As the global financial landscape continues to reshape, mergers and acquisitions this year will be led by those firms seeking capital or those that have capital in hand, according to Jefferies Putnam Lovell.
While M&As were robust in the first half of 2008, they ground to a halt in the second half of the year, according to the investment bank.
"Pure-play asset managers, acting alone and in concert with private equity firms, will increasingly take advantage of this unique situation as commercial banks and insurance companies shed non-core investment businesses to raise capital," said Jefferies Putnam Lovell Managing Director Aaron Dorr. "In asset servicing, we see a wave of consolidation looming, as undercapitalized companies look to divest operations, while small- and mid-sized independents seek shelter within better capitalized partners."
Due to a lack of available cash, buyers will become more creative with M&A financing, turning to asset swaps, stock, joint ventures, private equity and complex earnout provisions. That said, buyers with cash in hand will be in a strong negotiating position and will be active acquirers.
As Jefferies Putnam Lovell put it, "Better-capitalized international institutions will be increasingly active, and cross-border deals will represent a disproportionate share of deal flow as non-U.S. buyers seek to globalize via acquisition at historically low pricing levels."
Acquisition targets will be traditional long-only asset classes, while alternative asset classes will be largely shunned. "The alternatives sector will be reshaped in 2009," the firm said, "as investors reconsider fee levels, demand more flexible capital lock-up periods and insist on greater transparency. Alternatives transactions will be driven primarily by sellers that otherwise run the risk of folding, unable to generate a profit on shrinking management fees along."
Healthcare Funds Lead Defensive Plays, Up 2.8%
Of all of the possible defensive investment choices available, healthcare funds are doing the best, up 2.8% year-to-date, The Wall Street Journal reports. Strong earnings, healthy balance sheets, steady demand and industry consolidation are fortifying the sector, which is even beating telecommunications and consumer staples.
"There aren't a lot of places where you can put money and be comfortable right now, but healthcare is one of them. It's kind of the lone world," said Dean Kartsonas, manager of the Federated Capital Appreciation Fund.
"People are hard-pressed to cut out their health expenditures," said Christopher Davis, an analyst with Morningstar.
Even consumer staples are getting hit by consumers bargain shopping, while telecommunications companies are losing market share to cable operators.
But over the trailing 12 months, healthcare mutual funds are still down, by 16.8%. Put in perspective, however, that is far better than utilities funds' 31.4% average loss and the Standard & Poor's 500 Index's 36.5% tumble. And research-intensive, capital-intensive healthcare stocks, as well as medical facilities that offer elective procedures, are not doing well, and many portfolio managers are avoiding them.
FINRA Fines Wachovia $4.5M Over Discounts
FINRA has fined two Wachovia units $4.5 million for failing to pass along breakpoint and rollover discounts for mutual fund and unit investment trust purchases, as well as for suitability violations and inadequate supervisory procedures.
As per the settlement, Wachovia has returned $2.4 million to mutual fund investors and $3 million to unit investment trust investors.
"Firms must consider all relevant factors when recommending securities," said FINRA Executive Vice President and Chief of Enforcement Susan L. Merrill. "The failure to provide available discounts or recommend a suitable share class wrongly increases costs to investors. We are pleased that through these settlements, millions of dollars are being returned to customers."
Fidelity's No-Nonsense Personal Financial Goals
Fidelity Investments continues to do a smart job of marketing in this tough economy with no-nonsense personal finance recommendations in the February edition of its Investor's Quarterly magazine.
Rather than urge investors to continue to blindly invest in equity funds, or tout the long-term performance of the stock market, the three lead stories focus on budgeting, bond funds and remaining committed to retirement savings.
Fidelity tells investors not to focus on factors that they cannot control-namely a downward spiraling stock market, weakening economic conditions and unemployment. Instead, Fidelity asks investors to focus on what they can control, namely "managing your credit, streamlining housing costs, looking for tax efficiencies and spending wisely."
Fidelity even offers ways to lower heating bills and asks investors to level with themselves about whether or not they need replacement TVs, cars or other consumer goods as frequently as they tend to gravitate to them.
One powerful example Fidelity makes is delaying purchasing a new car by one year over one's lifetime. Rather than purchasing a car every six years, but, instead, every five, and using that one year of $447 monthly payments to invest in the stock market with a hypothetical yield of 7% a year, yields an impressive $185,883 in retirement savings over 35 years, Fidelity shows. Waiting two years would net $309,655 more for retirement.
Fidelity behavioral economist Eric Gold said, "People don't like uncertainty and they tend to overreact in the process of trying to get rid of it." But taking charge of one's finances can reverse those feelings, Gold said.
Essentially, by showing people how they can do a better job of managing what Fidelity calls their "personal economy," the firm is helping its customers to feel more confident about their own budget, and potentially putting them in a better position to continue to save with Fidelity.
Thus, the next article, "Finding Balance With Bonds," is also very timely. "Some 'sunshine' investors overestimate their capacity to take on risk," Fidelity notes. "But when markets head south, investors often learn a hard lesson about how much volatility they can really handle." Thus while fixed income returns are lower than equity, they are more predictable, Fidelity notes. The primer on bonds closes with Fidelity pointing out the merits of its lineup of bond mutual funds and money market mutual funds.
Following these lines of reasoning, Fidelity's third article, "Don't Derail Your Retirement," falls very logically and more convincingly in sequence. In no uncertain terms, Fidelity urges investors not to stray from their retirement goals. "Even if the recent market volatility has you concerned about losses or tempted to cut back on your saving, in a word: Don't! Keep going!" Fidelity warns. Otherwise, you could jeopardize and seriously "damage" your own future well-being, the firm tells investors.
Exchange Funds Projected To Top $1 Trillion by 2011
Fee-based financial planners are keen on exchange-traded funds.
As investors move to fee-based financial planners, rather than those paid per transaction, those planners have become more comfortable recommending exchange-traded funds, according to Strategic Insight.
And as a result, ETF sales will grow by more than 50% over the next two years, catapulting the $725 million industry to more than $1 trillion, Strategic Insight predicts.
"ETFs are benefitting from the trend of the investment community moving into a compensation model that favors fees for advice instead of point-of-sale commissions," Loren Fox, a senior research analyst with Strategic Insight, told Reuters.
Even last year, ETFs took in $260 billion, while the mutual fund industry overall fell from $12 trillion to $9.6 trillion.
"Throughout the mutual fund industry, nearly $1 trillion in aggregate has been net invested over the past five years in asset-allocation vehicles, including target-date retirement funds, balanced funds and mutual fund wrap programs," according to the Strategic Insight report. "This shift in emphasis to asset allocation helps ETFs, as most ETFs enable straight asset allocation." In a survey of 85 registered investment advisers, the market researcher found that 24% plan to significantly increase their use of ETFs, and 49% said they would increase their weighting in customers' portfolios slightly. Another 22% said they would continue recommending the same allocation to ETFs.
Genworth Selects SPDRs For Tactical Allocation
Genworth Financial Wealth Management has selected State Street Global Advisors to run six of its tactical asset allocation portfolios using exchange-traded funds.
Geared toward high-net-worth investors, the portfolios will offer an array of risk/return strategies. Tactical asset allocation attempts to exploit short-term market inefficiencies and deviations.
"We are delighted to bring SSgA's sophisticated institutional investment management skill to the retail market through an offering that combines their strengths in asset allocation and ETFs," said Michael Abelson, senior vice president, product management, at Genworth.
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