Schwab Successfully Unwinding SIVs: Analysts

Charles Schwab is successfully selling off $8 billion in potentially risky structured investment vehicles (SIVs) that it held in six money market funds, according to a research report from Sanford C. Bernstein. Thus, Bernstein doesn't believe the funds will suffer any adverse effects from the subprime crisis.

Currently, Schwab's money market funds hold about 4% of their assets in SIVs, down from $115 billion, or 7%, at the end of September. And even though Schwab is rapidly selling these holdings, that should not cause investor panic or its remaining SIV holdings to fall drastically in value, Bernstein added. By the end of the year, SIV holdings in Schwab money market funds should be only 3.5%, and by the end of February, only 2%, according to Bernstein's projections, based on the SIVs' maturity dates.

"Like other large mutual fund complexes, Schwab is unlikely to ever allow its funds to drop below a dollar and would, if necessary, step in to buy the SIV commercial paper at par," said Bernstein Analyst Brad Hintz.

BoA Shuts $12B Money Fund to New Investors

Bank of America has shut the Columbia Strategic Cash Portfolio, a fund for institutional investors, to new investors due to massive losses in the past few months that were spurred by asset-backed securities, depleting its holdings to $12 billion, down from $20 billion.

BoA spokesman Jon Goldstein told the Associated Press that some of the asset-backed securities were in subprime mortgage holdings, but noted that the instruments have affected asset management firms around the globe. "The conditions have really weakened the performance across the industry, including this one," he said.

The Strategic Cash fund attempted to maintain a $1-per-share net asset value, but its prospectus didn't guarantee investors that it would, Goldstein said.

Brennan Keeps Egalitarian Traditions at Vanguard

Continuing the steady, egalitarian approach to running Vanguard that founder Jack Bogle began, current CEO Jack Brennan has kept the firm's open-door policy and attempts to keep executives with the firm for a long time by rotating them frequently to make their jobs more intriguing and by promoting from within, The Financial Times reports.

That also means that there is no executive dining room and even the top executives, Brennan included, answer phones at the call center when volume gets heavy.

And when new employees join the company, even if they're fresh out of college, Brennan tells them: "We hope this is your last job."

The approach seems to be working. The turnover at Vanguard over the past 30 years has averaged less than 7% a year, one of the lowest rates for any company in the U.S. And because Vanguard is mutually owned by its investors and run at cost, it charges some of the very lowest fees of any asset management firm, another key reason for its success.

Perhaps more impressively, Vanguard is the top-selling mutual fund company through October of this year, taking in $64 billion, bringing its total assets under management to more than $1.3 trillion.

As to Brennan's individual style, he says he prides himself on hard work and long hours, reporting to duty every morning at 6 a.m. for 13- or 14-hour days. Discipline, teamwork and a straightforward approach also figure among his priorities.

"We're a no distractions' place," Brennan said. "There's not a lot of golf that goes on at Vanguard. If you're here, you're here long hours."

And as to the practice of moving people around to very different jobs, Brennan explains: "Our former head of IT now runs our retail business. The man who runs marketing used to be our external institutional [sales]person. The man who ran Europe just came back to head internal audit. We want to round people out so they can be as effective as they can."

Brennan also said there are many advantages to remaining a privately held firm, least not of which is being able to "think about our business in a very long-term way. One quarter, one month or one year of cash-flow data doesn't mean that much to us. We've never had a growth objective. Our objective is fund performance and the quality of what we do."

Hedge Fund Boom Causing Back-Office Shortages

Nearly 70% of hedge funds are having a difficult time retaining back-office personnel, and 60% don't have enough staff, according to a survey of more than 500 chief financial officers at hedge funds with $100 million or more in assets under management, by accounting firm Rothstein Kass.

Howard Altman, co-managing principal of Rothstein Kass, said: "Firms of all sizes are struggling to retain qualified personnel, including CFOs and COOs. These problems will only be exacerbated by the industry's increasing institutional focus."

"It was clear to us from our daily interactions with clients that back-office staffing concerns are pervasive," added Todd Noah, principal in charge of Rothstein Kass Executive Search Group.

Wealthy Once Again Focus On Preservation of Capital

High-net-worth investors are most concerned with preserving their wealth in an environment of volatile credit and stock markets, a weakening dollar and the uncertainties surrounding a presidential election, according to the latest "WealthTrends" survey from the Dow Jones Wealth Management Advisory Council.

