Here’s the link –or you can just click the tab at the top of the page.
Monthly Archives: September 2010
world financial center survey: London, New York, Hong Kong tied at the top
Z/Yen
A London-based consulting group called Z/Yen (the name is supposed to mean risk/reward) has been compiling rankings of the world’s financial centers semiannually for the past four years. The first seven lists were underwritten by the City of London, the latest by the Financial Center Authority of Qatar.
The results
The September 2010 shows a virtual dead heat for first place among global financial centers among:
–London
–New York, and
–Hong Kong.
The remainder of the top ten, in descending order, are:
–Singapore
–Tokyo
–Shanghai
–Chicago
–Zurich
–Geneva
–Sydney.
The bottom of the pile of 75 cities rated are, again in descending order:
–Athens
–Tallinn
–Reykjavik
patterns
Although the survey has been going on for only a short period of time, a number pf patterns have begun to emerge:
the steady rise of Asian centers.
— Z/Yen predicts that Singapore will soon emerge as a world co-leader with the present top three.
–Hong Kong and Shanghai have shown the most improvement from list to list
–survey participants name Shenzhen, Shanghai and Singapore as their picks for the cities with the most upward potential
tax havens losing favor
–The Cayman Islands and the Bahamas are among the havens showing the greatest falls in ranking, all all tax-favored centers are declining. Oddly, Scandinavia is the other area on the wane.
methodology
The ranking is obtained by combining the results of an internet survey of financial professionals with an analysis of “instrumental factors” selected to describe the objective working conditions in a given city.
For this list, Z/Yen obtained input from 1,876 survey participants, who made a total of 33,023 city rankings.
The instrumental factors fall into five groups: people, business environment, infrastructure, market access and general competitiveness. Specific factors include things like office rents, personal and corporate income tax rates, and indices of corruption and regulatory opacity.
quirks
All of the top names on the list—down almost to the middle, in fact—exhibit a reputational glow. That is to say, the ratings derived from the online survey questionnaire are significantly higher than those obtained from statistical analysis of the instrumental factors alone, although the rank order remains the same. My guess is this is because the survey participants rank on average just shy of twenty cities. How can they know that many?
The perennial question about internet surveys (see my posts on surveying) is that there’s no way of telling whether the respondents to the survey are characteristic of the overall group whose opinion you want to obtain. Relative to the survey results that, say, the Census Bureau, get, online surveys have to be regarded as not 100% reliable.
On particular items in the survey, one section looks at the regional breakdown of favorable and unfavorable ratings. Everyone agrees that London and New York are the top two financial centers. Europeans, however, are very skeptical of Asian financial cities. The US joins Europe in worries about Shanghai. No one likes the tax havens other than the havens themselves.
my thoughts
My guess is that the list is fairly reliable.
The rise of Hong Hong doesn’t surprise me too much, since that entrepreneurial city has constantly reinvented itself over the years. It still has an advantage over the mainland in support services for financial professionals.
I find the emergence of Singapore interesting, although that city-state has been undergoing a thorough makeover during the past decade.
An ISS voting recommendation adds 9%+ to the value of BKS: does this make sense?
My guess is that it doesn’t. But this will be an interesting case to watch.
Barnes and Noble
The management of BKS, the Riggio family, is locked in a struggle with dissident shareholders, Ron Burkle and Peter Eichler, over the strategic direction the bookseller should take. Each side controls about a third of the stock. The Burkle group has nominated three candidates to oppose management’s selections in the upcoming shareholder vote for members of the company’s board of directors at the firm’s annual meeting.
Both sides are actively campaigning for their candidates. That’s where Institutional Shareholder Services (ISS), a part of the MSCI asset management consulting conglomerate MSCI, comes in.
what does ISS do?
Each year, a publicly traded company will prepare a list of proposals that it needs a favorable vote of shareholders to implement. The list varies from company to company, and country to country, but almost always includes names of candidates for election to the firm’s board of directors. The document that contains this list is called a proxy statement. In the US, companies file the proxy statement with the SEC and send copies, along with what amounts to an absentee voting ballot, to its shareholders.
Over the past twenty years or so, government regulation has more closely defined the obligations of registered third-party investment advisers, like mutual fund or pension fund money managers, toward voting the shares of stock they hold for their clients. Current SEC rules require that investment advisers:
–vote the shares they control,
–vote in the best interests of their clients, and
–let clients know what they’re doing, and why.
This is a large legal and administrative burden for an asset management company, which may hold thousands of different stocks in its portfolios. And if a money management firm performs this task completely by itself, it risks being second-guessed or possibly sued for actions it takes. So virtually everyone hires a proxy consulting firm, both to ease the administrative burden and as insurances agains possible lawsuit.
