Section 2 - FTSE

With operating income that now tops $1.3bn, up
27% on 2005, National Bank of Kuwait (NBK) is
easily the country’s largest bank and boasts the
highest rating of any bank in the Middle East. While
NBK has an extensive international network, its
strategic imperative over the immediate term is
driven more by regional considerations. The
regional investment climate remains buoyant, in
spite of no small degree of volatility in the region’s
equity markets and local consumer credit growth
remains strong. These factors have so far played to
the bank’s strengths. How long can the good times
last though and just how far can NBK go? Francesca
Carnevale reports from Kuwait City.
UNLOCKING
NBK’s
LONG TERM
GROWTH
THE CRISP AUTUMN night in Kuwait City is
illuminated by a stream of limousines heading to the
Arab Fund for Economic and Social Development
building, an architectural marvel that showcases the
growing artistic and financial sophistication of the Gulf
Cooperation Council (GCC) countries in general and of
Kuwait in particular. The limo occupants are invitees to a
special seminar, arranged by NBK on “Leveraging the GCC
Boom: A View Towards Asia,” and where the headline
speaker is no less than the ex-premier and now Minister
Mentor of Singapore, Lee Kwan Yew.
The seminar is significant for a number of reasons. The
GCC is awash with investment money looking for a profitable
home. Two, more of that money is heading eastwards rather
than its traditional route to the western economies of North
America and Europe — as much (it has to be said) for political
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
Ibrahim Dabdoub, NBK’s chief executive officer.
Photograph kindly supplied by NBK, December 2006.
COVER STORY: NBK
49

COVER STORY: NBK
50
reasons as financial ones. Three, the Singapore growth model
carries resonance in a region (or even a country) that sits bang
at the crossroads between the ‘new’economies of the east and
the ‘old’ economies of the west. Individually all the GCC
countries have aspirations to be an entrepôt for trade and
financial flows between the old world and the new.
Kuwait, like all other GCC countries is swept up in a
cultural, religious, and political maelstrom, with all the
contradictions that might suggest. Each country is rapidly
having to absorb a heady cocktail of new technology,
changing consumer tastes, new financing and investment
products (both Islamic and non-Islamic), a population
profile that is skewed towards the under 25s, a rising and
increasingly affluent middle class, and a rapidly expanding
range of opportunities in which to invest the region’s
abundant petro-dollars. Naturally, that is also counterbalanced
by a (some say transient) resurgence of traditional
politico-religious values and practices that sometimes sit
askance with the modern push and tug of change. NBK’s
story lies firmly in its
apparent ability to look
above the parapet and make
sense of the interweaving
streams in the broader
region, leveraging them to
best effect.
At the seminar, Lee Kwan
Yew, outlined what he saw as
some of the pre-requisites
that underpin sustainable
economic growth. In the
dinner table talk that
followed the seminar, it was
clear that attendees had clearly understood the significance
of the event. What was discussed was not so much Lee
Kwan Yew’s paean to western economic and political
values, but the fact that NBK was presenting such a
seminar and such a topic. The bank was clearly laying out
its credentials as a regional thought leader and positioning
itself as a natural partner for key GCC businessmen
looking to leverage Asia’s growth story. Most importantly,
NBK was clearly displaying its growing confidence.
While established international players might take that sort
of thing for granted, for a bank in the Middle East, it is a thing
of moment. Two days later, in a private interview, Ibrahim
Dabdoub, NBK’s chief executive officer hints at the extent of
the wholesale change in thinking and approach this has
required. “I once asked Jamie Dimon, JP Morgan’s chief
executive, whether size inevitably results in bureaucracy. He
said he is sure it does. It is something we took to heart and
therefore have given our people leeway to make decisions. We
have people in place now whose job is just to manage change.
Frankly, it has not been easy because we have always lived in
a command/control environment. But we are doing it —
even if sometimes we do it more slowly than we might like.”
Dabdoub has run NBK since 1983, having joined the
back in 1961. He worked up the corporate ladder, heading
“We do a lot of market
segmentation analysis and product
testing, which has helped us develop a
range of products that have a high
take up,” says Dabdoub.”
the bank’s credit operations in 1969 and then being
promoted to deputy CEO soon after. Although naturally
reticent, Dabdoub has the easy frankness of a man with a
successful track record. It’s a natural consequence of a
period of uninterrupted growth, concedes Isam Al-Sager,
NBK’s deputy chief executive officer. Even so, “The good
thing about NBK is that it is a well-diversified operation,
with most departments in the bank contributing directly to
the bottom line,”he says.
Dabdoub’s latter-day management style is collegiate, in line
with his avowed aim to decentralise decision-making.
Dabdoub has a three line strategy to ensure that it works to
best advantage. The first is “to encourage communication and
the free flow of ideas between management. Our focus is on
our people. We have a first class team and we actively foster a
collegiate approach, that encourages the discussion of
strategy. The flow of information at NBK is first class. Given
our size, it is probably much easier than it is, at a larger
operation. On Sundays, Tuesdays and Thursdays we have
informal management
session, which are
supplemented by other
meetings and the senior
management team is in
constant touch throughout
the day.”
