-backed loans and distressed debt.
The approach seems to be working: Gradel’s flagship $1.45 bil-
lion Pacific Alliance Asia Opportunity Fund has a net annualized
return of 27.71 percent since its inception through May of this year.
That’s more than twice the 12.24 percent annualized return for the
Eurekahedge Asia ex-Japan hedge fund index during the same period
and a whopping five times the 5.14 percent return for the MSCI AC
Far East ex-Japan index. Pacific Alliance’s performance during the
recent turbulence has been even more impressive. For all of 2008
the Asia Opportunity Fund was up 7.64 percent, trouncing the
Eurekahedge index, which fell 26.45 percent, and the MSCI index,
which plummeted 54.48 percent.
“Anybody who was up last year was doing something right,” says
Robin Eggar, head of communications and public affairs at Winton
Capital, a $15 billion London-based hedge fund firm. “These guys
[at Pacific Alliance] were smart to have found a niche where the holes
were obvious, and they exploited it while others stood by idly.”
Gradel has profited by operating away from the crowd. But the real
secret to his success has been his knack for identifying talent — a skill
he developed as captain of boats for his college rowing club at Oxford
University — and his decision early on to emphasize local expertise
in building his team. Pacific Alliance’s investment process depends
on it, as Gradel and his fellow portfolio managers and analysts do
their own on-the-ground research to generate investments; they don’t
want to rely on bankers or other intermediaries for ideas.
“That was critically important last year, when many hedge funds
lost a lot on poorly structured syndicated investments brokered by
the banks,” Gradel notes.
All of Pacific Alliance’s 32 hedge fund investment professionals
have extensive experience in Asia. Some, like managing director Ian
Zheng, Gradel’s first hire, grew up and went to school there. Others,
like COO Derek Crane, a Brit, have spent most of their careers in the
region. The combination of homegrown and imported talent has
helped Gradel — who studied economics and engineering at Oxford
before getting a more practical business education in the employ of
American industrialist Robert Pritzker — navigate the often murky
world of Asian markets.
Gradel himself has spent most of his adult life in Asia. He first came
to China in the mid-’90s to run a factory that Pritzker’s company, the
Marmon Group, was purchasing from the Chinese government. In
1999 he moved to Hong Kong as a consultant for McKinsey & Co.
It was there, two years later, that he met Horst Geicke, a former
president of the German Chamber of Commerce in Hong Kong,
who owned trading and manufacturing businesses in China and
Vietnam. The two hit it off, and Geicke provided half of the seed
capital for Pacific Alliance. In return he got one-third ownership of
the management company and the title of nonexecutive chairman
(both of which he retains today).
The other $5 million came from Millennium Management, the
now nearly $12 billion New York–based multistrat-
egy giant run by Israel Englander, where Gradel
worked for three months in 1999 before starting his
job at McKinsey. Millennium went on to invest as
much as $150 million with Pacific Alliance and to
own 20 percent of its management company before
Gradel bought back half its stake in 2007 and the
rest this year.
Under Gradel’s leadership, Pacific Alliance blos-
somed almost overnight into a major player in Asian
markets, dealing in hedge funds, private equity and
real estate. With $1.45 billion in hedge fund assets
as of April 1, it is the seventh-biggest hedge fund firm
headquartered in the region, according to Alpha’s
latest Asia 25 ranking, up from No. 12 a year ago
and No. 19 in 2007. Working closely with managing
directors Zheng and Eddie Hui, Gradel oversees the
firm’s hedge fund investments, the majority of which
are in China.
“I spend practically all my time on the hedge
fund,” he says. “I manage the fund.”
Entrusting the firm’s other investment activities to
members of his team has allowed Gradel to focus his
energies on the hedge fund. Managing partners Allan
Liu and Rachel Chiang head up Pacific Alliance’s
50-person private equity group, which has invested
a total of $1 billion in 34 deals , including China’s first
leveraged buyout. Patrick Boot, a managing director
who Gradel recruited in 2007, is in charge of the
firm’s $300 million in Chinese real estate investments.
Pacific Alliance also owns 55 percent of VinaCapital
Group, which Geicke and Gradel co-founded in 2003
with Don Lam to invest in real estate, private equity
and other ventures in Vietnam. VinaCapital CEO
Lam manages the firm’s now $1.7 billion in assets
largely independently from Pacific Alliance.
Gradel has had his headaches. In September
2006 his firm successfully listed on London’s AIM exchange a
$275 million closed-end fund that follows the same investment strat-
egy as the flagship hedge fund. The Pacific Alliance Asia Opportunity
Fund Limited (not to be confused with the limited partnership of
the same name) soared by 60.86 percent in 2007, lifting its assets to
$407 million, but last year it suffered an 18.31 percent loss, while the
more diversified hedge fund made money. Following a recent vote
by shareholders, Gradel wrapped the closed-end fund back inside
the limited partnership.
GROWING UP IN NORTHERN IRELAND, CHRIS GRADEL GOT
a firsthand view at a young age of the repercussions of political conflict.
His parents had moved from Germany to Ballymena, a loyalist strong-
hold, in 1970, the year before he was born, and Gradel remembers
watching from the school playground as dense smoke occasionally rose
over the small industrial town, signaling that the Irish Republican Army
had just set off a car bomb. In 1977 an IRA terrorist broke into his house
and tried to kill his father, who ran an Irish subsidiary of a German
company.“I slept through the whole thing,”says Gradel, who lived in
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a year on the factory floor to see for yourself how it

works,’” Gradel recalls.
Gradel soon found himself in Cedar Bluff, a 1,000-
person town in rural Virginia, working for a com-
pany that made coal-mining equipment. One of his
first jobs was to count all the bolts on each type of
machine in the factory.“It was mind numbing,” says
Gradel, who recalls thinking at the time, “So this is
why I got a degree from Oxford.”
After a year Pritzker sent him to China, which was
auctioning off old state-owned factories to all com-
ers, including Westerners. Gradel was put in charge
of a plant that Marmon was buying from the govern-
ment — a ramshackle operation that made conveyor
belts for coal mines. The plant was located in Tang-
shan, a city of 3 million people about 100 miles east
of Beijing. Gradel — who at the time didn’t speak any
Chinese — spent six months there, modernizing the
operation and improving safety procedures. He also
got officials from the city and the local Communist
Party to approve Marmon’s request to build two new
factories on green-field sites.
“That was terrific experience,” says Gradel, who
went on to spend six months in Tianjin and two
years in Beijing working for Marmon. “I gained
an understanding of the motivations of people in
government and the restrictions under which they
operate. I also learned that confrontation is not going
to work in China.”
In late 1998, Gradel told Pritzker (who by then was
getting on in years; he would retire in 2002) that he
was leaving Marmon, and he accepted an offer from
McKinsey to join its Hong Kong office. Before starting
his new job in spring 1999, Gradel headed to New York
Allan Liu (far left) and Rachel Chiang head up the private equity team; Eddie Hui (second from right) at the invitation of Robert Knapp, a classmate of his
works closely with Gradel on hedge fund investments; Derek Crane oversees the firm’s operations at Oxford, who was managing a portfolio for Millen-
nium. Gradel worked at Millennium for three months,
Northern Ireland until the age of 15, when his father changed jobs and learning the basics of arbitrage from Knapp, who was impressed by how
moved the family to Loughborough in the Midlands region of England. quickly his friend picked up the subtleties of hedge fund investing.
Gradel’s own fighting instinct showed itself at Oxford, where, as “I had thought Chris was unusual the day he accepted a job to
an undergraduate, he took up rowing for New College, one of the 38 work for a coal-mining company,” says Knapp, who rowed with
schools that make up the university.“When I started I had no idea that Gradel for three years at Oxford.“Chris is really good at finding out
rowing takes so much time and involves such tremendous pain,”says what is going on.”
Gradel, who manned all eight oars — at one time or another — for By the time he arrived at McKinsey, Gradel knew he had little
the eight-man crew and was named captain of boats his senior year interest in a consulting career. Still, he says, his three years at the firm
by the New College Boat Club in recognition of his leadership and taught him discipline and trained him to analyze companies. He also
competitive spirit. widened his circle.Among those he met in early 2001 was Hong Kong
He graduated from Oxford in 1994 with an honors degree in resident Geicke, a German-born entrepreneur and owner of a family
engineering, economics and management. Given his résumé he could manufacturing business. “Chris is extremely bright, very clear and
have easily gotten a job with a top bank or company in the U.K., straight,” Geicke says.“He has always had a sense of what will work.”
but he chose to work for Pritzker, whom he had met when Pritzker By spring 2002, Gradel was eager to leave McKinsey and set up his
was a visiting lecturer at Oxford. Pritzker had built Chicago-based own investment shop. He approached Knapp and Geicke.
Marmon Group into one of the largest privately held companies in Knapp flew to Hong Kong to learn more. Gradel suggested that
the U.S. and offered to launch Gradel’s career by throwing the young they go to Shanghai, China’s foremost commercial city, with its
man into the deep end. famous waterfront, the Bund, and crowds of people, so Knapp could
“Bob said,‘Before you run any of my businesses, you have to spend see the opportunity for himself. Stunned by the sheer electricity of
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HEDGE FUNDS

