It turns out that as a result of surging oil profits and decreased violence in Iraq, Last year investors were pricing the debt at 7.26 percentage points higher than Treasuries. Now that yield spread is down to 4.84 percentage points. Currently, the spread is actually narrower than the higher yielding notes of KeyCorp and National City banks out of Ohio. High crude oil prices and the global credit crunch are continuing to shake-up the entire global landscape, forcing portfolio managers to reconsider nearly everything in their portfolio.
The global infrastructure play continues to receive capital investment. According to an Asian Investor article, $18 billion is being raised globally by a number of firms for investments into infrastructure funds, with India receiving the most investment. JPMorgan and Macquarie Funds Management are raising $2 billion, while private equity investor Actis is raising $1 billion. Of interest is that various India-based organizations, whether private equity or venture capital-based, are are also investing $1+ billion sums. The combination of infrastructure needs in India and throughout Asia, along with various funds looking to diversity into this growing sector, appear to be driving the need to raise and deploy capital toward infrastructure investment. Recently, new infrastructure indexes were being developed to track infrastructure companies and allow easier investment in index-based ETFs (see previous post). Counter to this trend was the recent divesting of some infrastructure assets as a result of the credit crunch (see previous post), but this action seems to be isolated to Australia for now.
Jerry Webman of Oppenheimer Funds discusses bond market pricing and value. No specific names, but mentions that some individual mortgage-backed tranches offer value if you can find securities that are tied to financial companies with strong balance sheets, or at least companies that have the ability to repair their balance sheets. You need to be a long-term holder, but at least you are getting paid to wait (hopefully).
Pimco's is working to raise money for a $5 billion fund to purchase tranches of depressed mortgage-backed debt (see London Telegraph Telegraph article and Bloomberg Bloomberg article). Pimco managers are meeting investors to gain commitments for the new fund, called the Distressed Senior Credit Opportunities Fund (already dubbed Disco). The fund will invest in senior and super-senior securities backed by commercial and residential mortgages. Of interest is that while the fund will look for securities backed by traditional home equity, credit cards, and auto loans, the focus of the fund will be more international. Given the senior nature of the debt, the fund will be less risky than some other debt funds. Subordinated debt, selling at even more distressed levels, is still raising concerns. The current move appears more opportunistic than an indication that the credit issues are behind us. As seen recently with other similar investments by John Paulson and Goldman Sachs, those with the capital can often name their price and define their terms. Just a new spin on the golden rule: "Those with the gold make the rules."
The Swiss funds-of-funds firm Gottex Fund Management is launching a new fund that will emulate the investments and strategies of some of the larger U.S. academic endowment funds, such as those at Harvard and Princeton (see the HedgeFund.net article). The new Gottex fund will also allocate around 65% of the fund to alternative investments. Why 65%? When preparing the fund, the Gottex group found that a 65% exposure to alternative investments, when combined with traditional investments, did the best over the long-term. No indication if that means risk-adjusted or not. As for the alternative investments, everything from hedge funds, private equity, long-only equity, commodities, fixed income, real estate, and other real assets will be utilized. Given the current environment, the timing could prove advantageous. As mentioned by fund manager William Landes, "For the short-term the challenging environment for alternative products like private equity and hedge funds was where the opportunities lie. If I put my investor hat on, I would say that if I have a six to nine-month tactical horizon, global equity markets and some alternative markets are actually where I want to be.” Given the move by many academic endowments towards greater exposure to real assets, commodities, private equity, and international equities, any new fund emulating the likes of the Harvard fund may offer no other choice.
There is an interesting article in the Time Online (London). Apparently, Japan's powerful yakuza organised crime syndicates are moving away from old-fashion crimes of drugs and prostitution and are increasingly launching an assault on Japan's financial markets. Studies estimate that there are already hundreds of listed companies that may have some mob connections. Using "front companies," organization have become active traders in listed Japanese shares and in some cases own large positions. Of interest in the article is the feeling that "the new activities of the nation's largest crime syndicates have effectively turned the mob into the biggest private equity firm in Japan." Things have gotten so bad that some observers believe that the problem may have gotten to the point where it is now beyond control. The problem continues to grow exponentially as the groups hire newly unemployed traders who have been laid-off as a result of the credit crunch. In fact, the current mixture between legitimate and illegal activities is making it nearly impossible to discern the difference between the funds that flow through the Japanese markets. Some organizations even operate their own stock trading floors.
All of this reminds me of the attributed quote by the famous bank robber Willie Sutton, although the story may be an urban legend. As the story goes, Sutton was ask by a report why he robbed banks. Sutton is quoted as replying: "Because that is where the money is." It should really be no surprise that criminals will search out the financial markets for profit. After all, that is where the money is.
As reported at MarketWatch, Japan is considering lowering capital gains and dividend taxes as a way to encourage savers to move funds from lower yielding investments back into the stock market. The plan would cut dividend and capital gains taxes, potentially for up to 10 years. The proposal would temporarily exempt dividend payments of up to 1 million yen ($9,100) from taxes. An earlier plan that was passed in 2003 and cut capital gains by 50% and dividends to 10% is scheduled to expire early next year. It is hoped that the move will help spur the stock market, which has languished for over a decade. Given the level of fear in the U.S. markets, cutting capital gains by 50% and reducing dividend taxes to 10% would certainly give the U.S. markets a nice jolt. Hopefully it will not take over 10 years of poor market returns to see the need and potential benefits of such a cut. Just as the U.S. is considering higher taxes, this is yet another example of how countries around the globe are looking to reduce corporate, capital gains, and dividend taxes. Hopefully we will get the message.
There is an interesting article in the Financial Times regarding the rush by some Australian infrastructure funds to divest assets. Just within the last month or so infrastructure has been receiving increased attention, some of which helped to trigger the creation of new infrastructure indexes (see previous post). Now, credit problems and the general global credit crunch are causing some infrastructure funds to look for ways to reduce their weighted average cost of capital, such as by cutting net debt, paying distributions only from operating cash flows, or even selling assets that are currently at high valuations. What a difference a month or two makes.