"Heading into 2008, wealth managers will be advising their clients on how to mitigate exposure to volatile markets, while at the same time finding opportunities to grow their capital," said George J. Schietinger, a director with Credit Suisse Private Banking USA and a member of the Dow Jones wealth council.

Members of the council said security has become one of their clients' foremost concerns. "In the last few months, market turbulence put high-net-worth investors on the defensive," said Patricia Bell, a wealth management adviser with Merrill Lynch.

Other members of the council are advising their clients not only to invest internationally, but to take a diversified approach to protect against regional market swings and currency fluctuations.

The main reason investors are concerned about the presidential election in the U.S. is the tax outcome, said Joseph W. Montgomery, managing director of investments at Wachovia Securities.

Confidence Ebbs Among Affluent Investors

Confidence among affluent investors and millionaires has declined markedly. The Spectrem Group's Affluent Investor Index fell five points in November to negative five, matching its second-lowest level ever, while its millionaire investor index fell 11 points to three, matching its second-largest decline since the index debuted in February 2004.

The index, which measures the investment outlook of households with $500,000 or more in investable assets, now stands a point above its all-time low of negative six, which it set in October 2005. The last time the affluent index stood at negative five, a neutral reading, was in August 2006.

The Spectrem Millionaire Investor Index's largest decline took place in March, when the index fell 14 points. The November decline returned the index to neutral terrain from mildly bullish.

"Investment optimism among the affluent and millionaires eroded significantly in November, a month that saw the stock market erase much of its 2007 gains," said George H. Walper, Jr., Spectrem's president. "With both groups expressing concern about housing and real estate, as well as energy prices, we may not see a significant turnaround in optimism anytime soon."

In response to an open-ended question about the news stories most affecting their economic outlook, affluent investors in November cited housing and real estate (25%), increasing oil and gas prices (20%), the political climate (8%), the Iraq War (7%), the economy (3%) and interest rate increases (1%).

Millionaires expressed greater concern about housing and real estate (31%) in November than the affluent, but equaled affluent concerns about rising oil and gas prices (20%).

52% of Americans Admit To Not Saving Adequately

Fifty-two percent of Americans say they aren't saving adequately, 17% aren't saving anything at all, and 79% think Americans aren't saving adequately, a survey by the Consumer Federation of America and Wachovia of 2,000 adults found. Among various demographic groups, 86% of those with a college education said they don't think Americans are saving adequately.

However, 68% said they have adequate savings for such an emergency as a car repair or dental treatment, 58% said they have enough put away to pay for household expenses for a few months, should they lose their job, and 53% said they are saving adequately for retirement. But when both short- and long-term financial needs are accounted for, only 44% said they are saving adequately.

Those who earn $75,000 or more a year are about twice as likely as those earning less than $25,000 a year to say they have saved adequately for all of the above.

Seventy-five percent of the high-income group is also the most likely to believe they can accumulate $1 million during their lifetime, whereas only 1% of those earning less than $35,000 think so and only 2% of those earning between $35,000 and $50,000 think it's a possibility.

Among the 1,000 in the survey who said they are not saving adequately or could not afford to save, 72% said that both large, regular and unexpected expenses are precluding them from doing so, followed by 66% citing their incomes, 60% consumer debt and 37% impulse spending.

Those aged 18 to 24 years old were the most likely, 62% versus 52% for all Americans, to say they are not saving adequately, with 53% of them saying they are susceptible to impulse spending, versus 37% of all Americans.

Diversified Asset Firms' Stocks Are Holding Up

The stocks of publicly traded asset management firms are varying widely, with those that are well-diversified outpacing the S&P 500, but the more specialized firms, apparently affected by the credit crisis and more susceptible to an economic slowdown, are faring worse, The Wall Street Journal reports. Those that have listed their shares on an exchange within the past year are also among the worst performers.

But over the long term, the market will favor smaller boutique firms, maintained Andrew Mitchell, an analyst with Fox-Pitt Kelton.

Due to better performance in its mutual funds and $660 million in stock buybacks through September, Janus Capital has gained investors' favor. Its stock was the best-performing among asset management firms year-to-date through November-surging a whopping 64% from $20.48 at the beginning of the year to $33.57.

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

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