ISS is the largest and most influential proxy advisory firm. It has been in business since 1985, about the time voting clients’ shares started to become a hot-button issue. ISS analyzes and makes voting recommendations to its clients–primarily asset management companies–on matter contained in publicly traded companies’ proxy statements. Yes, someone–more likely, a committee of investment professionals–in the asset management firm will review the proxy and cast the firm’s vote. But in addition to the proxy, he will have a detailed ISS report in his hand. As a practical matter, he/they will either follow the ISS recommendations, or extensively document the instances where the vote is in the other direction.
The bottom line: ISS has immense influence in directing the votes of institutional shareholders of stock. And for most publicly traded companies, institutions hold a majority of the shares.
the BKS case…
In the case of BKS, ISS has recommended voting for the dissident board nominees, not management’s. Hence the spike upward in BKS stock yesterday.
…is not a typical one
BKS has a market capitalization of about $1 billion. That’s tiny, but it still overstates the liquidity of the stock. In addition, the Riggio family + the dissidents own about two-thirds of the shares. That means that the “float,” that is, the shares available for ordinary trading, amounts to only about $350 million.
Average trading volume is about one million shares a day–or about $15 million worth. So an institution would figure to be able to trade at most $2-$3 million a day without making a lot of noise in the market. Even that might require very skillful trading.
In other words, BKS is too small and too illiquid for most institutions.
conclusions
My guess is that the ISS recommendation is going to have little effect on BKS voting. Institutions probably don’t own the stock, and non-institutions don’t know–or care–who ISS is.
I think retail investors hold most of the float. That’s important. Typically, retail investors are intensely loyal to the incumbent management, even in cases where this attitude seems to fly in the face of common sense and the retail investor’s own economic interest.
There is, of course, the wider issue of whether having Mr. Riggio or Mr. Burkle calling the shots will make any difference for a firm whose market is undergoing rapid structural change.
As I said at the outset, this vote should be interesting to watch.
Dividend-paying stocks: some choices are better than others
general
One basic criterion for buying a security is how that issue fits into an investor’s overall investment plan–that is, how it helps meet his goals and objectives, whether it falls within his risk tolerances, and whether he is willing to expend the time and effort needed to research and monitor the position. (This third aspect is, in my opinion, the one that investors most commonly overlook.)
Looking at dividend-paying stocks, I think the main conceptual issue is the possible tradeoff between getting the highest current income and getting the best total return. You may not be able to do both. If your primary need is to generate, say, a 4% current yield from the US stocks you hold, you can probably do that, but chances are that you’ll underperform the S&P 500.
That shouldn’t be a big deal, since your aim is to produce steady income, not generate capital gains. It only becomes one if you forget–or don’t understand in the first place–what your primary goal is.
Why should an income-oriented strategy underperform?
In theory at least, prevailing prices express the aggregate market preferences for dividend yield and potential capital appreciation. In the US at present, this preferences are for a 2% dividend yield and a forward PE of about 12 . To tilt my personal portfolio away from the market by a little bit, by trading some capital appreciation potential for extra current income, I should not have to give away much more than I receive. But as I try to trade more and more appreciation for income, other participants in the market become increasingly reluctant to accommodate me, since doing so would move them farther away from their desired portfolio mix. So I have to “sweeten” any deal by offering increasing amounts of capital appreciation to get an extra unit of dividend income. Therefore, I start to underperform.
That’s the argument, anyway.
By the way, I think in today’s market it may be possible for an income-oriented strategy may do better than one might think. Several reasons:
–I imagine the movement of investors reaching for yield by moving from one part of the fixed income market to another as being kind of like the tide coming in. First it was government bonds, then corporate debt , then junk, now gimmicky things like century bonds. The wave hasn’t hit the equity market yet. But maybe it will.
–dividend haven’t been important in the US stock market for twenty-five years. Arguably, if/when the wave hits equityland, it’s not going to be as efficient as it might be.
–as far as I can see, there isn’t very much good research information about dividend-paying stocks around.
If so, great. It would be icing on the cake—but not by itself a compelling reason to concentrate on dividend-paying stocks.
how I’m choosing
In today’s US markets:
the two-year Treasury yields 0.46%
the ten-year Treasury yields 2.7%
the thirty-year Treasury yields 3.9%
the S&P 500 yields 2%
the forward market PE is about 12, meaning an earnings yield of 8%.
a first step
Over the past thirty years, the dividend yield on the entire stock market has only been higher than the coupon on the long bond during periods of extreme market stress–and even then only for brief periods of time. March 2003 and March 2009 were the only two instances over the past decade.
We’re obviously not in that position today. But still, in a less than 4% long bond world, there’s got to be some point beyond which a high dividend yield is an indicator of potential trouble–of potential investor worry that the dividend can’t/won’t be maintained at the current level.
