Discretion pays for traders

Tue, Feb 12, 2013, 00:00

Stocktake:If one is going to engage in dodgy behaviour, it’s best to be discreet about it.
 

Take RBS, fined £392 million last week for manipulating Libor rates. “It’s just amazing how Libor fixing can make you that much money,” one trader boasted via email. “The jpy Libor is a cartel now,” another scoffed.

“PRETTY PLEASE,” said a Swiss franc trader asking a submitter for a higher rate, promising he would “lvoe [sic] u forever”. Another joked there “might be a steak in it for ya” if a “small drop” could be arranged.

Meanwhile, SP is now being sued for $5 billion by the US government for giving high ratings to risky mortgage bonds prior to the global financial crisis. Their case isn’t helped by revealing emails such as the oft-quoted line that a deal “could be structured by cows and we would rate it”.

Another analyst borrowed from the Talking Heads song Burning Down the House, singing: “Subprime is boi-ling o-ver/Bringing down the house.” In a follow-up email, he added: “For obvious, professional reasons please do not forward this song. If you are interested, I can sing it in your cube ;-).”

Elan looks for life after Tysabri

Elan suffered its biggest fall in more than six months following last week’s $3.25 billion sale of blockbuster drug Tysabri.

Given the old cliche about how the market hates uncertainty, one can see why. Elan will continue to receive royalties on Tysabri sales but is otherwise almost a shell company, with lots of cash but no drugs.

Chief executive Kelly Martin is on the hunt for pharmaceutical assets but he’s not alone. “There are a lot of assets to buy but very few are interesting,” a UBS analyst told Martin. “What makes you believe that you may be better than them at finding little gems?”

Elan, he added, now resembles a publicly traded private equity fund.

Martin defends his 10-year tenure but it has been a rollercoaster.

Shares rocketed from below $3 in 2003 to $30 in 2004 before collapsing back to $3 in 2005. 2008 saw a high of $37 and a low of about $5. The stock hit $9.40 last week.

The company may “reinvent itself once more”, as Davy’s Jack Gorman hopes, but Deutsche Bank’s downgrade (“uncertainty over use of the proceeds”) is equally plausible. For now, it’s all a guessing game.

Wide spread on equity returns

Equities have beaten inflation, bonds and cash in every country since 1900, the yearbook finds, but returns vary hugely.

In South Africa the real value of equities, with income reinvested, grew by a factor of 2,925. Australian figures are similar, while the US is third, returns multiplying almost a thousand-fold.

Real Austrian returns grew by only a factor of two, however. Italy (seven) France (27), Germany (30) are way below the European average (106), which is itself below the global average (249).

And Ireland? Between 1987 and 2006, Ireland enjoyed the second-highest returns of any country, before collapse ensued. Since 1900, real returns grew by a factor of 71, well below the UK (316). Annualised returns average 3.8 per cent compared with 1.2 per cent for bonds and 0.7 per cent for bills.

The yearbook can be found at investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf

Expectations of wealth from stocks ‘delusional’

Stock market returns are lower than investors believe, and future returns are likely to be below average, according to the Credit Suisse Global Investment Returns Yearbook 2013, which examines equity returns in 22 markets, including Ireland, between 1900 and 2012.

Many assume the equity risk premium – equities’ excess return over risk-free rates – to be more than 6 per cent. Globally it has been just 4.1 per cent since 1900, the yearbook finds.

Equity investors have been “lucky” since 1950, with real global returns of 6.8 per cent. Bond investors, too, have been fortunate, earning real annual returns of 6.4 per cent since 1980.

Today, however, we are living in a “low-return world” of rock-bottom interest rates. Adjust for non-repeatable factors and the equity risk premium is likely to fall to between 3 per cent and 3.5 per cent in the next 20 to 30 years.

At the yearbook’s London launch Prof Paul Marsh warned that fund management fees of between 1 per cent and 1.5 per cent are unsustainable as they will be “gobbling up half of the return”.

Yet US pension funds expect to achieve real returns of 7.6 per cent. With their proportion of equities falling to 48 per cent, they would need to achieve nominal returns of 12.5 per cent.

Projected pension returns in the UK are lower (6.1 per cent) but the implied return from equities is still “greatly above the level we deem plausible”.

“To assume that savers can confidently expect large wealth increases from investing over the long term in the stock market – in essence, that the investment conditions of the 1990s will return – is delusional,” the report warns.