Shanghai, Knapp agreed that China had great invest-

ment potential. On his return to New York, Knapp
proposed to his colleagues that they offer Gradel seed
financing. “The go-ahead came from Millennium
and from Horst on the same day,” Gradel recalls.
“
When we
got back to
Hong Kong,
Chris and I
and by the beginning of this year was using rental
proceeds to pay back interest and principal.
At their height, bridge loans accounted for nearly
70 percent of Pacific Alliance’s hedge fund portfolio,
helping Gradel to preserve and grow his investors’
Pacific Alliance launched that July, investing in immediately capital in 2008. This year he expects asset-backed
exchange-traded closed-end country funds selling,
in some cases, at a 40 to 50 percent discount to their
began the lending to fall to 25 percent of hedge fund assets, as
the loans roll off and companies that borrowed from
net asset value, and then taking activist positions to
process of Pacific Alliance refinance them with cheaper bank
close the discounts. The next year, Gradel expanded getting out loans, thanks to the government’s 4 trillion–yuan
his portfolio into distressed debt and other securities, ofanything ($584 billion) stimulus package. Gradel is redirecting
looking for market dislocations that had created that money into closed-end funds, which are once again
mispricings. By 2005, Pacific Alliance was managing
to do with trading at sizable discounts, and broader distressed
$300 million and had 12 hedge fund staffers. That equities. opportunities driven by financial deleveraging, hedge
— Eddie Hui, Managing Director,
year, when China announced stock market reforms Pacific Alliance fund redemptions and the capital flow out of Asia.
that would convert nontradable C shares held by
state-owned companies into publicly traded A ones,
Gradel instructed his team to buy as many as possible.
“Having a large investment team on the ground, with
each member having his own significant network, we ” LATE LAST YEAR, GRADEL CAUGHT A MORN-
ing flight from Hong Kong to Tokyo.Although he had
never done much business in Japan, he liked what he
was being told about a certain deal there. Staying at the
were able to quickly cast a wide net when searching for C shares,” he Grand Hyatt Tokyo, Gradel met with Katsuya Takanashi, chairman
explains.“The money we made was a function of how many people and CEO of Secured Capital Japan Co., a publicly traded real estate
we could muster.” management company with $5.7 billion in assets. Secured Capital has a
Pacific Alliance earned about 300 percent in 2006 on the C shares great investment track record, but it was struggling to refinance an exist-
trade (the Asia Opportunity Fund was up 45.6 percent overall that ing convertible bond. Such were the times. With the system in default,
year). By the middle of 2007, however, the C shares had all been perfectly creditworthy companies were unable to obtain financing.
converted into publicly traded ones, the discounts on closed-end Pacific Alliance invested $30 million in a convertible bond that
funds were largely gone and distressed-debt investments were drying gives the firm as much as a 40 percent stake in Secured Capital, which
up, as most of the world was still awash in credit and equity markets is listed on the main board of the Tokyo Stock Exchange.
were flying high. “It was a terrific deal for Chris,”notes Jon-Paul Toppino, president
That fall, Gradel took the entire company — by then spread and CIO of SCJ Investment Management Co., a subsidiary of Secured
among Beijing, Hong Kong and Shanghai — to the luxurious Grand Capital that manages several Japanese real estate funds.
Hyatt Tokyo in the fashionable Roppongi district for two days of “The investment was attractive financially but also strategically, as
formal and informal meetings. On the second day, he gathered all it gives us a foothold in the Japanese market,” Gradel says.“Secured
the investment professionals in a private conference room to talk Capital has a distressed-debt-servicing team, which will give us more
about what they were seeing in the markets. The general view was depth when looking at Japanese distressed-debt opportunities.”
that Chinese equities, which had hit an all-time high in October 2007, Gradel inked the deal with Secured Capital in late March, just as he
were overvalued and that Asian markets in general were overpriced. was getting ready to open an office in Tokyo. In June he hired Anthony
After everyone spoke Gradel asked people to vote by a show of hands Miller to run the Japanese operation. Miller, who had been president
on what the firm should do. of New York–based multistrategy fund Ramius’s RCG Japan unit,
“Overall, the vote was about 70–30 in favor of caution,” says had brokered the Secured Capital deal with Pacific Alliance. He was
managing director Hui, who has 20 years of experience in Hong Kong. already a member of the firm’s four-person investment committee,
“When we got back to Hong Kong, Chris and I immediately began the which approves all loans and other structured deals and includes
process of reworking the portfolio, getting out of anything to do with Gradel, COO Crane and chief credit officer Philip Skevington.
equities where we could. That is how we escaped the crash in 2008.” Pacific Alliance’s entrée into Japan is the latest example of Gradel’s
Last year Gradel and his team focused on making loans in China, investment style. The Oxford graduate has no crystal ball, he says, but
where credit was virtually nonexistent, as the government had been is inclined to be opportunity-driven. That, in part, is what has drawn
attempting to slow the economy’s then–double-digit economic him to Asia, where markets are less efficient and transparent and where
growth. “We saw asset- and share-backed lending as an attractive every few years capital rushes in and then just as quickly rushes out.
opportunity to weather the storm,” Gradel explains. Asked where he expects Pacific Alliance to be in a decade, Gradel
The bulk of the investments were short-term bridge loans made to responds: “Certainly, I do not want to gobble up the rest of the
property developers like Beijing-based Zhonghong Group. In April world. I don’t have that amount of ambition.” Nor will he need it.
2008, Pacific Alliance provided $92 million in financing for the com- Asia appears to present a world of opportunity perfectly suited to
pany to complete a shopping mall in a well-established residential his investment style. ••
area of Beijing. Zhonghong, which is paying a 32 percent annual
interest rate on the 18-month loan, put up the mall as collateral Comment? Click on International Markets at iimagazine.com.
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INSIDE:
EUROPE’S BEST CFOS
The region’s top
financial executives
find innovative ways
to protect margins
through the crisis.
Page 58

Brazil’s Biggest
Money Managers
Low exposure to equities helped many asset
managers avoid the brunt of last year’s 41 percent
stock market plunge. Page 54
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UNDS RESEARCH THE BRAZIL 20 EUROPE’S BEST CFOS THE BUY SIDE INEFFICIENT MARKETS ALTE
B
ECONOMIC THEORY
OF RELATIVITY
Brazil’s top money managers saw
the assets under their control tum-
ble by 21 percent last year, in dollar
terms. In ordinary circumstances a
decline that steep would be
cause for alarm. But these are
extraordinary times, and such a
drop can be cause for celebration
when compared with the 41 per-
cent plunge of the nation’s bench-
mark index. Investor aversion to
equities helped cushion the stock
market’s blow for the firms in the
Brazil 20, Institutional Investor’s sec-
ond annual ranking of the coun-
try’s top money managers (right).
Many people will probably con-
tinue to favor fixed-income securi-
ties, even though interest rates
have dropped and Brazilian stocks
are more attractively priced than
they have been in years. It’s hard
to argue with a strategy that works.
Conservative strategies are also
the order of the day in Europe,
where leading financial execu-
tives have abandoned earnings
guidance and embraced aggres-
sive capital management (see
“Europe’s Best CFOs,” page 58).
Not long ago, a finance chief
would have been assailed for fail-
ing to provide earnings estimates,
but in this economic environment,
such projections are unhelpful —
relatively speaking.
— Thomas W. Johnson
Managing Editor
Thomas W. Johnson
Senior Editor
Jane B. Kenney
Senior Associate Editor
Tucker Ewing
Associate Editors
Denise Hoguet
WeiQing Lu
Carolynn B. Tetro
Cover photograph by
Rich Press/Bloomberg News
THE 2009 BRAZIL 20
Brazil Breathes
a Sigh of Relief
Limited exposure to equities muted the
impact of the financial crisis on Brazil’s
top money managers.
BY LESLIE KRAMER
B razil’s asset managers are
breathing a bit easier these
days. As of mid-June the nation’s
benchmark Bolsa de Valores,
Mercadorias & Futuros Bovespa
index had climbed 43.6 percent
off its March low, which repre-
sented a 50.7 percent plunge since
its May 2008 high. Jittery inves-
tors, both foreign and domestic,
yanked money out of the market
on concerns that the financial cri-
sis roiling developed countries
would stop Brazil’s booming
economy in its tracks.
“It appears that the worst is
over,” says Demosthenes
Madureira de Pinho Neto, São
Paulo–based head of asset man-
agement and executive director of
financial institutions at Itaú Uni-
banco, the firm created through
the merger, completed in March,
of Banco Itaú, Unibanco Hold-
ings and Unibanco–União de
Bancos Brasileiros.
Brazil is emerging from the
global meltdown ahead of many
other countries for one simple rea-
son: “We did not have a banking
crisis, and that makes all the dif-
ference,” says Madureira, pointing
out that not a single Brazilian
bank failed. Owing to a strict reg-
ulatory framework that precludes
them from leveraging assets to the
extent that their counterparts in
the U.S. could — and did — Bra-
zilian banks are generally healthy
and well capitalized. “It’s interest-
ing that we just found that out
after the crisis,” Madureira notes
with a chuckle.
Although worldwide financial
turmoil caused a sickening 41.2
percent drop in the BM&F Bove-
spa index in 2008, the effect on
Brazil’s top money management
firms was muted because only a
small portion of their total hold-
ings is in equities, thanks to high
interest rates that make fixed-
income instruments more attrac-
tive to investors. At BB Gestão de
Recursos, which repeats in first
place on the Brazil 20, Institu-
tional Investor’s second annual
ranking of the nation’s leading
managers, stocks account for
only $19.5 billion of the firm’s
$105.2 billion in total assets under
management. That total is down
15.5 percent from one year earlier,
in dollar terms; in local currency
terms BB Gestão de Recursos and
several other firms saw their assets
under management increase in
2008. The real fell 24.5 percent
against the dollar last year.
Caixa Econômica Federal,
which rises one spot to take sec-
ond place, saw its assets under
management slip 12.4 percent in
2008, to $76.3 billion; of that
total, only $2.8 billion is in equi-
ties. Had the Itaú Unibanco
merger been completed by year-
end 2008, the combined firm
would have secured the No. 2 spot
(the position Banco Itaú held on its
own last year), with $95.4 billion
in total assets, but only $8.2 billion
in stocks. As it is, Banco Itaú slips
one rung to third place, with
$73 billion in assets (25.9 percent
less than a year earlier), $7.5 bil-
lion of which is in equities.
In fourth place again this year
is Bradesco Asset Management,
whose assets under management
slid 23.7 percent last year, to
roughly $64 billion. Less than 10
percent of that total is in stocks.
Robert John van Dijk, the firm’s
director superintendent, says the
avoidance of equities turned out
to be a smart move for Brazilians.
“If we consider the negative
performance of the Bovespa in
“WE DID
NOT HAVE A
BANKING
CRISIS, AND
THAT MAKES
ALL THE
DIFFERENCE.”
2008, and the small decrease in
the total assets of Brazilian funds,
we can conclude that the impact
of the international crisis in Bra-
zilian funds was very low,” says
van Dijk, who is based in São
Paulo. Total assets of the Brazil 20
fell just 21 percent last year.
Although the crisis appears to
be over, at least in Brazil, it was
not without its harrowing
moments. “We saw high risk
aversion from banks in terms of
lending and huge uncertainty
about how each sector in Brazil
would be affected,” notes São
Paulo–based Alcir Freitas, who
directs equity research coverage
of the banks and financial services
sector at Itaú Securities. “Money
flow suffered, credit was
squeezed, and access to lending
became very restricted deeply into
the fourth quarter of 2008.”
The Brazilian Central Bank’s
Monetary Policy Committee
swung into action as soon as gov-
ernment figures showed that the
economy had stumbled. In Janu-
ary, after the Brazilian Institute of
Geography and Statistics reported
that Brazil’s real gross domestic
product growth had contracted by
3.6 percent in the October-to-
December period compared with
the third quarter, the committee
slashed the benchmark Selic inter-
est rate by a full point, to 12.75
percent, in an effort to increase
liquidity and stimulate growth.
The Selic has since been cut three
more times, with June’s full-point
reduction bringing the rate to its
lowest level on record, 9.25 per-
cent, even though Brazil’s GDP
contraction of 0.8 percent in the
first quarter was much slower than
many economists had expected
and seemed to suggest that the
recession would be short-lived.
José Luiz Rosenberis Cunha,
Caixa’s portfolio management
superintendent, predicts that the
rate will remain low, by Brazil’s
standards (the Selic topped 40
percent a decade ago), at least
through next year. Although
reducing interest rates encourages
borrowing and helps promote
consumer spending and corporate
growth, he says, this approach
also puts Brazil’s money managers
in the uncomfortable position of
having to reconsider the fees they
charge — 2 percent is currently
the norm — because the lower
the rate, the lower the nominal
gain and the bigger the impact
of the fee on the investor’s
account balance.
Bradesco’s van Dijk agrees.
“When the interest rate was 20
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ERNATIVES NERD ON THE STREET CONTENTS INSIDE II TICKER PEOPLE FIVE QUESTIONS DID II SAY