The second is careful
market analysis, “We do a
lot of market segmentation
analysis and product
testing, which has helped
us develop a range of
products that have a high
take up,” says Dabdoub. Third, is a heavy investment
programme in staff training and the bank’s technology
infrastructure. In October, LogicaCMG secured a $27m
contract to modernise NBK’s core banking applications.
LogicaCMG will manage the replacement of NBK’s current
bank branch teller and core banking systems and build a
service orientated architecture (SOA) platform. Phase one
of the contract has already been completed with
LogicaCMG undertaking a business study which led to the
production of a transformation roadmap for the bank. “It
involved the full technical and business architecture plans
that will help us to position ourselves to leverage our
expansion strategy. It is a major transformation program
that will provide us with a platform to operate on a larger
scale, in a more open and competitive environment, and
keep in step with the evolution of banking practices and
converging technologies,”explains Dabdoub.
“Once the implementation of the plans is complete,
NBK will benefit from streamlined processes, new branch
functionality, enhancements to other bank functions
including banking operations, retail and corporate banking
and the ability to offer more flexible products, pricing and
services which can be delivered more quickly to market,”
explains Adel Abdul Wahab Al-Majed, group general
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

Adel Abdul Wahab Al-Majed, group general
manager, consumer banking. Photograph
kindly supplied by NBK, December 2006.
manager, consumer banking. “The bank will also achieve
greater efficiency and scalability through the introduction
of straight through processing and improved management
control and compliance,” adds Salah Al Fulaij, group
general manager, investment services and treasury group.
“It adds up to a significant change in the corporate culture,
so that we can handle the booming markets in which we
work and make the best of it. Things are changing so
rapidly here and the old command and control systems
cannot accommodate the requirements of today’s markets.
I am pleased with what we are achieving,”adds Dabdoub.
Dabdoub has much to be pleased about. NBK’s bottom
line is on a rising trajectory. Recently issued performance
figures for the first nine months of 2006 show the bank
enjoyed a record net profit of $657m, up 22% on
comparable year on year figures. NBK’s total assets stood
at $24.2bn at the end of September, with shareholders’
equity of $2.8bn. Return on assets and return on equity also
rose to 3.85% and 38.7% respectively, demonstrating the
bank’s robust earnings power. NBK’s earnings power has
earned it the highest credit ratings in the Middle East from
Moody’s, Standard & Poor’s and Fitch Ratings. The rating
agencies have praised the depth and stability of NBK’s
management and the clarity of the bank’s growth strategy.
This year NBK expects the net profit to hit $900m.
But there are also other considerations. The ratio of nonperforming
loans to total loans at NBK dropped to 1.4% in
2005, which rank among the lowest worldwide, with
provisions against bad loans at 224% of their value,
confirming the bank’s prudent credit culture. Most recently,
NBK embarked on a capital increase programme, at the
end of October that will see the bank’s capital increase by
10%. The subscription was sold down to shareholders
through NBK’s branches across Kuwait, with a reportedly
high demand for shares.
NBK now has the largest domestic network in Kuwait with
60 branches and one of the largest international networks
among Arab banks. It is clear that NBK is breaking out of a
confined national and GCC banking model. Although the
bank’s international growth strategy was conceived in the
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
Shaikha Khaled Al-Bahar, group general
manager, corporate banking. Photograph
kindly supplied by NBK, December 2006.
Randa Azzar, chief economist, NBK.
Photograph kindly supplied by NBK,
December 2006.
mid-1990s and it has most notably gathered pace over the
last three to four five years. During this time the bank has
made a concerted play in the GCC countries and begun to
work out into the wider Middle East and North Africa
(MENA) region and beyond that into Turkey and selected
markets in East, such as Vietnam and China (specifically
Shanghai).“Our expansion is not worldwide,”concedes Isam
Al-Sager, deputy chief executive officer,“because we have a
high level of customer focus, we are in some markets not on
a competitive basis, to win market share, but on a supporting
basis, to help our customers. Our major expansion is in the
Middle East,”he adds.
In 2004, NBK bought 20% of International Bank of Qatar
(formerly Grindlays Qatar Bank) together with full
management control. The same year, NBK opened a new
branch in Amman, Jordan, and a tenth branch in Lebanon.
The following year, NBK extended its branch network in
Kuwait and opened a representative office in China, also
kicking off operations in Iraq through the newly acquired
Credit Bank of Iraq. In May 2006, the bank opened its first
branch in Saudi Arabia.“NBK’S focus was and is to expand
in markets with strong prospects and where we can leverage
our fundamental strengths,”explains Dabdoub. NBK is now
looking to buy an Egyptian bank next year and also has its
eyes on pushing into the UAE and Turkey as well.
