Executives Protest Raising Hedge Funds' Taxes

Investment executives have stressed to Congress that its proposal to raise the taxes paid by hedge fund and private equity managers could harm the economy and financial markets, according to the Los Angeles Times.

"There is no justification" for changing the way managers are taxed," said Bruce Rosenblum, chairman of the Private Equity Council and managing director of the Carlyle Group, in testimony before the House Ways and Means Committee.

Hedge fund managers have been able to get around a loophole in the tax code, and are able to pay lower tax rates on their income. Managers typically get 20% of the profits, known as carried interest, and those are taxed at the 15% capital gains rate rather than the ordinary income rate, which can be as high as 35%.

Under a proposed House bill, the managers' profits would be taxed at the higher income rate. Senate members are considering a less abrasive move, applying only to private equity firms that go public.

A key issue in the debate is whether hiking the amounts paid by hedge funds and private equity managers would trickle down to retirees and other investors in the form of higher fees or lower returns.

Experts said that the effect would be limited. Taxing carried interest as ordinary income could push up fund costs by 0.1% to 0.2% a year, said Alan Auerbach, director of the Center for Tax Policy and Public Finance at the University of California, Berkeley, adding that firms might devise ways to avoid such taxation.

"I'm concerned that at least some of the costs would be passed on to pension fund investors, though it's hard to say how much," he said.

At one point during the meeting, Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, pressed an executive from the California Public Employees' Retirement System for a clear answer. "If you do not know what the effect will be, it sounds like it would not be very great," Baucus said.

Russell Read, chief investment officer at CalPERS, which has a growing private equity stake recently valued at $17 billion, said the answer was not yet clear. "My personal expectation is that this will be a factor. How large it will be is really difficult to know," he said.

Senate Warns of Rise in Senior Investment Fraud

Senior citizen investment fraud is on the rise, and many advisers are putting seniors in inappropriate and costly investments, according to the Los Angeles Times.

A survey by the North American Securities Administrators Association suggests that fraud against seniors has risen 44% in the last year, said Joseph Borg, the organization's president.

Massachusetts Secretary of the Commonwealth William Francis Galvin related to the Senate U.S. Special Committee on Aging that there is "a widespread pattern of purported senior specialists using sophisticated marketing tools to give senior citizens the impression that they are acting as their unbiased, knowledgeable, and independent adviser, when the real objective is to convince them to purchase a product that the specialist offers."

These so-called specialists in some cases have just filled out a five-minute online application with the National Ethics Bureau, a for-profit company that purports to certify a salesperson's ethical caliber with its "Seal of Trust," Galvin said.

The "Certified Senior Advisor" name issued by the Society of Senior Financial Advisors also is "primarily a marketing tool" that doesn't require meaningful training, Galvin said.

The society defended its training and designation in testimony to the panel but said its program didn't qualify anyone to give investment advice.

Massachusetts recently adopted a regulation that bans broker/dealers and financial advisers from using a designation that has not been accredited by a reputable national accreditation organization. No other state has such measures in place.

Shakeup at Fidelity Impairing Recruiting

With 77-year-old Fidelity Chairman and CEO Edward "Ned" Johnson remaining quiet about who is next in line to take over when he retires, industry watchers say his deafening silence is hurting the company's ability to recruit top talent, Fortune reports.

And this year's departure of a number of key executives and the hiring of a new president rather than the promotion of brokerage chief Ellyn McColgan is adding to the mystery.

In January, Steve Jonas, head of the mutual funds division, left; followed by Chief Operating Officer Bob Reynolds in April; Fidelity Retirement Services President Jeff Carney, EVP Michael Sternklar and 401(k) salesman Bill McDermott in July; and McColgan in August, a day after the arrival of new President Rodger Lawson.

"We're talking to people who we could never get out of Fidelity," said a recruiter speaking on anonymity. "Now they're desperate to get out because there's no end in sight to the inconsistency of leadership."

As one industry executive who was approached by Fidelity's search firm put it, "Why would I go there, not knowing who's in charge?"

ETFs Struggling to Get on 401(k) Platforms

For all of the talk about 401(k) plans rushing to include exchange-traded funds in their lineup, few sponsors are making the move, The Wall Street Journal reports.

Most believe they already offer funds with the attractive features of an ETF, namely low-cost equity and fixed-income index funds. In addition, they don't see the benefit of offering funds known for their tax efficiencies in qualified plans and, certainly, don't want to encourage investors to actively trade their funds or incur the brokerage commissions.

On top of this, because ETFs can be traded like stocks, it would require plan sponsors and their administrators to go to the time, trouble and expense of building trading platforms.