BRAZIL’S TOP 20 MONEY MANAGERS

RANK TOTAL ASSETS 2008 BRAZILIAN PORTFOLIO MIX ($ MILLIONS)
UNDER
MANAGEMENT FIXED CASH & ALTERNATIVE
2008 2007 FIRM ($ MILLIONS) EQUITIES INCOME EQUIVALENTS PROPERTY INVESTMENTS

1 1 BB Gestão de Recursos1 (Rio de Janeiro) $105,197 $19,538 $85,659 — — —

2 3 Caixa Econômica Federal (São Paulo) 76,275 2,778 24,105 $ 882 — $48,509
3 2 Banco Itaú2 (São Paulo) 73,094 7,530 31,913 23,498 — 10,153
4 4 Bradesco Asset Mgmt (São Paulo) 64,231 5,780 42,405 12,182 — 3,865
5 7 Santander Asset Mgmt3 (São Paulo) 34,375 2,248 14,538 10,040 — 7,548
6 6 HSBC Global Asset Mgmt (São Paulo) 23,847 925 13,491 202 — 9,2294
7 9 Unibanco–União de Bancos Brasileiros2 22,314 621 9,643 3,472 $120 8,459
(São Paulo)
8 5 UBS Pactual Asset Mgmt5 (Rio de Janeiro) 16,525 2,352 10,467 2,122 — 1,584
9 13 Banco Safra de Investimento (São Paulo) 11,006 979 5,406 4,621 — —
10 17 BNY Mellon ARX Investimentos6 (Rio de Janeiro) 10,014 6,270 32 997 — 2,716
11 15 Votorantim Asset Mgmt (São Paulo) 8,908 167 4,459 4,282
12 12 Credit Suisse (São Paulo) 8,666 475 1,534 1,363 86 5,208
Credit Suisse Hedging–Griffo Asset Mgmt 6,082 97 436 1,363 86 4,100
Credit Suisse (Brasil) 2,584 378 1,098 — — 1,108
13 11 BNP Paribas Asset Mgmt Brasil (São Paulo) 8,580 1,991 3,237 223 21 3,107
14 10 Western Asset Mgmt (São Paulo) 8,289 813 4,809 2,667 — —
15 18 SulAmérica Investimentos (São Paulo) 5,739 199 4,163 41 — 1,335
16 16 Opportunity Asset Mgmt (Rio de Janeiro) 4,898 3,529 27 175 72 1,095
17 — Gávea Investimentos (Rio de Janeiro) 3,979 45 — — — 3,934
18 — Icatu Hartford Administração de Recursos 1,775 100 1,675 — — —
(Rio de Janeiro)
19 — Quest Investimentos (São Paulo) 1,238 — — — — 1,238
20 19 Schroder Investment Mgmt Brasil (São Paulo) 1,084 827 — — — 257

All assets are as of December 31, 2008,
and where necessary are converted
from reais using the exchange rate on
that date. Ranks in 2008 were based on
assets as of September 30, 2007.
1Rank in 2008 was for Banco do Brasil
Administradora de Ativos, which in July
2008 changed its name to BB Gestão
de Recursos.
2In November 2008, Banco Itaú, Unibanco
Holdings and Unibanco–União de
Bancos Brasileiros agreed to merge. The
deal closed at the end of March, and the
combined firm is Itaú Unibanco.
3Rank in 2008 was for Santander Asset
Management. In July 2008, Banco
Santander acquired the Brazilian
operations of ABN Amro Holding; ABN
Amro Asset Management was No. 8 6Rank in 2008 was for BNY Mellon Asset
last year. Management Brasil, which acquired ARX
4HSBC Global Asset Management’s Capital Management in January 2008;
the combined firm is BNY Mellon ARX
alternative investments include Investimentos.
balanced funds.
5UBS announced in April that it will sell its
Brazilian financial services business, UBS
Pactual; the transaction is expected to
close sometime this summer.

percent, a management fee of 2
percent represented only 10 per-
cent of the Selic reduction in the
fund return. But when the Selic rate
reaches 10 percent, the same fee
represents a loss of 20 percent,” he
explains. “We have savings
accounts that yield TR plus a 6 per-
cent fixed coupon, without man-
agement fees and without income
tax, which means that funds with
high management fees yield less
than savings accounts.” (TR, or
taxa referencial, is the rate used to
determine yields on passbook
accounts; it is based on the average
30-day yield on certificates of
deposits issued by Brazil’s top
banks and is adjusted monthly.)
Instead of lowering their fees,
some fixed-income portfolio man-
agers will choose to chase yield,
according to Itaú Unibanco’s
Madureira. “In the past it was very
easy to manage a fixed-income
mandate, because you could invest
everything in government bonds
and get a decent yield,” he says.
Madureira predicts that fund
managers will move from plain-
vanilla investments to more com-
plex securities, such as derivatives,
to boost return and justify what
now appears to be a dispropor-
tionately high fee.
The low Selic rate may also
motivate some investors to allocate
more money to Brazilian equities.
“It will be a gradual process, but
people are starting to realize that if
they want more return, they have to
take more risk — and that makes
the stock market a more attractive
investment,” says Madureira.
Brazilian investors had been
moving toward equities when the
financial crisis hit. The trend
began in the middle of the decade,
when the BM&F Bovespa index
was racking up gains of 26.5 per-
cent in 2005, 34.2 percent in 2006
and 43.6 percent in 2007 (in local
currency terms), then it reversed in
the fall of 2007 as investors grew
worried about collateral damage
to Brazil’s economy from the crisis
unfolding in the U.S. and other
developed markets. The share of
money allocated to Brazilian
equity funds reached 15.5 percent
of the total market in 2007, a
record, before dropping back to
10 percent last year, according to
Brazil’s National Association of
Investment Banks. By last month it
had inched up to 11 percent.
Caixa saw its percentage of
equities under management fall
from 20 percent of its portfolio in
mid-2007 to less than 4 percent by
year-end 2008, Cunha says; as of
last month, it had climbed back to
roughly 10 percent. However, that
figure reflects recent stock market
gains as well as inflows, he notes.
Bruno Pereira, who left UBS
Pactual and joined Rio de Janeiro–
based asset management firm Leb-
lon Equities in January, says
pension funds and retail investors
will look more seriously at equities
as they watch the returns of their
fixed-income investments drop
below the yield of savings accounts.
“Commercial banks have to face
the challenge of developing prod-
ucts that are suitable to the retail
segment, and this will gradually
 J U LY / AU G U S T 2 0 0 9 I N S T I T U T I O N A L I N V E S TO R
49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

UNDS RESEARCH THE BRAZIL 20 EUROPE’S BEST CFOS THE BUY SIDE INEFFICIENT MARKETS ALTE

EQUITY ALLOCATION DROPS AT BRAZIL’S BIGGEST MONEY MANAGEMENT FIRMS

2008 2007

TOTAL ASSETS EQUITIES AS A TOTAL ASSETS EQUITIES AS A

UNDER PERCENTAGE OF UNDER PERCENTAGE OF
MANAGEMENT EQUITIES TOTAL ASSETS MANAGEMENT EQUITIES TOTAL ASSETS
RANK FIRM ($ MILLIONS) ($ MILLIONS) (%) ($ MILLIONS) ($ MILLIONS) (%)

1 BB Gestão de Recursos (Rio de Janeiro) $105,197 $19,538 18.57% $124,458 $31,610 25.40%
2 Caixa Econômica Federal (São Paulo) 76,275 2,778 3.64 87,024 7,622 8.76
3 Banco Itaú (São Paulo) 73,094 7,530 10.30 98,637 16,966 17.20
4 Bradesco Asset Mgmt (São Paulo) 64,231 5,780 9.00 84,230 10,604 12.59
5 Santander Asset Mgmt (São Paulo) 34,375 2,248 6.54 29,542 3,652 12.36
6 HSBC Global Asset Mgmt (São Paulo) 23,847 925 3.88 35,865 2,001 5.58
7 Unibanco–União de Bancos Brasileiros (São Paulo) 22,314 621 2.78 26,357 1,883 7.15
8 UBS Pactual Asset Mgmt (Rio de Janeiro) 16,525 2,352 14.23 31,337 6,442 20.56
9 Banco Safra de Investimento (São Paulo) 11,006 979 8.90 12,241 2,119 17.31
10 BNY Mellon ARX Investimentos (Rio de Janeiro) 10,014 6,270 62.61 10,537 8,664 82.22
11 Votorantim Asset Mgmt (São Paulo) 8,908 167 1.88 10,366 232 2.23
12 Credit Suisse (São Paulo) 8,666 475 5.48 13,639 1,891 13.86
Credit Suisse Hedging–Griffo Asset Mgmt 6,082 97 1.59 7,788 545 7.00
Credit Suisse (Brasil) 2,584 378 14.63 5,851 1,346 23.00
13 BNP Paribas Asset Mgmt Brasil (São Paulo) 8,580 1,991 23.21 15,087 4,703 31.17
14 Western Asset Mgmt (São Paulo) 8,289 813 9.81 14,344 1,387 9.67
15 SulAmérica Investimentos (São Paulo) 5,739 199 3.47 7,587 433 5.70
16 Opportunity Asset Mgmt (Rio de Janeiro) 4,898 3,529 72.05 9,982 6,919 69.31
17 Gávea Investimentos (Rio de Janeiro) 3,979 45 1.12 4,288 121 2.82
18 Icatu Hartford Administração de Recursos 1,775 100 5.65 2,296 158 6.87
(Rio de Janeiro)
19 Quest Investimentos (São Paulo) 1,238 — 0.00 339 — 0.00
20 Schroder Investment Mgmt Brasil (São Paulo) 1,084 827 76.27 2,881 2,217 76.96

All assets are as of December 31 of the respective year and where necessary are converted from reais using the exchange rates on those dates.