The turn of the century revitalised NBK. Since then, NBK
has shown it has effectively learned to leverage the dynamics
between the old and the new. Shaikha Khaled Al-Bahar,
group general manager, corporate banking explains the
synergy between the bank’s strategy and its customer focus:
“Our business is defined by our clients. Our relationship
with some of the strongest international players in the
region, which make up the bulk of our corporate banking
clients, nowadays want us to provide more creative and
complex services. Part of that is helping them list overseas,
in New York or buy real estate in the growing markets of
India and China. I’ve told our clients again and again,
because we have a comprehensive product range, we have
the strength to underwrite their transactions. It puts us on a
different plane to other banks in the region.”
51

COVER STORY: NBK
52
That depth in service
provision, according to Al-
Majed, group general manager
of consumer banking, has been
developed through NBK’s
ability and determination to
respond positively to a number
of tipping points. For one,
competition spurred the bank’s
push for growth, explains Al-
Majed. “Up to five years ago,
we were working in a protected
market. Over those same five
years competition has begun to
accelerate under the
assumption that the market is
opening up. So, NBK began to
improve its service offering,”he
explains. Expectations of the
bank are high, he concedes,
particularly in Kuwait itself,
which provides a benchmark
for its regional service offering. “A high proportion of
Kuwaitis travel and deal with international banks and
therefore have ample opportunity to benchmark service
quality. I would say we are innovative and have a head
start on most offerings in our regional market. However,
many of these services can be duplicated within a three to
six month timeframe. So we are kept on our toes.
Sustaining good service and innovative service on a
consistent basis is difficult, but I would reasonably claim
it for the bank.”
Al Fulaij explains that another tipping point was the creation
and separation of NBK Capital from the main bank. Like many
regional institutions NBK had investment banking, asset
management and treasury services firmly embedded in its
operations. It now operates as a commercial bank and has a
defined investment bank, NBK Capital. While NBK Capital
sources and manages specialist private equity funds of its own,
the bulk of the group’s asset management business is still
retained within the main bank. NBK Capital is managed as a
separate business by CEO George Nasra, who has adopted a
parallel growth strategy to
that of the main bank. It’s
latest fund, which has
garnered commitments
worth $200m to date will
focus on private equity
investments in the GCC,
Levant, Egypt and Turkey. In
September 2006, the
investment bank opened a
new office in Turkey,
appointing Ahmet
Tartaroglu as country
manager. “The move is very
much in line with the
Rebased (30 Nov 2003=100)
200
180
160
140
120
100
80
60
Nov-03
George Nasra, ceo NBK Capital. It’s latest fund, which
has garnered commitments worth $200m to date will
focus on private equity investments in the GCC, Levant,
Egypt and Turkey. Photograph kindly supplied by NBK,
December 2006.
NBK Successfully Builds on a Booming Local Market:
3 Year Performance of the National Bank of Kuwait
(Kuwait Dinar)
May-04
Nov-04
May-05
group’s ongoing expansion across
the Gulf and the Middle East,”
explains Nasra. The new Turkish
operation builds on a year in
which NBK has opened
operations in Kuwait, Beirut in
May, and in the Dubai
International Financial Centre
in February.
A third tipping point,
according to Al Fulaij, was the
reorientation of the bank’s
regional focus. “We had held
back,”admits Falajj,“intentionally
avoiding the regional markets
until we felt they offered
appropriate depth.” NBK’s
caution was perhaps well
grounded: memories of market
shakedowns in 1982 and 1997
were still strong. Dabdoub
maintains the bank is pleased
with the strong results coming from the new markets in
Qatar and Jordan “alongside our established network in
major financial centres. Our international network has long
played an important role in supporting NBK’s businesses
from treasury, trade finance and corporate banking to
private banking and wealth management.”
Dabdoub agrees that the bank has enjoyed prevailing
winds that support its growth strategy to date. “The
operating environment has, on the whole, remained very
positive for banking services, as all indicators pointed to
a continuation of momentum built in 2005, boosting
NBK’s business at all levels. Kuwait and the region
continued to enjoy solid economic growth, high business
confidence, and strong consumer spending and
investment, fuelling demand for credit. NBK’s interest
margins benefited from the rise in interest rates, and its
sound management of liabilities.”
“We leveraged our solid franchise and fundamental
strengths to capitalise on the favourable business
environment by expanding our client base in all of our
Nov-05
May-06
Nov-06
Source: FTSE Group. Data as at December 2006
markets,” agrees NBK’s
chief economist, Randa
Azzar. As a result, we
were able to generate
balanced growth across
business lines and
regions,”she adds.
Dabdoub believes the
success of the bank over
the medium term will
depend on whether NBK
continues to leverage the
opportunities on its own
doorstep and among its
nearest neighbourhood.
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
Having dashed the hopes of baldheaded men, Sharer continues to differentiate Amgen from big pharma
companies.“We are a science-based company, not a marketing-based company. Marketing is very
important, but fundamentally we are a science-based company. It is a little bit involved to make the
difference between biotech and big pharma, but for those of
us who live it, It is quite apparent.”Photograph
kindly supplied by Istockphotos.com,
December 2006.
