November 28, 2020

Fundamentally: Investing Abroad May Require a Detailed Map This Year

“Many felt the euro zone would blow apart and that China and the emerging world economies would hard-land,” said James W. Paulsen, chief investment strategist at Wells Capital Management.

Yet despite widespread worries over Europe’s debt crisis and China’s rapidly slowing economy, a broad swath of foreign stocks in the developed and emerging markets delivered double-digit gains for the year.

As 2013 begins, it looks once again like a tough slog for international investors — and this time, conditions may actually make it harder to generate strong portfolio returns. For starters, investors will have to be far more selective with their foreign stocks if they hope to enjoy the type of success they did last year, money managers say.

This is partly because much low-hanging fruit has already been picked. Value-minded funds that bet that blue-chip European stocks were being unfairly punished for the region’s debt troubles earned 6.8 percent in the recently ended quarter and 16.8 percent for all of 2012. And growth-oriented funds that focus on China had impressive gains of 11.6 percent in the fourth quarter and 20.4 percent for the year.

To be sure, “the long-term story of the emerging markets — with their faster-growing economies and younger populations — has legs,” said Jason Hsu, chief investment officer at the investment consulting firm Research Affiliates. “And in Europe, stocks are still trading at historic discounts.” For instance, based on 10 years of averaged earnings, the price-to-earnings ratio for European equities was less than 16 as the new year began, versus an average of slightly more than 20 over the last decade, he said.

But the risks are clearly on the rise, fund managers say.

For instance, while valuations abroad remain generally attractive, the same cannot be said about the pricing of high-quality companies in both the developed and emerging-market worlds that fund managers most covet.

Consider emerging-market companies that sell largely to consumers in their home regions, as opposed to customers in the much slower-growing developed world. While the P/E ratio for the Morgan Stanley Capital International Emerging Markets index was only 12 at the start of the year, based on projected earnings, it was more than 25 for consumer-related stocks in that index, according to Bloomberg.

“The disparity in valuations in the emerging markets between high-quality consumer companies and the rest is much wider than in the developed world,” said Simon Hallett, chief investment officer at the asset management firm Harding Loevner.

“Investing in the emerging markets is a question of price as well as relative growth,” Mr. Hallett added. “My point is that P/E expansion in the companies we want to buy in that region has at least largely taken place.”

This explains why the Harding Loevner International Equity fund, which outpaced 70 percent of its peers over the last year, has more than half of its portfolio in Europe and just 13 percent in the developing world.

Yet there are risks in betting on European equities, other managers say.

For instance, in recent years, a popular strategy among investors with European shares has been to concentrate on multinational companies that generate the bulk of their sales in the faster-growing emerging markets. These companies are generating stronger revenue and earnings growth than European concerns that do most of their business in their recession-racked home region.

While this strategy has worked, “valuations are looking stretched among these companies,” said Harry H. Hartford, president of Causeway Capital Management and co-manager of the Causeway International Value fund, which beat 98 percent of its peers in 2012 and 92 percent over the last five years.

A good example is Diageo, the spirits maker. After surging more than 36 percent last year, shares of the company — the seller of brands like Johnnie Walker, Smirnoff and Tanqueray — traded at a frothy P/E ratio of 38 as the year began, based on projected 2013 earnings. And after gaining 19 percent in 2012, shares of the household products maker Unilever traded at a forward P/E of nearly 17, versus 15 for Procter Gamble, its United States-based rival.

The choice for investors is difficult. They may need to pay uncomfortably high prices for quality stocks or assume a different type of risk by going down the quality curve to companies with poorer balance sheets and earnings prospects.

Mr. Hartford added that investors should be aware of yet another risk, even if it seems unlikely right now. In 2012, global stocks were supported by cheap capital made available by central banks worldwide. Thus far, there’s little indication that those central banks, including the Federal Reserve in the United States, will turn off the spigot of cheap liquidity. But it could happen.

“If there is a withdrawal of that liquidity, or if we get higher interest rates in the U.S. or Europe for that matter, you’d have to be much more selective with stocks,” Mr. Hartford said.

“I don’t anticipate that happening anytime soon,” he added. Still, he said, “it is undoubtedly the case that the further we get into 2013, in the absence of another round of unanticipated economic weakness, there is a greater likelihood of interest rates rising.”