lead to additional structural merger and acquisition activity Fortis in the €72 billion ($98.3 bil- ments. “There will still be niche
changes in the mutual funds indus- washes over Brazil’s financial land- lion) buyout of the Dutch bank, the players focused on equity man-
try and open more room for inde- scape. In addition to the Itaú- biggest such deal in history, which dates, long and short hedge funds
pendent asset managers,” says Unibanco merger, Bank of New closed in July 2008. That same and private equity, but there may
Pereira, who was the top-ranked York Mellon Corp. acquired ARX month, BB Gestão de Recursos be some consolidation in those
analyst in Banking & Financial Capital Management in January changed its name from Banco do sectors as well,” he explains.
Services on II’s 2008 All-Brazil 2008 and merged it with subsidiary Brasil Administradora de Ativos to For the moment, investors and
Research Team and leader of the BNY Mellon Asset Management emphasize its asset management money managers seem more con-
first-place troupe in Financial Insti- Brasil to form BNY Mellon ARX operations. And in April UBS cerned with finding out if the cur-
tutions on the 2008 Latin America Investimentos. Banco Santander announced it would sell its Brazil- rent market rally is sustainable.
Research Team. acquired ABN Amro Holding’s ian financial services unit, UBS Pac- Caixa’s Cunha believes it is. He
Some structural changes are Brazilian operations when it joined tual, to BTG Investments, a Rio de predicts that the Bovespa index will
already occurring, as a wave of Royal Bank of Scotland Group and Janerio–based boutique founded by end the year up 20 percent and gain
André Esteves, a former Banco Pac- an additional 25 percent in 2010,
tual managing partner who had as Brazil’s economy begins picking
sold the firm to UBS in 2006. The up steam and investors look to
HOW THE RANKING WAS COMPILED $2.5 billion deal is expected to close equities — attractively priced after
Institutional Investor’s second annual ranking identifies sometime over the summer. last year’s rout — for returns they
Brazil’s top 20 fund managers by assets. São Paulo– Some industry observers believe can no longer get from fixed-
based Researcher Milena Mazzola Moreti compiled the M&A activity will have only a income instruments.
the ranking under the guidance of Senior Editor Jane minor impact on the money man- Itaú Securities’ Freitas is also
PAPER: RICHARD MEGNA