AMGEN’S
MOLECULAR STRATEGY
Approaching middle age, biotechnology giant Amgen faces a raft of potential problems ranging
from patent infringement, and changes in the way that Medicare buys drugs, to complacency. Save
your sympathy. The firm’s revenues will rise probably 50% in only the next four years, and are
expected to rise to $21bn. Moreover, profits will follow suit. The corporate strategy: “remain
hungry, nimble and focused on serving patients,” looks likely to outmaneouvre all-comers. Art
Detman reports from California.
IT IS AFTER nine o’clock on a glorious fall morning —
warm and cloudless — at the headquarters of Amgen Inc.
in Thousand Oaks, a distant suburb northwest of Los
Angeles. A steady stream of cars pours into the company
parking lot. Employees, contractors, vendors and visitors —
they continue to arrive even though all of the thousands of
spaces in the vast lot are taken. Not to worry. A young man
directs traffic to aisles where his colleagues hand out claim
tickets. The vehicles will remain parked in the aisles until their
drivers return. At the world’s largest biotechnology company,
nestled in the coastal hills of Southern California, valet
parking has prevented a systemic collapse.
Already at his desk in one of 43 buildings in the complex
is Kevin W Sharer, an aeronautical engineer and former US
Navy officer who became chief executive officer (CEO) in
January of 2001. Since then the company has added well
over $10bn in revenues, to an expected $14.1bn or so for
2006 — an average annual compounded growth rate of
more than 25%. Net profits have kept pace, rising from
$1.1bn in 2000 to a projected $4.5bn last year. Some analysts
forecast revenues of $21bn and earnings of $7bn by 2010.“It
is kind of interesting for me to be the CEO of the largest
company of its kind in the world in a technology that did
not exist when I graduated from college,”says Sharer, who
graduated from the US Naval Academy in 1970.
Amgen will be only 27 years old in April, having been
founded in 1980 as Applied Molecular Genetics by
professors from the University of California at Los Angeles.
In company lore, the founders “just drove out here where
the houses were cheap and land was cheap and said,‘Okay,
this is it,’ The story may be apocryphal,” says Sharer,
“although I am pretty sure it is true.”
One thing for certain is that the remote Thousand Oaks
location is entirely a historical accident. Amgen’s 194 acres
there are virtually built out, and for some years the company
has been expanding elsewhere and now has operations in
CORPORATE PROFILE: AMGEN
53

CORPORATE PROFILE: AMGEN
54
nine US states and 30 countries. Like the big pharmaceutical
companies, such as Pfizer, Merck and so forth, Amgen is in
the business of creating medicines to cure or ameliorate
human illness. But Sharer is quick to point out the
differences in product, strategy and culture. “A
pharmaceutical company’s technology is basically
carbohydrate pills,” he says. “These pills are just chemical
compounds made through normal chemical processes, and
they can be swallowed and digested and have their effect.
Our products are completely structurally different. They are
large molecules and mostly they are proteins and antibodies.
Take, for example, our earliest product, for the treatment of
anemia, Epogen. This molecule comprises 165 amino acids,
which are natural substances, that are in a chain in a specific
sequence. On this chain hang some big sugar molecules.”
Because the body’s digestive system would break down
this elaborate construction, Epogen and most other biotech
medicines must be injected. What’s more, Sharer says,“the
molecule is so exquisitely matched to the biology of the
body that a change in one amino acid will almost always
render the molecule not workable and perhaps even
dangerous.” In contrast, substitution in the world of
traditional drugs is common. “You can get around the
patent by changing one of the compounds in the small
molecule,”Sharer says. “That’s why there are seven or eight
statins on the market now. Everybody’s got a statin.”
As Sharer notes with some satisfaction, in the world of
large-molecule biotech drugs, there is much less flexibility in
the ingredients and their arrangement. In terms of patent
protection,“This makes biotech a more defensible business.”
The intangible differences appear every bit as important.
What Sharers — and apparently all of Amgen’s 16,500
employees — want to avoid is becoming a “big pharma”,
which by their definition is a large, slow-moving, traditionbound
drug company focused more on marketing than
innovation.“The fact that we are 26 years old and based in
Southern California instead of being a 100-year-old-plus
company based in New Jersey means there are vast cultural
differences,”says Sharer. “I hope that we are more nimble,
that we can recognise an opportunity quicker and make a
decision faster. We certainly are not perfect by any stretch of
the imagination, but I have been told by people who came
from those companies that there is just more energy, more
enthusiasm, more speed, and more ambition here.”
Another difference, Sharer says, is Amgen’s product
focus.“We have a much different research and development
strategy. Our strategy is to develop innovative medicine for
grievous illnesses. That means we’re not going to have a
product to treat male pattern baldness; there’s a need there,
and I am sure somebody can make a lot of money from that.
However, we are going to focus on serious illnesses. I am
not saying that the pharmaceutical companies are all
chasing non-serious illnesses; they are not. They are
certainly in the cardiovascular space, the cancer space,
trying to do that too. But we are there exclusively.”
Having dashed the hopes of baldheaded men, Sharer
continues to differentiate Amgen from big pharma
companies. “We are a science-based company, not a
marketing-based company. Marketing is very important, but
fundamentally we are a science-based company. It is a little
bit involved to make the difference between biotech and big
pharma, but for those of us who live it, It is quite apparent.”