Let’s say that point is a 6% dividend yield–above which one must tread very carefully. As a matter of stock triage, unless you are willing to spend the time doing careful research you may want to discard these high yielders as too good to be true (although as you’ll see below, they may merely be stocks with little hope of capital appreciation).
three cases
Let’s work out three simple examples to try to distinguish among the various types of dividend-paying stocks that are available in today’s market. They are:
1. an 8% dividend yield, no earnings per share growth
2. 4% yield, 5% average annual eps growth
3. 2.5% yield, 15% annual eps growth.
We’ll take a five-year investment horizon and assume that all of the stocks pay a constant percentage of profits in dividends and that none enjoy PE expansion or suffer PE contraction. To make the arithmetic easier, let’s also say that the initial price of each issue is $100.
Stock #1: at the end of five years, the stock price remains $100. The owner has received $40 in dividends. The stock yields 8% on the $100 purchase price.
Stock #2. The fifth-year stock price is $$127.70. The owner has received $21.83 in dividends. The stock yields 5.1% on the $100 purchase price.
Stock #3. The terminal stock price is $200. The owner has collected $16.88 in dividends. The stock yields 5% on the $100 purchase price.
the differences–objectives matter
Stock #1 generates by far the most income. Even the fast-growing #3 will not be matching #1 on a current payout basis for close to another five years. #2 won’t be doing so for at least a decade.
On a total return basis, #1 and #2 are within striking distance of one another.
Stock #3 is the total return winner. It does so on the basis of its capital gain, which, in turn, rests on its ability to generate above-average growth for an extended period of time. It produces only a third of the income of #1. A #3 also takes a lot more careful monitoring.
My investment personality orients me toward #3, but then I’m content to wait five years for serious income to start to kick in. But I also own one or two #3 types, understanding that they may underperform, because of the income they produce.
risks
There are specific risks associated with every stock.
For these general sketches, it seems to me that the risk in #1 is that the company cuts the dividend, either because it can no longer afford to pay at that high level or because management decides to use the money that would otherwise be returned to shareholders in an effort (usually futile) to expand.
For #3, the risk is that the company can’t sustain a 15% growth rate for longer than a few years. As its business matures, it may turn into a #2. As it does so, its PE would likely contract. This means capital appreciation will be lower than the simple projection above anticipates.
who are they?
Do instances of these three general forms exist? Yes.
#1s are probably European banks or telecoms.
#2s are gas or electric utilities.
#3s are harder to find. They’re maybe TIF, or WMT, or maybe even INTC.
Exotic turns in the quest for yield
bond yields are paltry
The yield on the ten-year US Treasury bond is 2.74%. The yield on the thirty-year Treasury is 3.9%. The two-year note yields 0.46%. In shorter-term instruments, your capital is safeguarded but you receive basically no income.
We know that income-oriented investors, both individuals and institutions, have been forced to search for yield elsewhere. Year to date, the dollar value of new junk bond issues in the US has already surpassed the total for all of 2009–which itself was a record year for issuance. High yield bond prices have already returned to the levels of mid-2007, before the financial crisis began to take its toll on valuations. True, yield spread over Treasuries is more than 300 basis points wider today than then, but the two-year note was yielding about 4.9% during the summer three years ago (how quickly we forget!).
New issuance appears to be accelerating.
exotic alternatives
Two new, more exotic types of issue have begun to make the news recently. I don’t pretend to be an expert on bonds, but in the stock market these would be signs that the market is topping. They are:
the hundred-year bond Norfolk Southern recently issued, at a price of about 101, $250 million in 6% unsecured notes due in 2015. Yes, they’re redeemable, but at the company’s option, not the holders. No, they’re not secured by the company’s physical assets. Yes, they’re very sensitive to changes in interest rates. No, trading them won’t be easy.
the mandatory convertible General Motors is planning to issue one along with common stock in its IPO. Details of the GM mandatory haven’t been announced, but the idea is that it will initially be a preferred stock yielding, say, 5%. After some specified period of time (two years?) the security will automatically convert into being common equity according to a formula that will give holders some protection against a decline in the new GM shares, and the company some relief it its stock is very strong.
One notable feature of this mandatory is the pik (pay-in-kind) option. That is, GM can choose to pay the dividend in shares of GM stock rather than in cash.
Put another way, GM will be giving you a 10% discount for agreeing now to buy common stock around the then prevailing market price two years from now. GM wins if the stock is 10% higher then than now. And you win vs. buying the common now, if …?
bullish for stocks
To me, this all means that silly season for bond investors is in full swing. This development is ultimately bullish for stocks, I think. If investors are willing to buy these exotic instruments, can the purchase of stocks–even regarded as a funny type of bond–be far behind?