B. Kenney, using data from questionnaires filled out by the agement business in Brazil, where
institutions themselves. II refined this data through follow- the top ten firms already control
up faxes, e-mails and telephone calls. All figures are in 88 percent of the assets. However,
millions of dollars, as of December 31 of the respective Madureira says it could pose prob-
lems for smaller, independent enti-
year, and where necessary were converted from reais. ties if institutional investors
choose to consolidate their invest-
optimistic. “The recovery will not
be a V shape,” he says. “It will be
slow but, on a relative basis to
other countries’, not that slow.” ••
Comment? Click on the
Research tab at iimagazine.com.
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 J U LY / AU G U S T 2 0 0 9 I N S T I T U T I O N A L I N V E S TO R
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IL 20 RESEARCH EUROPE’S BEST CFOS THE BUY SIDE INEFFICIENT MARKETS ALTERNATIVES NER
EUROPE’S BEST CFOS
Investors Cheer
Candor, Caution
Earnings guidance is out, cost controls are in,
as European financial chiefs steer their
companies through the recession.
BY WILLIAM BOSTON
I nvestors typically look to a com-
pany’s chief financial officer for
guidance about its earnings outlook.
But in the midst of this recession,
many of Europe’s top CFOs are
openly acknowledging that the
future is as clear as mud.
“We pride ourselves on being
pretty good with our forecasting,”
says Robin Freestone, CFO of U.K.
publishing company Pearson. “But
this year we’ve stopped giving guid-
ance on sales and margins because
it’s too difficult to get that accurate.”
That stance, which would have
invited swift punishment from the
“NOW WE
INTEND TO
BE FAST
IN TAKING
OPPORTUNI-
TIES.”
— Dieter Wemmer
Zurich Financial Services
market in years gone by, wins accep-
tance from investors in these volatile
times. Instead of focusing obses-
sively on earnings targets, share-
holders are looking for candor from
CFOs about business developments,
cost control and capital manage-
ment. Such actions build the credi-
bility that is vital to maintaining
confidence in hard times.
Freestone has certainly delivered.
While many companies gorged on
cheap credit during the boom years,
Freestone reined in borrowing and
slashed Pearson’s ratio of debt to
earnings before interest, tax, depre-
ciation and amortization by more
than half since 2000, to 1.7 last year.
That prudence is a major reason
investors voted Freestone No. 1 in
the Media sector in Institutional
Investor’s seventh annual ranking of
Europe’s Best CFOs.
“At the time when everyone was
leveraging, Freestone never went to
extremes,” says Andreas Wagen-
häuser, analyst with Deka Invest-
ment in Frankfurt.
Some CFOs built credibility by
tackling problems in ways that
prepared their companies for an
economic downturn. Joseph
Kaeser of Siemens, who ranks first
in Electronic & Electrical Equip-
ment, helped the German com-
pany recover from a bribery
scandal by spearheading a restruc-
turing that aims to generate
€1.2 billion ($1.7 billion) in
annual cost savings by next year.
Nicolas Dufourcq of Cap Gemini,
No. 1 in Technology/Software,
helped the consulting firm
rebound from a big loss four years
ago by tightening financial con-
trols and expanding the group’s
presence in India.
Companies that maintained dis-
cipline in the go-go years now find
themselves in a position to capitalize
on the weakness of competitors.
At BNP Paribas, CFO Philippe
Bordenave, a former markets chief,
helped limit the growth of the firm’s
investment banking unit and mini-
mized its exposure to U.S. subprime
mortgages and other shaky assets.
When turmoil shook the European
banking industry after the collapse
of Lehman Brothers Holdings last
year, he led a team that struck a deal
with the governments of Belgium
and Luxembourg to acquire control
of Fortis while taking on few of its
toxic assets. Bordenave was also
quick to take advantage of the
recent thaw in credit markets to
raise €23 billion of BNP Paribas’s
€30 billion funding requirement for
2009 by early June.
Zurich Financial Services has
avoided complex financial deriva-
tives in recent years and focused on
its core insurance business. In April
its Farmers Group subsidiary
snapped up the auto industry unit of
troubled rival American Interna-
tional Group for $1.9 billion.
As Zurich CFO Dieter Wemmer,
winner in Insurance, puts it, “We
came through the crisis fairly well,
and now we intend to be fast in tak-
ing opportunities.”
Philippe Bordenave
BNP Paribas
Age: 55
Year named CFO: 2000
Number of employees: 173,188
2008 earnings: E3.0 billion
($4.2 billion)
Compensation: Undisclosed
B eing chief financial officer of
one of Europe’s major banks
through last year’s financial crisis
was a demanding job; doing that
job while helping to close the
acquisition of a troubled Euro-
pean lender was even more
daunting. Yet Philippe Bordenave
has met the challenge with
panache, helping BNP Paribas —
France’s largest bank by profits
and market capitalization —
emerge from the crisis with its
standing and market share
enhanced.
BNP Paribas was a harbinger
of the credit crisis. The bank’s
decision, in August 2007, to sus-
pend withdrawals from two
investment funds exposed to
U.S. subprime mortgages was
one of the first signs that the
crunch would have global reper-
cussions. Bordenave’s strong
financial markets background —
he headed the bank’s global mar-
kets division before becoming
“WE ARE AT
THE BEGIN-
NING OF THE
ECONOMIC
CRISIS. THE
RECESSION IS
DEEPENING.”
— Philippe Bordenave
BNP Paribas
CFO — enabled him to confront
the challenges head-on. BNP
Paribas disclosed its limited
direct exposure to the subprime
market in its third-quarter results
that year and alerted investors to
a sharp rise in counterparty risk
— a problem that would not
become widely apparent until
the deterioration of monoline
insurers and the near collapse of
Bear Stearns Cos. last year. “We
were the first ones to mention
that,” Bordenave says, referring
to counterparty risk. “There
were not many CFOs who
understood what that meant.”
BNP Paribas’s relative
strength enabled it to pounce last
October when the Belgian and
Luxembourg governments
sought a buyer for Fortis, the
banking and insurance group
that was brought down by sub-
prime investments and its top-of-
the-market purchase of part of
ABN Amro. Bordenave, who for
years has screened potential
acquisition targets so BNP
Paribas could move quickly, led a
team that inspected Fortis’s
books over a weekend and
reached a purchase agreement
with the governments. Although
that deal was blocked by minor-
ity shareholders, who claimed it
undervalued Fortis, BNP Paribas
held its ground and struck a
broadly similar accord in March
to pay €3 billion in shares for
control of Fortis’s banking oper-
ations and €1.4 billion for one
quarter of its insurance business;
crucially, the governments agreed
to take 90 percent of any losses
on Fortis’s holdings of structured
products. That protection, and
the share-based payment — “We
couldn’t afford to harm our tier-
one ratio” — made the acquisi-
tion, which closed in May,
attractive, Bordenave says.
Bordenave remains cautious
on the banking outlook.
Although U.S. banks are racing
to repay government capital
received under the Troubled
Asset Relief Program, he has no
plans to buy back the €5.1 billion
in nonvoting shares that the
French government bought in
March. “The worst of the finan-
ILLUSTRATIONS BY NATHAN SINCLAIR
cial crisis is behind us,” he says.
“But we are at the beginning of
the economic crisis now. The
recession is deepening.”
Investors appreciate Borde-
nave’s candor and conservative
approach. “I always feel he tells
me how he really feels about the
environment,” says an analyst at
one U.S. fund manager.
37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
RD ON THE STREET CONTENTS INSIDE II TICKER PEOPLE FIVE QUESTIONS DID II SAY THAT? RAINM
Joseph Kaeser
Siemens
Age: 52
Year named CFO: 2006
Number of employees: 430,000
2008 earnings: E5.7 billion
($8.3 billion)*
Compensation: E3.5 million
($5.0 million)*
M any CFOs have been tested
by the financial crisis. Joseph
Kaeser came to it battle hardened.
Kaeser, a veteran Siemens execu-
tive, thought he had the best job in
the world when he took over as
CFO in May 2006. Instead, he
immediately found himself on the
front lines of a scandal over alleged
bribes that company executives had
paid to win orders. The affair forced
the resignation of chairman Hein-
rich von Pierer and the early depar-
ture of CEO Klaus Kleinfeld in
2007. Kaeser spent most of the next
two years overhauling the com-
pany’s internal controls and cooper-
ating with German and U.S.
investigations into the alleged pay-
ments. In December the company
pleaded guilty to U.S. charges of cir-
cumventing internal controls and
violating the Foreign Corrupt Prac-
tices Act and agreed to pay a total of
$800 million in fines and restitution
to settle criminal and civil charges;
PHOTO OF JOSEPH KAESER: THORSTEN JOCHIM/BLOOMBERG NEWS
“KAESER
INTRODUCED
A MORE
RIGOROUS
SYSTEM OF
FINANCIAL
TARGETS.”
— Christian Frenes
TIAA-CREF
it also paid €596 million in fines to
settle German legal investigations.
Europe’s Best CFOs
“It was a question of whether Listed here by industry and sector are the 28 finance chiefs who
or not the company would keep its scored the highest when Institutional Investor asked portfolio
license to do business,” says Kaeser. managers and buy-side equity analysts to choose the top-
“Siemens could not afford to fail.” performing CFOs in their domains.
In addition to addressing legal
BASIC MATERIALS
matters, Kaeser ramped up a cor-
porate restructuring that Siemens Chemicals Klaus Kühn, Bayer
had initiated in 2005. The plan Metals & Mining Vesa-Pekka Takala, Outotec
consolidated 13 business divisions
CONSUMER
into three — energy, health care
Autos & Auto Parts Holger Härter, Porsche
and industry — which it subjected
to strict financial targets. The com- Beverages Malcolm Wyman, SABMiller
pany sold unprofitable or periph- Food Producers Pierre-André Terisse,
eral businesses such as its stake in Groupe Danone
Fujitsu Siemens Computers and a
nuclear power alliance with France’s Household & Personal Colin Day,
Areva.And Kaeser set a target of Care Products Reckitt Benckiser Group
cutting costs by €1.2 billion a year Luxury Goods Jean-Jacques Guiony, LVMH
by next year by reducing Siemens’s Moët Hennessy Louis Vuitton
1,800 legal entities around the Retailing/Food & Drug Darren Shapland, J. Sainsbury
world to fewer than 1,000.“This is
about streamlining, making sure Retailing/General Dariusz Pachla, LPP
there is only one M&A department ENERGY
in the company, not 15, as we used Oil & Gas Ashley Almanza, BG Group
to have,” he says.“It is to make sure
there is only one clear chain of com- Utilities Gregor Alexander,1
mand at the accounting level and Scottish and Southern Energy;
the reporting level.” Nicholas Luff,1 Centrica
Analysts appreciate the CFO’s FINANCIAL INSTITUTIONS
tough controls. “Kaeser introduced Banks Philippe Bordenave,
a much more rigorous system of BNP Paribas
financial targets that lead to finan-
cial discipline at the group level, Insurance Dieter Wemmer,
which is something you don’t often Zurich Financial Services
see in companies in continental Property Peter van Rossum,
Europe,” says Christian Frenes, a Unibail-Rodamco
New York–based analyst at U.S. INDUSTRIALS
pension fund manager TIAA-CREF.
Aerospace & Defense Alessandro Pansa,
*For the fiscal year ended September 30, Finmeccanica
2008. Electronic & Electrical Joseph Kaeser, Siemens
Equipment
Engineering & Machinery Hans Ola Meyer, Atlas Copco
PHARMACEUTICALS
& HEALTH CARE
Biotechnology Andrew Oakley,1 Actelion;
Ronald Scott,1
Basilea Pharmaceutica
Health Care Lawrence Rosen,1, 2
Fresenius Medical Care;
Stephan Sturm,1 Fresenius
Pharmaceuticals Erich Hunziker, Roche Holding
TECHNOLOGY, MEDIA
& TELECOMMUNICATIONS
Media Robin Freestone, Pearson
Dieter Wemmer
Technology/Semiconductors Pierre-Jean Sivignon,
Royal Philips Electronics
Zurich Financial Services
Technology/Software Nicolas Dufourcq, Cap Gemini
Age: 52
Year named CFO: 2007
Telecommunications
Equipment
Richard Simonson,
Nokia Corp.
Number of employees: 60,000
2008 earnings: $3.0 billion
Telecommunications Services Gervais Pellissier,
France Télécom
Compensation: Undisclosed
A
s rival insurers were chasing 1Tie.
2In March 2009, Fresenius Medical Care announced that Lawrence Rosen would
higher returns by investing in resign from the board and step down as CFO; the date of Rosen’s departure was not
exotic financial instruments, Dieter specified.
 J U LY / AU G U S T 2 0 0 9 I N S T I T U T I O N A L I N V E S TO R
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IL 20 RESEARCH EUROPE’S BEST CFOS THE BUY SIDE INEFFICIENT MARKETS ALTERNATIVES NER
Wemmer, CFO of Zurich Financial
Services, stuck to his knitting.
The decision to stay focused on
the company’s core insurance
business has paid off. In April,
when troubled American Interna-
tional Group was obliged to put
its U.S. Personal Auto Group up
for sale to reduce its massive debt,
its Swiss competitor scooped up
the business for $1.9 billion. The
deal transformed Zurich’s U.S.
subsidiary, Farmers Group, into
the third-largest property-and-
casualty insurer in the country. It
also demonstrated how Zurich
can wield its financial strength to
grow through selective acquisi-
tions, says Wemmer.
“In the current market there will
be opportunities coming as more
people become willing to sell at
reasonable prices,” he notes.
Not that Zurich has been
immune to the economic down-
turn. Its net income fell 47 percent
last year, to $3 billion, and dropped
75 percent year-over-year in the
first quarter, to $362 million. The
declines reflect both weaker under-
writing performance and reduced
earnings on investments. With
many companies cutting back on
insurance expenses, Zurich’s gen-
eral insurance arm — the p/c unit
that generates roughly 60 percent
of premium income — posted a 12
percent drop in first-quarter pay-
ments, to $9.8 billion.
Market declines knocked the
value of Zurich’s average invested
assets down to $176.7 billion at
the end of March, off 10 percent;
investment income plunged 62
percent, to $816 million. “We lost
a substantial amount last year,
especially on our bond portfolio,”
says Wemmer.
Zurich is acting on several
fronts to offset the impact of the
crisis. Wemmer, considered a can-
didate for the top job when CEO
James Schiro retires at the end of
ZURICH’S
“STRONG T he European and U.S. econo-
mies are deep in recession, and
POSITION the media business is reeling, but
SHOULD HELP you wouldn’t know it from looking
at publishing powerhouse Pearson.
THEM GAIN The company, a major educational
publisher and owner of the Finan-
cial Times newspaper and Penguin
MARKET books, reported a 15.6 percent
SHARE.” increase in sales last year, to
£4.8 billion, and a 2.8 percent rise
— Christoph Bieri
Credit Suisse
this year, says the company has
reduced its investment exposure to
stocks, credit instruments and
short-term bonds, preferring to put
money into long-term, high-grade
corporate bonds. He says the
insurer does not invest in deriva-
tives, and it avoids complex instru-
ments. “We take risks, but on the
insurance side,” he says.
The company has also pushed
through price increases of 1 to 2
percent on insurance policies for
businesses. In light of the increased
possibility of corporate failures,
“balance sheet protection is getting
expensive,” Wemmer says. And the
company froze salaries this year to
keep a lid on costs.
Zurich is already reaping
rewards from its cautious invest-
ment strategy, according to Chris-
toph Bieri, an analyst with Credit
Suisse Private Banking in Zurich.
“This put them in a better position
than some of their competitors
going into the crisis,” he says.
“This strong position should help
them gain market share from
weaker players.”
Robin Freestone
Pearson
Age: 50
Year named CFO: 2006
Number of employees: 33,584
2008 earnings: £292 million
($423 million)
Compensation: £957,000
($1.4 million)
in earnings.
No small amount of credit for
the company’s robust health goes
to its CFO, Robin Freestone. When
many companies were loading up
on cheap debt a few years ago,
Pearson was conspicuously
restrained.
“There was a lot of investor
pressure to leverage up all the way
into the middle of 2007,” Freestone
says. “We resisted that temptation
and didn’t overborrow, and when
we go to debt markets now, our
ratings are worth something.”
The company did increase its net
debt to £1.46 billion at the end of
last year from £973 million in 2007
as a result of purchases, including
that of educational testing company
Harcourt Assessment for $635 mil-
lion, and the pound’s weakness,
which inflated the value of the com-
pany’s dollar-denominated debt.
Still, Pearson’s ratio of debt to earn-
ings before interest, tax, deprecia-
tion and amortization fell to 1.7 in
2008 from 3.9 in 2000.
Looking ahead, Pearson is
embracing the digital transforma-
tion of media. A few years ago the
company began developing digital
education products, such as its
MyLab series of online instruction
products, which now boast 4.1 mil-
lion users in the U.S. Pearson is also
bullish about the prospects for elec-
tronic reading devices, such as
Amazon.com’s Kindle.
“We are making sure that all
our major works and all new
books are available on Kindle and
other e-readers,” he says. “Keeping
products available digitally is a
must; it’s not an option.”
Nicolas Dufourcq
Cap Gemini
Age: 46
Year named CFO: 2004
Number of employees: 91,621
2008 earnings: E451 million
($636 million)
Compensation: Undisclosed
O ver the past five years, Cap
Gemini has transformed itself
from a loss-making also-ran in the
race for a piece of corporate infor-
mation technology budgets to a
strong — and profitable — global
competitor. But Europe’s largest IT
consulting group by revenue isn’t
immune to the recession that has
gripped much of the rest of the
industrialized world.
“The financial crisis hit us in
January,” says Nicolas Dufourcq,
the Paris-based company’s chief
financial offider. Dufourcq imme-
diately ordered a round of belt-
tightening based on projections
that revenue would fall by 2 per-
cent this year. He imposed a hir-
ing freeze, implemented a
program to cut procurement
costs by €18 million this year and
ordered executives to hold tough
against customer demands for
lower prices.
“Cost-cutting has been heavy,
and it allows us to protect the
margins of the group,” says
Dufourcq, who adds that he is
comfortable with analyst esti-
mates that Cap Gemini will
achieve an operating profit margin
of 7 percent this year, down from
8.5 percent in 2008.
Dufourcq has been open with
investors and analysts about the
company’s outlook, although he
has not given any earnings guid-
ance for the second half of this
year, saying it is difficult to project
earnings in the current environ-
ment. His cautious approach goes
over well with many shareholders.
“They aren’t hiding behind the
trees,” says Luc Mouzon, an ana-
lyst at Crédit Agricole Asset Man-
agement in Paris. “They are one of
the few companies giving us lots
of details about their cost base,
contracts and what’s going on in
the market.”
Dufourcq’s disciplined financial
control is a major reason for Cap
Gemini’s turnaround in recent
years. The company posted a
€534 million loss in 2004, when it
was still reeling from the dot-com
bust and the postmillennium drop
in IT spending. Last year it reported
a 2.5 percent rise in net income, to
€451 million, on revenue that was
flat, at €8.7 billion.
Cap Gemini has also been
expanding its presence in India,
catching up with such rivals as
IBM Corp. and Accenture in that
important IT service market. The
company expects to have more
than 40 percent of its employees in
India by the end of the decade, a
greater percentage than in its home
market of France. ••
Comment? Click on the
Research tab at iimagazine.com.
 J U LY / AU G U S T 2 0 0 9 I N S T I T U T I O N A L I N V E S TO R
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NCE THE BRAZIL 20 EUROPE’S BEST CFOS INVESTING THE BUY SIDE INEFFICIENT MARKETS

INSIDE:
U.S. INVESTORS
KEEP FAITH WITH
FOREIGN MARKETS
Page 62
CHINA’S ECONOMIC
RECOVERY MAY NOT
BE WHAT IT SEEMS
Page 64
MICHAEL KIRKHAM