Amgen has only ten products that are both governmentapproved
and sold commercially, and five of these account for
90% or more of its sales. Amgen’s first product was Epogen,
created in 1983 when an Amgen scientist cloned the gene for
human erythropoietin — EPO, for short — and produced
recombinant EPO, later patented and named Epogen. This
became the first of Amgen’s family of billion-dollar drugs.
Later a similar protein, Aranesp, was introduced. Both
are used to support people undergoing chemotherapy for
cancer or dialysis because of chronic kidney disease. Often
in these instances the patients aren’t just a little tired, they
are virtually bedridden with exhaustion. “These drugs
restore the red blood cells,” says Sharer. “They make a
dramatic difference in the lives of dialysis patients. And
they make it possible for people with cancer to actually live
with the disease; they can get chemotherapy and still have
a quality of life.”
Together, Epogen and Aranesp sales grew about 18% in
2006, to more than $6.7bn. Neulasta and Neupogen are
both proteins that reduce the risk of chemotherapy-related
infections in cancer patients. Annual sales are about
$3.5bn. Amgen’s fifth principal product is Enbrel, a protein
used to treat rheumatoid arthritis and psoriasis. It
generates about $2.6bn annually.“Enbrel has not done as
well this year as we hoped,”Sharer admits. “This is due to
the fact that one of its markets, moderate to severe
psoriasis, has not grown much at all.”
Sharer finds this puzzling — after all, the overall
population is growing — and suspects that many psoriasis
sufferers simply don’t know about the drug. A direct-toconsumer
advertising campaign had to be pulled because
of objections from the Food and Drug Administration. The
company is now negotiating with the FDA regarding a
new series of advertisements. “It is possible that many
psoriasis patients need to be communicated to so they will
go to a doctor’s office,”says Sharer.“The kind of psoriasis
we’re talking about is not just a little something on your
elbow. It is nearly full-body coverage. Essentially, you
cannot go outside. You don’t have a life. But about threefourths
of the psoriasis patients who take Enbrel find it
just makes it disappear.”
Two new products are Sensipar, a small molecule developed
in conjunction with NPS Pharmaceuticals that is used to treat
a thyroid condition caused by chronic kidney disease, and
Vectibix, an antibody designed to shrink or eliminate
colorectal cancer tumors. While Sensipar’s potential is
relatively modest — Eric Schmidt of Cowen and Company
believes it will take more than four years before sales reach
$1bn — Vectibix holds the promise of being a blockbuster (as
drugs with multibillion annual sales are known in the
industry). Schmidt believes Vectibix will capture 60-70% of the
anti-EGFR market in colorectal cancer in three or four years
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

Kevin W Sharer, chief executive officer of Amgen. Amgen will be only 27 years old in April, having been founded in 1980 as Applied Molecular Genetics by
professors from the University of California at Los Angeles. In company lore, the founders “just drove out here where the houses were cheap and land was cheap and
said,‘Okay, this is it,’ The story may be apocryphal,”says Sharer,“although I am pretty sure it is true.”Photograph kindly supplied by Amgen December 2006.
and over time gain acceptance in all of the same markets as
the current dominant therapy, Erbitux, a product of ImClone
Systems and Bristol-Myers Squibb.Vectibix received approval
in September and since then, says Sharer,“There was a very
substantial uptake. We are doing well against Erbitux, and we
hope and expect that this will continue.”
Amgen’s next potential blockbuster is Denosumab, which
Sharer says has the potential to score big in two different
markets: postmenopausal osteoporosis and bone cancer
caused by the metastasising of other cancers. “When a
cancer metastasises,” he explains, “it often migrates to the
bone. That causes enormous pain and weakens the bone. It
is a horrendous side effect, if you will. Our early and midstage
tests give us a great deal of hope that Denosumab will
greatly reduce the tendency of cancer to migrate to the bone,
which would be a huge benefit to patients. We will know the
results of the current clinical trials in 2008. We are investing
on the order of $500m a year on this product alone.”
It is likely, then, that Amgen could have invested $1bn in
Denosumab by the time its final clinical trials are complete —
but before it is approved for general use. Just how risky this is
for drug companies was dramatically illustrated in December,
when the world’s largest pharmaceutical company, Pfizer,
abruptly halted a clinical trial of an experimental drug intended
to treat heart disease after it was discovered that it apparently
caused an increase in deaths and heart problems. What had
promised to become the world’s largest-selling drug suddenly
became a write-off of almost $1bn. On the next trading day,
investors frantically sold Pfizer shares, driving down the price
11%. In a day, more than $21bn in market value vanished.
Meanwhile, Amgen has about a dozen drugs in phase one
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
of development. Most are intended to treat cancer or cancerrelated
illness. Two are to treat pain, one is for asthma,
another for obesity, and a third for Type 2 diabetes. In
addition, five new drugs — including Denosumab — are in
phase two or phase three of development, and several
approved drugs are being tested for new applications. For
example, Aranesp, the anemia therapy, is being investigated
to treat cardiovascular disease in patients with chronic
kidney disease and Type 2 diabetes.