Paul J. Lim is a senior editor at Money magazine. E-mail:

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DealBook: Powerball Millions Go to 3 Asset Managers in Greenwich

Tim Davidson, second from left; Greg Skidmore, center; and Brandon Lacoff, second from right, on Monday with a ceremonial check for $254 million won in the Connecticut Powerball on Nov. 2.Connecticut Lottery, via Associated PressTim Davidson, second from left; Greg Skidmore, center; and Brandon Lacoff, second from right, on Monday with a ceremonial check for $254 million won in the Connecticut Powerball.

A lottery drama may be coming to a close.

After three Connecticut asset managers stepped forward last week to claim a $254.2 million Powerball jackpot on behalf of the Putnam Avenue Family Trust, speculation swirled that they were handling the money on behalf of a client who wished to remain anonymous.

Now, the beneficiary of the trust has been revealed as a second entity, called the Western Putnam Avenue Trust, that was also formed in connection with the lottery winnings. The three men have stated in an affidavit that they are the only beneficiaries of that trust, which will receive all the assets held by the first trust when it expires on Nov. 22, 2012, according to a copy of the Putnam Avenue Family Trust agreement reviewed by The New York Times.

On Nov. 28, Timothy C. Davidson, Brandon E. Lacoff and Gregory H. Skidmore, three executives with Belpointe Asset Management, an investment firm based in Greenwich, Conn., claimed the winning ticket in the lottery jackpot, the largest in the state’s history. The three money managers formed a trust, collecting an after-tax payment of around $104 million.

The win touched off gossip in Greenwich, a suburb that is home to many of the nation’s wealthiest investors. In the ensuing days, Mr. Davidson sent messages to friends asserting that he was not the true winner of the lottery, according to a copy of one of the messages. He claimed that Belpointe, which managed approximately $100 million, was investing the winnings for a client in exchange for a 2 percent fee.

Those messages were “an ill-advised attempt at humor,” Gary Lewi, a spokesman for Mr. Davidson and the other trustees, said on Tuesday. Mr. Davidson has since identified himself as the person who bought the winning ticket at a BP gasoline station near his home in Stamford, Conn.

The three men signed an affidavit, which was filed with the Connecticut Lottery Corporation and first reported by the Hearst Connecticut Newspapers and The Hartford Courant, that states that they are the sole “lifetime beneficiaries” of the West Putnam Avenue Trust, and that no ineligible winners are involved, according to Jason Kurland, the group’s lawyer.

Collecting lottery winnings through a trust is not uncommon. But before the affidavit was unearthed, the trust-within-a-trust structure struck some experts as vague.

The trust was drafted in a way that the ultimate beneficiary could not be ascertained, said Ronald J. Weiss, a partner at the law firm Skadden Arps specializing in trusts and estates. He is not involved in either trust.

Mr. Kurland said that his three clients were “not hiding anything,” and that the trust structure was intended for privacy and to give the trustees certain options for planning their estates.

Mr. Lewi, the trustees’ spokesman, said the trust agreement had been “reviewed by counsel, and by the state of Connecticut, and is totally consistent with standard estate planning.”

After the burst of intense media attention last week, the three asset managers announced Sunday that they would donate $1 million to five charities focused on the well-being of military veterans, including the Bob Woodruff Foundation and the Intrepid Fallen Heroes Fund.

“We are leveraging our professional experience and our collective success in money management to ensure these lottery dollars go far further than their face value,” Mr. Davidson, Mr. Lacoff and Mr. Skidmore said in a statement announcing the gifts.

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Economix: Morning Optimism

The great sell-off may be taking pause.

About two hours before the New York opening, Dow futures are up about 150 points and S.P. futures show similar gains.

In Asia today, afternoon trading raised prices and China’s market even ended up for the day. Japan, off 4.7 percent at its lunch break, ended the day having recovered two-thirds of the fall.

European indexes are lower for the day, but turned up around 4:30 a.m. New York time. The FTSE 100 in London fell below 4,800 points before it began to recover, but is now over 5,000.

What remains to be seen is whether there will actually be buyers for shares when trading opens in New York. Phil Roth, a longtime market watcher with Miller Tabak, says there is little evidence that either individual investors or traditional money managers are putting in money, so buying by hedge funds may be needed.

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DealBook: A Tangle of Details Emerge in an Insider Trading Case

Federal District Court in Lower Manhattan.Craig Ruttle/Associated PressFederal District Court in Manhattan.

6:40 p.m. | Updated

The dark side of Wall Street’s expert network industry was on full display in Federal District Court in Manhattan on Friday.

A former executive at Nvidia admitted to leaking information about the semiconductor company’s financial results as part of an insider-trading ring involving an expert network firm — consultants who connect money managers with public company employees.