FORTRESS PICKS UP
THE PIECES OF
A FORMER RIVAL
Page 66
 J U LY / AU G U S T 2 0 0 9 I N S T I T U T I O N A L I N V E S TO R
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CFOS INVESTING THE BUY SIDE INEFFICIENT MARKETS ALTERNATIVES NERD ON THE STREET CO
of the market downturn.
But only nine of those lay-
offs involved employees
outside the U.S., because
the firm regards foreign
markets as key growth
areas in the long term.
Market declines drove
the firm’s non-U.S. assets
down 42 percent last year,
to $39.92 billion, but
some of that lost ground
was regained in the first
quarter, thanks in part
to strong net inflows of
$4.5 billion — most of
which was channeled
into non-U.S. strategies.
“That snapped back very
Gregory Johnson is
expanding Franklin
smartly,” says Edward
Templeton’s network Bernard, the fund man-
ager’s vice chairman in
charge of marketing and
Staying the distribution, noting that just over half the
new money came from institutional inves-
Course tors. “The institutional business outside the
America’s Largest Overseas U.S. is growing faster because we are under-
Investors remain committed to represented there.”
international growth, despite a Other leading fund management firms,
sharp setback in 2008. including Capital Group Cos., Franklin
BY MICHAEL SHARI Templeton Investments and Invesco, have
maintained their international efforts even
WHEN U.S. INVESTORS BE- as they have cut back in the U.S. in recent
gan to sour on American stocks months, executives say.
in late 2007, fund managers were Barclays Global Investors, the world’s
only too happy to lead them into largest fund manager, has also seen a strong
more-buoyant overseas markets, rebound in its international business. The
and build up their own interna- San Francisco–based firm, which agreed to
tional business in the process. Then the col- be acquired by BlackRock in June, attracted
lapse of Lehman Brothers Holdings spread $92 billion in net inflows in the first five
financial panic around the world, hitting months of this year. BGI’s extensive global
most international equities — particularly reach was one reason it was such an attrac-
those of emerging markets — even harder tive acquisition target, according to Black-
than U.S. stocks. Rock COO Susan Wagner.
Although the global sell-off nipped talk “We did have very healthy flows into
of decoupling in the bud, it hasn’t dimin- global mandates during the first handful
ished the interest of U.S. asset managers in of months this year,” says BGI CEO Blake
overseas markets. Grossman, although he declines to disclose
Consider T. Rowe Price Group. In April the percentage of inflows allocated to non-
the Baltimore-based fund manager elimi- U.S. strategies. Stronger performance helped
nated 288 positions as part of a company- draw investors, he says. For example, BGI’s
wide initiative to reduce costs in the face International Tilts strategy, managed by
“
Institu- Minder
tional
Cheng, the
firm’s chief investment
officer for active equi-
business ties, outperformed the
outside MSCI EAFE index by
the U.S. 17 basis points in 2008
is grow- that benchmark for
after underperforming
ing developed interna-
faster tional markets by 277
because basis points in 2007.
The recovery in
we are international strate-
under- gies is welcome news
repre- for U.S. fund managers.
sented been a major source of
Foreign markets had
there. growth, and the firms
— Edward Bernard
”
T. Rowe Price Group
were whipsawed by last
year’s abrupt decline in
those markets — and
the investor withdraw-
als that ensued.
The MSCI EAFE index declined 45.1
percent in 2008, in dollar terms, a worse
performance than that of the Standard
& Poor’s 500 index, which was down 38.5
percent. Investors were spooked, triggering
a net outflow of $60.43 billion from non-
U.S. equity and fixed-income mutual funds
and exchange-traded funds, according to
Financial Research Corp. in Boston; bil-
lions more were withdrawn from separately
managed accounts. It was a stark departure
from the bounty of 2007, in which inves-
tors poured $229.37 billion into non-U.S.
funds, according to FRC.
The 50 biggest U.S.-based managers of
non-U.S. stocks and bonds, which make up
Institutional Investor’s annual ranking of
America’s Largest Overseas Investors, saw
combined foreign holdings fall by 38.6 per-
cent last year, to $4.79 trillion. The robust
growth rates of 21.9 percent in 2007 and 29.6
percent in 2006 were a distant memory.
BGI, which has placed No. 1 on the list
every year since 2000, fared better than most
of its rivals in 2008, with its global assets
falling by 27.3 percent, to $728.84 billion.
Those holdings accounted for 47.6 percent
of BGI’s total assets, roughly the same share
as in the previous year.
 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

ONTENTS INSIDE II TICKER PEOPLE FIVE QUESTIONS DID II SAY THAT? RAINMAKERS DONE DEALS

THE LARGEST U.S.-BASED MANAGERS OF NON-U.S. SECURITIES

NON-U.S. SECURITIES
TOTAL TOTAL
NON-U.S. AS FIXED ASSETS UNDER
RANK ASSETS PERCENTAGE OF EQUITIES INCOME MANAGEMENT
Other firms were less fortunate, par- 2008 FIRM ($ MILLIONS) TOTAL ASSETS ($ MILLIONS) ($ MILLIONS) ($ MILLION)
ticularly in global equities. State Street
Global Advisors, which stays at No. 2, 1 Barclays Global Investors $728,841 47.64% $447,455 $281,386 $1,529,849
2 State Street Global Advisors 439,116 30.50 328,534 110,582 1,439,577
saw its non-U.S. assets fall 33.7 percent,
3 Capital Group Cos. 333,231 34.64 312,271 20,960 962,034
to $439.12 billion. That represented
4 AXA Group 299,520 48.79 232,322 67,198 613,863
30.5 percent of the Boston-based firm’s
5 BlackRock 266,060 20.35 182,295 83,765 1,307,151
total assets under management, or 3.1
6 Fidelity Investments 225,294 18.84 203,234 22,060 1,195,514
percentage points less than a year earlier.
7 Franklin Templeton Investments 197,841 47.53 143,193 54,648 416,203
The pressure point for SSgA was non-
8 J.P. Morgan Asset Mgmt 167,132 14.75 121,355 45,777 1,133,232
U.S. equities, where assets plummeted by 9 Legg Mason 158,800 22.79 21,235 137,565 696,694
39.6 percent, to $328.53 billion.“Active 10 Goldman Sachs Group 138,625 18.50 38,806 99,819 749,249
equity has been an area where we have 11 Bank of New York Mellon Corp. 127,715 15.07 95,561 32,154 847,527
seen outflows,” says SSgA CEO Scott 12 Allianz Global Investors of America 114,023 14.40 7,297 106,726 791,891
Powers. Non-U.S. fixed-income assets 13 Invesco 103,000 28.84 82,640 20,360 357,200
fell only 6.9 percent, to $110.58 bil- 14 Morgan Stanley Investment Mgmt 100,295 23.99 71,938 28,357 418,131
lion, as a new management team made 15 Wellington Mgmt Co. 93,530 22.29 66,004 27,526 419,627
improvements to SSgA’s active fixed- 16 Northern Trust Global Investments 75,476 13.51 55,919 19,557 558,830
income investment processes, says Mark 17 Prudential Financial 73,079 16.24 14,049 59,030 449,857
Marinella, executive visce president and 18 ING Group 65,901 28.09 18,638 47,263 234,630
global fixed-income CIO of SSgA. 19 MassMutual Financial Group 64,088 23.54 41,235 22,853 272,201
Franklin Templeton Investments, 20 Old Mutual Asset Mgmt 63,520* 25.48 39,756 23,764 249,279
which repeats at No. 7, suffered a fall 21 Lazard Asset Mgmt 62,384 78.80 53,382 9,002 79,165

in equity assets but enjoyed an increase 22 Ameriprise Financial 60,089 31.16 30,512 29,577 192,846

in fixed-income assets outside the U.S. 23 Vanguard Group 57,533 6.76 52,656 4,877 851,341

The San Mateo, California–based firm’s 24 Sun Life Financial 53,014 35.89 45,304 7,710 147,733
25 Grantham, Mayo, Van Otterloo & Co. 52,806 61.59 48,368 4,438 85,733
total non-U.S. assets fell by 39.7 percent,
26 Dimensional Fund Advisors 47,974 43.17 38,972 9,002 111,125
to $197.84 billion, mainly reflecting
27 TIAA-CREF 44,646 12.48 26,991 17,655 357,733
lower valuations as opposed to out-
28 Brandes Investment Partners 40,684 76.84 40,684 — 52,944
flows. Its non-U.S. fixed-income assets
29 T. Rowe Price Group 39,924 14.45 32,760 7,164 276,300
rose by 17.6 percent, to $54.65 billion,
30 Artio Global Mgmt 39,581 87.56 39,581 — 45,204
boosted by strong net flows into its
31 Natixis Global Asset Mgmt 37,770 18.95 17,152 20,618 199,346
mainstay, institutional Global Fixed 32 Principal Global Investors 33,081 16.68 12,530 20,551 198,318
Income strategy. 33 Putnam Investments 32,104 30.46 18,072 14,032 105,409
Emerging markets have rebounded 34 Mondrian Investment Partners 31,271 98.56 26,118 5,153 31,729
strongly in the first half of this year, but 35 Bridgewater Associates 28,830 42.76 — 28,830 67,430
it could take some time before many 36 Arnhold and S. Bleichroeder Advisers 25,354 82.92 25,354 — 30,578
U.S. investors that bailed out of those 37 Dodge & Cox 24,746 17.28 24,746 — 143,178
markets venture back in. “The U.S. 38 California Public Employees’ 23,833 21.69 23,833 — 109,896
investor hasn’t seen anything like this Retirement System
39 Affiliated Managers Group 23,344 22.84 23,280 64 102,228
kind of decline,” says Gregory Johnson,
40 Thornburg Investment Mgmt 21,475 63.72 21,475 — 33,702
CEO of Franklin Templeton. “That’s a
41 GE Asset Mgmt 19,577 20.71 16,075 3,502 94,517
big concern: Is the trust still there?”
42 Nuveen Investments 18,630 16.42 17,743 887 113,444
Johnson is betting that it is. In Feb-
43 Northern Cross Investments 18,383 97.10 18,383 — 18,933
ruary and March this year, Franklin
44 LSV Asset Mgmt 17,605 43.60 17,605 — 40,375
opened new country offices in Malaysia
45 Artisan Partners 17,362 56.78 17,362 — 30,577
and Mexico, acquired a stake in an asset 46 Baillie Gifford Overseas 16,682 95.49 16,647 35 17,469
manager in Vietnam and increased an 47 Teacher Retirement System of Texas 16,425 28.51 12,673 3,752 57,610
existing stake in an asset management 48 BNP Paribas Investment Partners 15,896 46.68 5,432 10,464 34,056
firm in Dubai. •• 49 New York Life Investment Mgmt 15,626 9.81 5,200 10,426 159,213
Holdings

Comment? Click on the Investing 50 Silchester International Investors 15,409 100.00 15,409 — 15,409

& Trading tab at iimagazine.com. *Includes assets in consultation arrangement.