Last year Amgen’s research and development budget
was about $3bn, an attention-getting 22% of revenues and
perhaps the highest ratio among all large biotech and
pharma companies. Sharer expects R&D spending will
increase this year by double digits.“Our basic policy is to
spend as much as we can possibly afford,” he says. “Our
products will eventually go off patent; we have to be ready
for that. So now is the time to invest and do our best.”
Of course, even drugs with patent protection can be
challenged. Right now Amgen is battling Roche, the huge
Swiss-based company, over its CERA drug, which Sharer
says violates the patent on Epogen, which treats anemia in
patients who are on dialysis. Amgen has 100% of this
market, which it serves by selling to companies that
operate chains of dialysis treatment centers. They in turn
are allowed by Medicare a 6% markup on the average
selling price of Epogen.
Amgen won the right to sue Roche, and the trial is
expected to begin late this year.“Our plan is to beat Roche,”
Sharer says.“We are very confident in our patent position.”
Among analysts who follow Amgen — they all are MDs or
PhDs in molecular biology — opinions range widely. Michael
55

CORPORATE PROFILE: AMGEN
56
Aberman, a physician and
analyst at Credit Suisse, gives
Roche an 80% chance of
winning. Another physician,
Mark Schoenebaum of Bear,
Stearns, takes the opposite
view. “I am increasingly
comfortable with the idea that
Roche’s CERA probably
infringes Amgen’s patents,”
he says.
Cowen and Company’s Eric
Schmidt, a Ph.D., isn’t sure
either way. “This is a tough
call,” he says. “We’ve gotten
[sic] advice from a lot of legal experts, and everything
indicates this is going to be a close one. But I am not sure that
the impact of CERA coming to the US market, should Roche
get around Amgen’s patents, is of that much consequence. It
would still have to compete in the marketplace, and that is
going to be a significant hurdle for CERA. It doesn’t have any
advantages over the Amgen products, which are entrenched
and have been on the market anywhere from five to fifteen
years. That’s where CERA is going to fall short, and that is
why I think it really does not matter much to Amgen whether
or not CERA is marketed here.”
Indeed, Amgen has already locked up some major dialysis
chains with exclusive long-term contracts. And Roche can’t
tempt the others with a lower price because the government’s
reimbursement is based on a percentage of the cost. Dialysis
centers have no incentive to buy a lower-cost product. If
Schmidt’s analysis is correct, then the CERA problem is
mostly an illusion, despite the very real concerns of many on
Wall Street. Another illusionary problem may have to do with
Medicare and the new Congress, both houses of which will be
controlled by Democrats. Right now Medicare — unlike the
Department of Veterans Affairs — cannot negotiate with drug
companies over prices. Many Democrats have favored
changing this, something virtually all drug company CEOs (at
biotechs and pharmas alike) oppose.
Sharer, who is chairman of the board of the Pharmaceutical
Research and Manufacturers of America, a trade association,
is among them. “The government today gets very good
prices,”he says. “The government has essentially outsourced
the negotiation of prices to many, many private plans, and
these private plans have real bargaining leverage. When you
read the newspapers, you get the idea that under the current
system the government just pays list price and is, if you will,
a dumb buyer. That’s not remotely true. The government
pays negotiated prices that are quite aggressive.”
Since the election in November, talk about empowering
Medicare to negotiate prices has quieted down. Bear,
Stearns’Schoenebaum believes there “will be a drumbeat of
negative headlines, but the probability of any real policy
changes ahead of the 2008 presidential election is small.
Besides, Bush would veto it.”
And even if a presidential veto were overridden — after
Because the body’s digestive system
would break down this elaborate
construction, Epogen and most other
biotech medicines must be injected.
What is more, Sharer says, “the
molecule is so exquisitely matched to
the biology of the body that a change
in one amino acid will almost always
render the molecule not workable and
perhaps even dangerous.”
all, all House seats and a
third of Senate seats will
face voters in 2008 — the
outcome might be
immaterial for Amgen.
“The company’s products
are almost all unique,” says
Schmidt of Cowen. “And if
any legislation were passed,
we’d have to see if it even
pertains to biologics. All the
discussions I have seen
focus on small-molecule
pills, and that would have
not impact on Amgen.”
Ironically, then, the two concerns that seem to affect
Amgen’s stock price right now (Roche’s CERA and changes
in Medicare) could well be non-issues. While some analysts
are neutral on the stock, others — among them Schmidt,
Albert Rauch of AG Edwards and Elise Wang of Citigroup
among them — have issued buy ratings. Amgen stock has
moved up nicely since dipping below 31 in 2002, and now
trades at around 70, which gives the company a market
capitalisation of $85bn. (Like electronic high-techs, biotechs
were caught up in the bubble of 2000; Amgen’s stock topped
80, fueled by a price/earnings ratio that approached 70.)
