Global Mar­kets Bear and Back Again

This year be­gan with a steep drop in stocks around the world. But since Fe­bru­ary, wor­ries about China, oil prices, and global re­ces­sion have eased, and stocks have al­most re­turned to where they started 2016. +4.6% -0.6%

Bloomberg Businessweek (North America) - - Markets/Finance -

and pol­icy anal­y­sis for the Na­tional As­so­ci­a­tion of Col­lege and Univer­sity Busi­ness Of­fi­cers, which helped col­lect the data. For an en­dow­ment start­ing with $200 mil­lion, the dif­fer­ence adds up to $36 mil­lion over that time.

Ex­e­cut­ing the Yale model re­quires skill, but also re­la­tion­ships with man­agers of hedge funds and other so­called al­ter­na­tive in­vest­ments. That makes it hard for other schools to catch up. “You can’t go back 20 years and build those re­la­tion­ships,” says Karl Scheer, chief in­vest­ment of­fi­cer for the Univer­sity of Cincin­nati’s fund.

Many of the best al­ter­na­tive port­fo­lios are un­avail­able sim­ply be­cause they’re closed—not tak­ing new money. “There aren’t a thou­sand good buy­out funds,” says Erik Gor­don, a pro­fes­sor of busi­ness and law at the Univer­sity of Michi­gan. “There aren’t a thou­sand good VC funds. You have to find them, and you have to get in. The play­ing field tilts to­ward the en­dow­ments that are the big­gest and the ones that got into al­ter­na­tives early.”

It doesn’t help that hedge funds of­ten come at a high cost. On top of an­nual fees of about 2 per­cent, funds may take a share of any prof­its earned.

The in­vest­ment pol­icy at Muh­len­berg Col­lege’s $257 mil­lion en­dow­ment calls for 20 per­cent of as­sets in hedge funds. Kent Dyer, the en­dow­ment’s chief busi­ness of­fi­cer, isn’t sure whether that strat­egy has paid off. Over a decade, the en­dow­ment has earned an an­nual 5.7 per­cent, vs. 6.2 per­cent for those of sim­i­lar size. “I can re­mem­ber years back, all the fi­nance and in­vest­ment com­mit­tee dis­cus­sion be­fore dip­ping into hedge funds,” he says. “Are th­ese higher-fee ve­hi­cles do­ing us any fa­vors?” �Janet Lorin “Fo­cus Five,” which gen­er­ate the big­gest trad­ing com­mis­sions for Citi: Mil­len­nium Man­age­ment, Citadel, Sur­veyor Cap­i­tal, Point72 As­set Man­age­ment, and Carl­son Cap­i­tal, ac­cord­ing to some­one with di­rect knowl­edge of the list. Th­ese prized firms get pretty much what­ever they want from the bank, part of a move on Wall Street to pri­or­i­tize the most lu­cra­tive clients. Citi of­fers them its best ideas for trades, hours­long phone calls with its an­a­lysts, in­ti­mate soirees with ex­ec­u­tives of com­pa­nies Citi cov­ers, and cus­tom­ized trad­ing mod­els, say peo­ple with knowl­edge of the bank’s prac­tices. An­a­lysts must keep in touch with th­ese cus­tomers reg­u­larly.

In all there are fewer than 100 firms on Citi’s list, ranked by how much each con­trib­utes to the New York­based bank’s rev­enue, says the per­son fa­mil­iar with the ros­ter, who asked not to be iden­ti­fied dis­cussing in­ter­nal mat­ters. The list was win­nowed down ear­lier this year. An­a­lysts are dis­cour­aged from spend­ing time with firms that aren’t on it. A Cit­i­group spokesman says the bank doesn’t com­ment on its re­la­tion­ships with clients.

Citi’s not alone. Strug­gling for prof­its as they man­age stricter reg­u­la­tions and rock-bot­tom in­ter­est rates, in­vest­ment banks are fo­cus­ing their busi­nesses around the wealth and in­flu­ence of the world’s ul­tra­elite— call it the 1 per­cent of the 1 per­cent. Even on Wall Street, the di­vide be­tween the priv­i­leged few and ev­ery­one else is grow­ing.

One man­ager at a Wall Street firm, who de­clined to speak pub­licly for fear of reprisals, says she doesn’t even bother call­ing up top an­a­lysts at ma­jor banks. She’s come to un­der­stand that her com­pany doesn’t have the pull to get her calls re­turned, even though it man­ages bil­lions of dol­lars.

The fa­voritism isn’t lim­ited to eq­ui­ties re­search. Citi keeps lists of ac­counts across its busi­ness, ranked by as­sets or trad­ing value, says an­other per­son with knowl­edge of the bank’s prac­tices. Some fa­vored clients are iden­ti­fied by “plat­inum,” “gold,” or “sil­ver” sta­tus. The credit re­search desk has a pri­or­ity list of ma­jor fund com­pa­nies that buy bonds. In a postearn­ings con­fer­ence call in Jan­uary, Chief Ex­ec­u­tive Of­fi­cer Michael

Emerg­ing-mar­kets stocks have led the

rally The bot­tom line Col­lege en­dow­ments face low re­turns in the short run. In the long run, there re­mains a big gap be­tween haves and have-nots.

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