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SIDE INVESTING INEFFICIENT MARKETS ALTERNATIVES NERD ON THE STREET CONTENTS INSIDE
SO FAR, CHINA HAS PROVED
to be remarkably resilient in the
face of America’s Great Reces-
sion. Doomsayers predicted that
its economy would collapse as U.S.
imports contracted, yet it contin-
ues to expand rapidly.
Even the World Bank now expects growth
in China’s real gross domestic product this
year to be within a whisker of Beijing’s offi-
cial target of 8 percent. The Shanghai stock
market has exploded, and the country’s appe-
tite for raw materials is rekindling specula-
tive fervor for commodities. The nation’s
giant, 4 trillion yuan ($585 billion) stimulus
package is boosting car and home sales and
encouraging hopes that consumer demand
will drive future economic expansion.
Still, doubts persist. Because it is based on
rampant credit growth and fails to address
deep structural flaws in the economy, China’s
resurgence may be vulnerable to weaknesses
similar to those demonstrated by the U.S.
during the recovery that Alan Greenspan
engineered after the technology sector bust.
“The bullish group-think on China is just
as vulnerable to massive disappointment
as any other extreme of bubble nonsense
I’ve seen over the last two decades,” Albert
Edwards, a global strategist at Société
Générale, wrote in a note to clients in June.
Edwards points out that electricity output
— one of the few pieces of reliable macroeco-
nomic data to come out of the country — has
been declining. Industrial profits and exports
are also contracting sharply.
The key question surrounding China’s
future prosperity is whether the country can
wean itself from its dependence on exports
and on massive investment growth. Yash-
eng Huang, an economics professor at the
Massachusetts Institute of Technology’s
Sloan School of Management and author
of Capitalism with Chinese Characteristics,
dismisses the notion that rising domestic
consumption can offset declining exports.
During the past two decades, Beijing’s eco-
nomic policies have deliberately discouraged
small businesses in rural areas, according to
Huang. “In the 1990s foreign direct invest-
ment, national champions, massive infra-
structure developments and urban renewal
China Recovery
Doesn’t Add Up
Beijing’s stimulus plan risks
aggravating the economy’s
imbalances.
BY EDWARD CHANCELLOR
were elevated to the top of the economic
policy agenda,” he writes.
The nation’s rapid growth appears to tes-
tify to the success of Beijing’s policy. Impres-
sive new airports in Shanghai and Beijing
and the construction of numerous splendid
office buildings in both cities provide visual
confirmation of China’s arrival as an eco-
nomic superpower.
But appearances can be deceptive, notes
Huang. Much of the economy is still con-
trolled by the state. Although the investment
share of GDP has approached 50 percent in
recent years, the role of the private sector has
contracted. State-owned enterprises receive
the bulk of bank credit at the expense of small
businesses, which are forced to borrow (at
usurious rates) outside the official banking
system. Foreign investors benefit from tax
cuts that give them an advantage over indig-
enous entrepreneurs.
This policy of suppress-
ing private businesses in
favor of state-controlled
national champions and
foreign exporters has had
profound consequences.
In recent years, China’s
500 million rural work-
ers (two thirds of the total
workforce) have watched
their income share of GDP
drop below 50 percent,
whereas households in
Shanghai and other cities
have seen their pay go up,
Huang has found. Income
inequality in China has
climbed to Latin Ameri-
can levels. Education and
health services in rural
areas have been squeezed
to pay for such expensive
infrastructure projects as
Shanghai’s 300-miles-per-hour Maglev train.
In Huang’s view, Shanghai is a Potemkin
village: Vastly impressive to foreigners, its
gleaming modernity deflects attention from
the backwardness of the countryside, where
the bulk of the population lives and works.
Rural illiteracy has climbed as resources have
been diverted to urban development. Exces-
sive spending on infrastructure, combined
with restrictions on the private sector, has
contributed to a decline in China’s productiv-
ity, according to Huang.
Although GDP data point to a high Chi-
nese savings rate, Huang suggests that much
of the saving has been done by the govern-
ment, which achieved large budget surpluses
in the boom years. Household savings are
largely concentrated in the richest section
of the population. The discouragement of
small-scale businesses, poor rural income
growth and low savings among most of the
population — half of whom earn less than
$2 a day — all speak against the notion that
China can switch rapidly from an export-
and investment-driven growth model to one
based on expanding consumer demand.
BARRY FALLS
Where does the stimulus plan figure in all
this? Chinese auto sales, after all, climbed
by 9 percent in May, boosted by tax cuts.
43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

E II TICKER PEOPLE FIVE QUESTIONS DID II SAY THAT? RAINMAKERS DONE DEALS SCORECARD M

Subsidies to rural consumers have spurred the same set of policies which have pushed loans turn sour and the government is forced
sales of household appliances. Overall retail China ever deeper into the Asian develop- to bail out the banking system.
sales were up 15 percent for the same month. ment model,” a model that involves chan- This year, Beijing has shown that it can pull
However, as China watchers know only too neling subsidized capital into investment and the levers to generate rapid economic growth
well, such macro data can be misleading. export-oriented manufacturing capacity. in a fashion that Western policymakers can
Government purchases account for a sub- Bank loans, which surged by an incredible only envy. However, as Pettis points out, the
stantial part of “retail”sales.Value-added tax 15 percent in the first quarter of this year, are Chinese economy remains dependent on
receipts have diverged from sales figures, sug- largely going to state-owned enterprises to exports and the trade surplus continues to
gesting that the government has been playing boost investment. Even such sectors as ship- rise. The giant stimulus, in his view, is a mas-
a large role in generating consumption. building and steel production, which suffer sive “gamble on the duration of the global
Far from shifting China’s economic from overcapacity, are receiving fresh invest- slowdown.” Unless the worldwide economy
growth onto a new flight path, the stimulus ment capital. In a repeat of U.S. president Her- picks up shortly, Beijing may well find that all
package is exacerbating chronic industrial bert Hoover’s misbegotten policies at the onset its vast infrastructure spending has achieved
overcapacity, asserts Michael Pettis, a profes- of the Great Depression, Chinese companies is to dig the Chinese economy into an even
sor of finance at Beijing University’s Guan- are being instructed not to lay off workers. deeper hole. ••
ghua School of Management. “The massive Most of the stimulus money will be spent on
expansion of credit and investment,” Pettis infrastructure that, as Huang points out, is Edward Chancellor is the author of Devil
writes in his irreverent blog, China Financial already excessive. Pettis fears that long-term Take the Hindmost and a senior member of
Markets (mpettis.com), “is simply more of consumption growth could be suppressed if GMO’s asset allocation team.

AWARD WINNING EDITORIAL

AMERICAS EUROPE ASIA

The cost of equity trading Kevin Parker is remaking Bob Greifeld gets Nasdaq Central banker Meirelles Top analysts overcome cost Georgia’s Gurgenidze
The Wallenberg family Moscow rules: Ignoring the Central banks open the
DEC 2007/JAN 2008

keeps sinking, and so does Deutsche Asset Manage- back in the global game of maneuvers to keep Brazil’s pressures to meet their clients’ insists that the conflict with
the NYSE’s market share. ment, pushing into alterna- market consolidation with holding company enjoys credit crunch, investment money spigots in an effort inflation in check and its demands: the All-America Russia won’t delay reforms
Why investors are happy tives: Can he make money? two very different deals new prosperity by investing banks vie for talent as they to prevent the credit crisis impressive growth on track Fixed-Income Research Team or hold back the economy
like a private-equity player bid for Russian supremacy from spinning out of control

SEPTEMBER 2008 WWW.IIMAGAZINE.COM

NOVEMBER 2007 WWW.IIMAGAZINE.COM DECEMBER 2007/JANUARY 2008 WWW.IIMAGAZINE.COM
INTERNATIONAL EDITION · EUROPE

WORLD
Institutional Investor FRANCE AND LAGARDE THE POWER 75 DUBAI’S BANKING CHAMPION RUSSIA’S INVESTMENT BANKING BATTLE

ECONOMIC
FORUM
SPECIAL
REPORT
An exclusive IMF-WORLD BANK
interview SPECIAL REPORT
with France’s SOVEREIGN
Lagarde WEALTH FUNDS
The Power 75:
The movers NORWAY’S
and shapers of SLYNGSTAD
global finance TAKES AN
ACTIVIST TURN
Dubai bids
for banking BANKERS FLOCK
dominance in TO THE GULF
AND ITS RICHES
the Gulf

Inside China
Investment Corp.
In an exclusive interview,
Chairman Lou Jiwei explains how
he aims to “maximize returns”
and “be a good public citizen”
while turning China’s sovereign
fund into one of the
All’s Wells
Can new CEO John Stumpf La Belle
world’s leading investors.
PAGE 60

keep profits booming

at consumer savvy Wells Fargo despite
the mortgage crisis?
France
Finance Minister Christine Lagarde
PAGE 42 is driving ambitious reforms as part
of President Nicolas Sarkozy’s
goal to restore French confidence —
and influence in the world.
PAGE 36

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KETS INVESTING ALTERNATIVES NERD ON THE STREET CONTENTS INSIDE II TICKER PEOPLE FIV

Survivor
Benefits
A relatively prosperous hedge
fund firm picks up the remains
of a fading rival.
BY IMOGEN ROSE-SMITH
THE LATEST STAGE IN THE
slow shuttering of New York–based
D.B. Zwirn & Co. came in late
May, when its investors approved
the transfer of about $2 billion in
assets to crosstown rival Fortress
Investment Group.
It’s a move that makes sense for For-
tress in part because some of the holdings
are similar to what the publicly traded
alternative-investment firm already
owns. Had the assets gone in a fire-sale
auction, as they could have if Zwirn had
been forced into bankruptcy, they might
have fetched lower prices, driving down
the value of assets held by Fortress. For
example, both firms, according to a for-
mer Zwirn employee familiar with them, with Zwirn as early as April 2008, but it did of the very same assets in its Drawbridge
were lenders to radio-station chains Inner not make an outright bid until November. Special Opportunities funds.
City Broadcasting Corp., based in New Goldman, Sachs & Co. and Blackstone Briger said that he anticipated that the
York, and Pappas Telecasting Cos., based Group were among the other firms looking workout would take four to five years. For-
in Visalia, California. Other investments at the portfolios, according to an industry tress will need the time. Now, for example,

“
on the books of both firms, according to source. In the transfer it is very difficult to sell asset-backed loans
the former employee, include loans made that closed in late May, made to oil and gas companies. And both
through Summitbridge National Invest- Fortress paid $51 mil- Fortress and Zwirn still hold paper lent
ments, a Denver-based lender to small
companies, and Petrobridge Investment If inves- lion for what was left of
the D.B. Zwirn Special
to companies through their joint ventures
with Petrobridge, according to sources
Management, a Houston-based lender to tors Opportunities Fund. familiar with the deal.
oil and gas properties. have a Neither firm would “If investors have a choice, they do
After a run of redemptions last year, man-
choice, comment on the trans- not want to be unloading their portfolio

they do
aging partner Daniel Zwirn began closing action, but Peter Briger today,” explains Scott Johnson of GasRock
the D.B. Zwirn Special Opportunities Fund, Jr., the president of Capital, a Houston-based competitor of
which at its height — in October 2006 — had not want Fortress, told inves- Petrobridge’s.
more than $5 billion in assets. Zwirn’s main to be tors on a conference Johnson points to the recent double
strategy was direct lending to middle-market
companies, meaning his portfolio was highly
unload- call shortly after the
transfer that the firm
whammy of a drop in commodities prices
and the ongoing credit crisis: “If investors
illiquid. In the midst of the credit crisis, the ing their had acquired the assets can hold out one or two years, until a bet-
wind-down didn’t go well. port- because it “could tie all ter point in the cycle, they may well come
By November 2008, according to the folio aspects of the purchase out ahead,” he notes.
proxy proposal for the transfer of man-
agement to Fortress, “certain substantial
today. together.” Fortress had
more expertise in the
And although its assets have shrunk
considerably — to $26.5 billion today
GEORGE BATES

”
—Scott Johnson
investors had expressed a desire for chang- GasRockCapital Zwirn holdings than from $32.9 billion at the beginning of 2008
ing the manager.” did rivals, largely — Fortress is in much better shape to wait
Fortress had first looked at striking a deal because it had some around than Zwirn is. ••
 J U LY / AU G U S T 2 0 0 9
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43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

FFICIENT MARKETS ALTERNATIVES NERD ON THE STREET CONTENTS INSIDE II TICKE

Math, Machines and Wired Markets

SYNTHETIC COLLATERALIZED DEBT OBLIGATION (SCDO)

} {
UNDERWRITERS

ORIGINATOR DEFAULT INVESTORS

PAYMENT
Special
Asset 1 PRINCIPAL Senior Tranche
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Booting Up
BY DAVI D LEINWEBER (author of Nerds on Wall Street: Math, Machines and Wired Markets, John
RICHARD MEGNA

Wiley & Sons) The upper panel is a simplified schematic of a synthetic collaterized debt obligation based
on various sources who for some reason seem reluctant to have their original work further exposed. The
lower panel, taken from an actual U.S. patent for a “User -Operated Amusement Apparatus for Kicking the
User’s Buttocks” is a nonsimplified schematic of the effects of SCDOs on the world’s financial system.