Sharer is confident in the capacity of biotech to eventually
conquer human illnesses. “There is no disease that is
theoretically beyond the reach of biotechnology,” he says.
But he cautions against excessive optimism.”We know less
about biology than the man in the street thinks. People read
about sequencing the human genome and think that we
must know all about human biology. The human genome
is a wonderful advance, but it is just a parts list for the body.
The secret is how those parts interact and how they go
wrong. The goal of biotechnology is to understand the
fundamental biology and then develop products that can
interact with the biology in safe and effective ways.”
In conquering diseases such as cancer, ALS, diabetes and
Alzheimer’s disease, patience is a required virtue. “Fifty
years is only two and one-half product development
cycles,”Sharer notes.“That’s frustrating, but that is the way
science is. I think we will get there, but it is going to take
a while.”
Sharer expects that, on this long road to overcoming
human disease, Amgen will remain at the forefront
provided it remains true to its basic principles. “We’re
proud of our success and enthusiastic about the future,”he
says.“But any successful enterprise contains, at the time of
its success, the seeds of its potential future troubles.
Nobody is immune from that, and there’s no silver bullet
answer to avoid it. But the first thing to do is recognise that
the possibility exists, and be alert to that potential.”As he
told shareholders in last year’s annual report: “We are
absolutely determined to avoid the pitfalls of growth and
success and remain hungry, nimble and focused on serving
patients. Our best is yet to come.”
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

TRANSITION MANAGEMENT
Roundtable
THE FUTURE OF GERMAN
TRANSITION MANAGEMENT
ATTENDING
Left to right back row:
ED PENNINGS, managing director, head of sales and client relations, State Street Transition Management
HOLGER KNAUER, manager, Universal Investment
PETER DOMBECK, director, manager selection, Feri Institutional Advisors
GARY SPREADBURY, vice president, transition management, Morgan Stanley
Left to right front row:
CHRISTOPH KESY, portfolio management, E.ON Energie AG
ALEXANDRA THIELE, senior manager, master kags, ACTIVEST [Now PIONEER INVESTMENTS]
KARIN RUSSELL-WIEDERKEHR, director, transition management, germany, Credit Suisse
FRANCESCA CARNEVALE, editor, FTSE Global Markets
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
Supported by:
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TRANSITION MANAGEMENT ROUNDTABLE
58
NEW BUSINESS, NEW CHALLENGES
FRANCESCA CARNEVALE, EDITOR, FTSE GLOBAL
MARKETS: Ed, can you start please and describe the key
opportunities and drivers for growth in transition
management in Germany?
ED PENNINGS, MANAGING DIRECTOR, HEAD OF SALES
AND CLIENT RELATIONS, STATE STREET TRANSITION
MANAGEMENT: There have been a number of
developments: companies are funding their pension funds,
funding their liabilities and this trend continues. The
Kapitalanlagegesellschaften (KAG) investment law has
changed which has been an incredible business driver and
made things a lot simpler. It has been good for transition
management and good for investors as well. Also, there is a
greater awareness of transition management and that is
helping all of us.
HOLGER KNAUER, DEPUTY HEAD OF INSTITUTIONAL
SALES AND RELATIONSHIP MANAGEMENT, UNIVERSAL
INVESTMENT: I would add that beneficial owners are likely
to change their asset manager faster these days. They no
longer have the patience to accept poor investment results
and therefore they change managers more frequently. In
turn, that is providing more transition opportunities.
GARY SPREADBURY, VICE PRESIDENT, TRANSITION
MANAGEMENT, MORGAN STANLEY: A lot of that growth
has come from increased awareness and a greater
understanding of how the transition manager can help.
There are definitely instances where a transition manager
does not necessarily add value and it is being able to work
out whether he can pick value out of the process or not.
What you highlighted Holger, is right. There is absolutely
no reason today why a fund should have any exposure to
underperforming managers any longer than is necessary.
You should use the transition process to make that change
quickly and in a structured and efficient fashion.
PETER DOMBECK, DIRECTOR, MANAGER SELECTION,
FERI INSTITUTIONAL ADVISORS: Nowadays you find
yourself dealing with more complex and complicated asset
classes and more core-satellite fund structures. People are
aware that you need more transition specialists, particularly
if you are moving from one or two managers to three, four,
or five different managers with very specialised investment
approaches. Beneficial owners recognise that you need
someone who can handle complex transitions, is
experienced and who will make the shortfall of your
performance as small as possible.
KARIN RUSSELL-WIEDERKEHR, DIRECTOR,
TRANSITION MANAGEMENT, GERMANY, CREDIT
SUISSE: I agree. Transitions have become more complex
and it is vital to have someone specialised for the job. In
the German market some of the peculiarities are regulatory
in nature; others are operationally driven due to the
existence of KAGs. It starts with the regulatory counterpart
for a transition being the KAG and not the beneficial
owner, which is very different from other markets.
Additionally, each KAG has its own operational models
and different levels of technology. Other complexities
unique to Germany include the handling of withholding
tax claims, capital gains and book value transfers, which
can be challenging but are extremely important.