"We've had virtually no demand from our plan sponsors for ETFs," said Fidelity spokeswoman Jennifer Engle.

"It's an extremely large and embedded process that they're trying to crack through, [and] getting into those plans is very cumbersome," said Scott Ebner, SVP of the ETF Marketplace at the American Stock Exchange.

But that isn't stopping ETF providers from trying to land this business, which they view as offering the potential for millions, if not billions, of windfall. Thus, many are building trading platforms tailored for 401(k)s, and some are even cutting their trading commissions.

Opportunities Emerging in Value Stock Funds

Value stock mutual funds are showing some opportunities in the market, according to The Wall Street Journal.

"Adversity creates opportunity for value managers, especially long-term value managers," said Neil Eigen, a managing director at J&W Seligman.

At the beginning of this year value funds struggled during the volatility of the past few months. As the volatility continues, two value managers said they are picking through technology, retail and consumer-staples stocks.

"Whether the market's up 10% or down 10%, the game is always the same: buying companies that have equal or greater growth rates than the average company" in the Standard & Poor's 500-stock index "and that are cheaper, said Steven Neimeth, a senior vice president at AIG SunAmerica and manager of SunAmerica Value Fund. And occasionally, you can find those names," he said. "The volatility, obviously, creates opportunity."

Technology and consumer staples are two areas that stand out," Neimeth said. In technology, many of the companies are trading at price-to-earnings reactions that "we have not seen in many years," he said. For example, Microsoft is trading at a discount to the market.

Commercial-banking shares have also become cheaper, said Eigen, citing J.P. Morgan Chase as "a great bank, with great trading activity. It's very well managed, and it's depressed because of the mortgage markets," he said.

It's too early to look at the housing market, but some of the mortgage brokers, such as lender Countrywide Financial, offer value, Eigen said. Countrywide Financial was making one of six mortgages in the U.S. at its peak, and they will survive."

He does own certain brokerage stocks with some risk in these areas, but "we avoid pure plays on mortgages and credit. We own Merrill Lynch. It has the least exposure to these issues. We want to buy them, but in the most conservative of ways," Neimeth said.

Hedge Fund Business Continues to be Rewarding

The hedge fund industry continues to be a lucrative business, as compensation for all titles and jobs across the board continues to increase, according to a report, "2008 Hedge Fund Compensation."

The report, published by Glocap Search, Institutional Investor News and Lipper HedgeWorld, analyzed base salaries and bonuses of thousands of hedge fund professionals at hundreds of U.S. hedge fund firms from 2004 to 2007.

The average total compensation for investment professionals with one to four years of experience is $330,000, when working at funds with $1 billion to $3 billion in assets under management. The compensation rose 6% from last year.

For professionals with over 10 years of experience, they are expected to earn an average of $2.35 million this year, if they are working at firms with $10 billion or more in assets under management. The data tracked was a new category for the report this year.

Adam Zoia, managing partner at Glocap, noted that as hedge funds continue to attract capital at high rates and the markets become more competitive, there has been a heightened need for more qualified professionals to help invest the money, and the demand has pushed compensation higher.

Regarding bonuses this year, the report estimates that 2007 cash bonuses for investment professionals will increase anywhere from 1% to 9% over 2006 levels, which is significantly lower than what the authors of the report were predicting before the credit crunch concerns of the past few months.

Fund Filings Reveal Details of Risky Holdings

In the past few weeks, fund companies have become far more candid than ever before about their holdings, particularly those that expose their funds to subprime holdings and other risk, The Wall Street Journal reports. Along with this, they are now going to great lengths to explain losses and to detail how they have cut back risky exposure.

Evidently, fund companies are hoping that by being upfront and honest, they will allay investors' fears.

Jim Kelsoe, manager of the closed-end Regions High Income Fund, which has tumbled 30% so far this year, has laid out percentages of the fund exposed to subprime loan investments.

MFS Investment Management has let investors know that its MFS Bond Fund has 19% of its assets in mortgage-backed securities.

Whereas when the market tumbled in 2000 and 2001, fund companies were reticent to reveal losses, said Kathryn Morrison of financial public relations firm SunStar. But since then, due to the proliferation of online audio and video, companies are more inclined to join the movement with their own stories, rather than to leave it to other commentators.

Schwab Launches Website Aimed at Generation Y

Charles Schwab has launched a new website dedicated to young people in their 20s and 30s to educate them about investing. The website aims to teach how to save and invest and the importance of saving for retirement early on.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

http://www.mmexecutive.com http://www.sourcemedia.com

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.