FOR MORE ILLUSTRATIONS, COMMENTARY AND TO JOIN THE DISCUSSION,VISIT IIMAGAZINE.COM

 Ukraine’s consumer boom Europe’s Best CEOs stay Marfin’s Vgenopoulos
continues to attract foreign focused on the bottom line marshals elite backers in a
banks even as rising inflation to survive the credit crisis bid to create a southeast
threatens to crash the party and a weakening economy European business empire

Restoring
Munich Re
CEO Nikolaus von Bomhard
has turned the giant German reinsurer around.
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PAGE 38

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With the credit crisis and recession worries battering stocks,
top analysts keep their nerve and provide clear
insights. Introducing our 2008 All-Japan Research Team.
PAGE 116
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PAGE 34

GROUND BREAKING JOURNALISM

AWARD WINNING EDITORIAL




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President Fernández keeps
strategies and plain talk
on calling for cheaper credit
Can Banco del Sur and India’s promise continues Investor favorites: Europe’s
most shareholder-friendly
Switzerland’s private banks
look for opportunity in the
Improved straits: Taiwan’s
new president reaches out
Argentina’s banks profit
from an economic boom,
Class-action lawyers
turn up the heat on the
America’s Best CFOs:
Taking on more strategic
Where is the love? Find out
in our annual ranking of the
Bright lights, big tickets:
Homespun brokerage
Is the New York Stock
Exchange’s new manage- Can a hedge fund thrive in OMV’s bid to create an Medvedev promises to The Asian Development As Brazil’s banking market Korean shareholders unite?
Chávez challenge the to lure the world’s biggest Tokyo? Asuka Asset Manage- Austro-Hungarian energy boost spending, but Putin’s Bank focuses on the private booms, domestic leaders National Pension Corp. lays
United States — and investment banks despite companies pursue clear turmoil afflicting the country’s to China to build political but President Fernández 401(k) industry, seeking roles while tackling the most shareholder-friendly Edward Jones heads ment team getting ready
two banking behemoths and economic bridges calls for cheaper loans damages for excess costs punishing credit crunch companies in America to the city for growth to sweep the floor clean? ment bets on diversification to giant meets a nationalist heir risks upsetting Russia’s sector to narrow the region’s Itaú and Bradesco are down a marker by challeng-
Venezuela’s neighbors? recent market turmoil overcome a harsh climate backlash from MOL Group fragile economic stability yawning income gaps showing the way forward ing Hyundai and Doosan

The
Chávez
Bank of
Natixis
Goes Global
With Banco del Sur, Venezuela’s
socialist president pushes aside the
U.S. to mount a regional SPECIAL
France’s newest big bank challenge to World Bank–style REPORT
is already a European powerhouse development financing. COPING
in asset management. PAGE 42 WITH
Now CEO Pierre Servant has set his
sights on the world stage. CRISIS
PAGE 56
WALL STREET
AND REFORM
REGULATORS
RETHINK BASEL II
TOP INVESTORS
PONDER MARKET
MADNESS

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PAGE 32 backing from the region’s biggest investors, PAGE 34 Presenting the 2008 All-Europe the credit crisis from escalating.
he might just get there. Research Team. Will relief lead to meaningful reform?
PAGE 52 PAGE 37 PAGE 91

Dead Plans Waking: Why The Power 75: Our Columbia Management

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win business from reeling rivals Investors remain skeptical Hedge Fund Hall of Fame strategies and plain talk two banking behemoths world’s next Blackstone wealthy investors explodes to regain favor with investors sell-side equity research

SPECIAL REPORT:
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An exclusive
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THE II300:
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Leadingfrom
the Top AMERICAS’S BEST CEOs

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Alternatives Mr. Fix-It

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Finance Minister Christine Lagarde Martin Flanagan has turned around the tough times ahead.
PAGE 42
is driving ambitious reforms as part
of President Nicolas Sarkozy’s
Amid the gloom, America’s money managers
explore new strategies for growth. China Card
New President Ma Ying-jeou reaches out to Beijing
a battered asset management firm
by fashioning a collection of boutiques
into a single, focused company.
PAGE 50
goal to restore French confidence — PAGE 51
and influence in the world. in a bid to thaw relations and inject Chinese PAGE 32
PAGE 36 dynamism into his sluggish economy.
PAGE 58

Europe’s top CFOs combine
financial acumen and a firm
grip on operations to steer
through market turbulence
Moscow rules: Ignoring the Christine Lagarde’s push Dubai stakes a claim to Can a hedge fund thrive in OMV’s bid to create an The 2008 All-Europe Strauss-Kahn seeks a new Georgia’s Gurgenidze insists Central banker Meirelles Can Banco del Sur and Argentina’s banks benefit Natixis, the fledgling
Rebuilding Invesco: How Russia’s business leaders Munich Re’s von Bomhard Carbon credits lead University of Michigan CIO credit crunch, investment for economic reforms aids banking dominance in Tokyo? Asuka Asset Manage- Austro-Hungarian energy Research Team: The role for the IMF: helping to that the conflict with Russia maneuvers to keep Brazil’s Chávez challenge the from an economic boom, but French asset manager,
Martin Flanagan brought defy global economic woes has turned the giant reinsurer solar energy and biofuels Lundberg lifts the school’s banks vie for talent as they President Sarkozy’s drive to the Gulf with a merger to ment bets on diversification to giant meets a nationalist best analysts rise to the fight the credit squeeze and won’t stall the pace of reform inflation in check and its United States — and President Fernández keeps aims to boost alternatives
a chaotic fund group back and keep their feet on the around, but activist investors in climate-change market endowment into the top tier bid for Russian supremacy restore French confidence create Emirates NBD overcome a harsh climate backlash from MOL Group challenge of tough times warning of future crises or hold back the economy impressive growth on track Venezuela’s neighbors? on calling for cheaper credit and expand globally
to order, and profitability gas in a drive to expand are resisting his growth plan potential, traders say and looks abroad for alpha

IMF-WORLD BANK
SPECIAL REPORT
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CHINA’S LOU
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BANKERS FLOCK
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THE TWO
MASTERS AT
KOREA’S KIC

DMITRY PANKIN
ON RUSSIA’S Force for
Power
The NEW WEALTH
Change
Embracing activism,
75
Our exclusive new
CIO Yngve Slyngstad shakes
up Norway’s giant oil fund.
Will the returns justify
ranking of the most the political risks?
influential leaders PAGE 90
in global finance shows
Righting the the rise of Asian executives

Banking
like No. 4–ranked
ShipBuffeted
of State Jiang Jianqing,
chairman of the
by subprime losses,
staff turnover and client lawsuits,
Industrial and
Commercial Bank Upping on India
Banking on State Street Global Advisors
puts Old Mutual’s Scott Powers
of China.
theAnte
New Delhi’s economic emergence
has attracted a stampede of global investment
Insurance
Michael Diekmann has restored profits
at the helm.
PAGE 34
PAGE 50
Russia’s Medvedev promises to
bankers — and the recent market
turbulence isn’t slowing them down.
ramp up spending, but can Putin’s successor PAGE 66
at Germany’s Allianz. Can he unload troubled maintain economic stability?
Dresdner Bank unit and win investors’ favor? PAGE 62
PAGE 34

Arun Sarin on leadership:
Have a vision, stick to it
and ignore the naysayers,
advises Vodafone’s CEO
The Best of the Buy Side:
Demand is up for investment
analysts, and our exclusive
survey names the finest
Chile’s Codelco is riding
high, thanks to surging
copper prices, but politics
makes management tricky
Central banker Meirelles
maneuvers to keep Brazil’s
inflation in check and its
impressive growth on track
Top analysts overcome cost
pressures to meet their clients’
demands: the All-America
Fixed-Income Research Team
NYSE Euronext’s Niederauer Emilio Botín’s relentless Reports of the demise of Japan weighs the creation Emilio Botín’s old-style Fashion victim: How high Japan’s best CEOs look Oligarchs on the run! The Emilio Botín’s old-style
Georgia’s Gurgenidze says volatility and demand retail focus has Spain’s quantitative investing are
insists that the conflict with How the mighty have fallen: Jean-Claude Trichet tries Britt Harris charts a course of a sovereign wealth fund to approach to banking lets leverage has humbled to new business models and rout in Russia’s stock market approach to banking lets
for trading expertise breathe Banco Santander thriving premature, writes hedge Our Power 50 list shows how to sustain consensus at the in alternatives for the stodgy lift returns on its pension fund Banco Santander thrive, France’s Wendel and set products to drive growth slashes the wealth of many of Banco Santander thrive,
Russia won’t delay reforms new life into the exchange and expanding amid crisis fund manager Cliff Asness
or hold back the economy the credit crisis has shaken up ECB, and growth in Europe, but politically charged Teacher and vast currency reserves and expand, amid crisis off a bitter family struggle even as the economy slows the country’s top industrialists and expand, amid crisis
the global financial elite amid pressure for action Retirement System of Texas

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NORWAY’S
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MENT
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The

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’07
PAGE 56
fund into one of the The credit crisis threatens a storied French dynasty
world’s leading investors. that has survived three centuries of war,
PAGE 60 A strong balance sheet built in good revolution and nationalization.
times helped U.S. Bancorp weather Can chairman Ernest-Antoine Seillière
the worst of the credit crisis. overcome risky leverage and
Introducing our first ranking of America’s Now CEO Richard Davis and his an unprecedented family squabble?
leading investment banks, team are pushing old-fashioned PAGE 48
loan and deposit growth.
as chosen by the folks who know them best — PAGE 48
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Our last best hope
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