Sonny Nguyen, 39, told a judge that he participated in an illegal scheme to supply Winifred Jiau, a consultant at the expert network firm Primary Global Research, and another person with secret information about Nvidia’s quarterly earnings in 2007-8. He faces up to five years in prison.

A few hours later, Sam Barai, who ran the hedge fund Barai Capital Management, pleaded guilty to trading on secret corporate information provided to him by Ms. Jiau about stocks including Nvidia. He also pleaded guilty to obstruction of justice, and faces up to 25 years in prison.

Ms. Jiau, who has pleaded not guilty to insider trading crimes, is scheduled to go on trial on June 1. Mr. Nguyen is expected to testify in the case. Mr. Barai has also been cooperating with the government.

Evan Barr, a lawyer for Mr. Barai, declined to comment. A lawyer for Mr. Nguyen did not return a request for comment.

The pipeline of illicit information about Nvidia, moving from an employee at the company to a consultant to a hedge fund manager, is illustrative of the criminal activity that the government has sought to root out at expert network firms.

The government has criminally charged 13 people connected to these firms, including Ms. Jiau, who is accused of knowingly facilitating the passing of inside information. Of the 13 charged, eight have pleaded guilty.

At a news conference earlier this year, Preet S. Bharara, the United States attorney in Manhattan who has led the government’s investigation, lambasted the expert network business.

“Given the scope of the allegations to date, we are not talking simply about the occasional corrupt individual,” said Mr. Bharara. “We are talking about something verging on a corrupt business model.”

The expert network business developed over the last decade alongside the explosive growth of hedge funds, which have used the firms to supplement traditional Wall Street research and gain an investment edge. The insider trading cases have hurt expert network firms as a number of prominent hedge fund managers have stopped using them.

Primary Global, the firm that employed Ms. Jiau, has been hit hardest by the government’s investigation. At least seven people connected to Primary Global, a California firm started by two former Intel executives, have been charged with insider trading-related crimes.

Mr. Barai, a 39-year-old former Citigroup executive, was a client of Primary Global. In February the government charged him with swapping illegal stock tips sourced by Ms. Jiau with two portfolio managers at SAC Capital, the hedge fund run by the billionaire investor Steven A. Cohen.

After reading news reports about the government’s investigation last November, Mr. Barai instructed one of his colleagues to destroy his BlackBerry Messenger communications and erase incriminating data from his laptop computer.

The two SAC managers, Noah Freeman and Donald Longueuil, have already pleaded guilty. A fourth person connected to the case, Jason Pflaum, an employee of Mr. Barai’s, also pleaded guilty.

The inquiry has reached to the top of SAC, one of the world’s most influential hedge funds and a big user of expert network firms. Federal prosecutors are examining trades in an account run by Mr. Cohen that were suggested by Mr. Freeman and Mr. Longueuil.

Neither SAC nor Mr. Cohen has been accused of any criminal wrongdoing and the firm is cooperating with the government’s investigation.

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Economix: Poker as a Game of Skill

Steve Marcus/Reuters

Is poker a game of luck or skill? That’s the question the economists Steven D. Levitt (of “Freakonomics” fame) and Thomas J. Miles explore in a new working paper published with the National Bureau of Economic Research.

Their research may interest more than the usual band of professional economists. Last month, the Justice Department indicted executives of the three leading online poker sites that allow Americans to play, charging them with a variety of crimes including bank fraud and running an illegal gambling operation. The department is seeking $3 billion in compensation. As a result, the sites stopped accepting American players, estimated to number 1.3 million to up to 15 million.

The economists contend that according to both state and federal law, “the single most important factor in determining the legality of poker is whether poker is a game of skill or a game of luck.”

To determine how important lady luck is, Mr. Levitt and Mr. Miles analyzed results from the 2010 World Series of Poker that was held in Las Vegas and computed the net loss or gain for each of the more than 32,000 players who competed for a total of $185 million in prize money.

The tournament’s entry fee ranged from $1,000 to $50,000, for which a player receives a certain amount of chips.

The pair found that the 720 players rated as highly skilled won an average of more than $1,200 each per event, or received a 30 percent return on their initial investment. All other players averaged a loss of $400 per event, 15 percent of their investment.

The differences are “far larger in magnitude than those observed in financial markets, where fees charged by the money managers viewed as being most talented can run as high as 3 percent of assets under management and 30 percent of annual returns.”

The paper is available at the bureau’s Web site. A full explanation of the federal indictments of online poker sites can be found on Nate Silver’s FiveThirtyEight blog.

Tell us whether you think poker is mostly skill or luck. And how much did you win or lose the last time you played?

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