CHRISTOPH KESY, PORTFOLIO MANAGEMENT, E.ON
ENERGIE AG: The typical German relationship banking
model broke apart—at least this is the case for many
companies. Investors are more knowledgeable these days
and performance more transparent, particularly as the
market has moved from balanced portfolios to core-satellite
structures and from a multiple KAG structure to the
centralised Master-KAG. Now we have liability driven or
alternative investment approaches, and a much higher rate
of portfolio turnover than in the past. Investors nowadays
also accept transactions costs as an important performance
factor of the overall portfolio. Following on from that, they
want assistance from a decent transition manager.
KARIN: Transition services and its benefits are well
understood in Germany. Wherever we go consultants
have already primed clients about when or when not to
use a transition manager. Not every restructure requires
the support of a specialist transition manager. Do you
agree Peter?
PETER: I agree with Karin that it is not always the case
that a transition is suitable—particularly when there are
only small changes in a portfolio that can be easily moved
out. However, in complex asset restructurings, you get a
much better result if you have a suitable transition
manager. Consultants are an important influence in this
regard, definitely.
HOLGER: There is another important consideration. While
investors and KAGs are happy to work together with a
range of transition managers, if we have a big restructuring,
involving various asset managers, we are now happy to
have just one transition manager who is in control of the
entire project. It means somebody is taking care that the
whole process is carefully controlled, and we are reassured
that the wishes of the investor are met. In these instances,
we are also assured that execution is in the precise format
we need and therefore we can take care that any new
managers are able to start their mandate by a due date.
Moreover, we know precisely when we can begin to
measure the performance of a new manager and there are
no excuses about late starting periods and costs associated
with the starting period.
PETER: Yes, investors are very keen on this. It has also been
an educative process for consultants, if you like, as well.
There shouldn’t be any black holes or any reasons at the
outset for missing performance targets.
CHOOSING TRANSITION MANAGERS
FRANCESCA: Looking around this table, none of the
transition managers is German. How do you know that
these transition managers can deliver for you? Do they
know your market well enough? Does it matter that none
are German?
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

CHRISTOPH: We feel comfortable to have someone in a
transition management team that has a good knowledge of
the German markets, of the master KAGs and local custody
structure. We think it is very important. Project
management competences are also key.
GARY: The KAG question is interesting. With the
consolidation of the market, and the master-KAGs coming
into play, people are reducing the number of KAGs they are
using. Subsequently, we have found that the transition
manager has had to deliver an awful lot of value
coordinating KAGs. It is all very well the legal entity being
one KAG here and one KAG over there, but if they are not
talking to each other, then you will encounter serious
issues. Unquestionably, the possibility and potential for
the transition manager to project manage that whole
space, is significant and you cannot really undervalue the
importance of it. Even though a fund may know that there
will not be a complete restructuring, or a series of fund
manager changes, changing the KAG structure can be a
risky process if it is not handled properly.
ED: The trend towards outsourcing, rather than advisory
agreements, which used to be more prevalent in the past,
also gives a lot more freedom and responsibility to the
transition manager. It is a role that is, in fact,
complimentary to what the KAG does. It acts as a sort of
fiduciary role for the underlying investor and the work that
the transition manager does fits very well into that space. I
want to build on Christoph’s point. I would not want to say
that relationship banking is falling apart, but it certainly is
crumbling and you see a trend towards a model of best of
breed service providers. For transition managers to be
successful in this environment they have to have
experience of the German model.
GARY: It’s interesting that you talk about experience within
transition managers. There is a core skill set within perhaps
three or four houses, that have a unique understanding of
the German investment industry and that are not
necessarily working for domestic providers. The global
provision of transition management in Germany does give
you a very good illustration of why and who has the inhouse
expertise.
FRANCESCA: Alexandra, does that give you comfort?
ALEXANDRA THIELE, SENIOR MANAGER, MASTER
KAGs, ACTIVEST [NOW PIONEER INVESTMENTS]:
Obviously, it is important that a transition manager has the
right experience, but I also think it is important that the
KAGs are good at their work. It is vital for the KAG to ask
the right questions, thereby avoiding problems in the later
stages of a transition. Although we all speak English, it is
easier sometimes if you can explain your concerns in your
own language. So, a knowledge of the German language,
direct experience of the market; someone who knows what
kind of issues or problems they will face in transition in the
German market and who you can speak to directly is vital.
KARIN: Language skills are particularly important when
you are transitioning for local authorities and domestic
Vorsorgeeinrichtungen. I speak from experience. When I
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
ED PENNINGS, managing director, head of sales and client relations,
State Street Transition Management
have to deal in unfamiliar territory, I prefer to speak in my
mother tongue and that has proven to be important for
German clients too. It does not matter where a transition
manager is located, where the person sits, or whether the
person works for an American international financial
conglomerate or a German institution. It is really down to
the individual’s skills.
CHRISTOPH: As an investor, we look for operational
excellence when we undertake our transition manager
selection. It is not important where the effective trading is
done, if it is done in London or Frankfurt or elsewhere. It is
absolutely crucial to the process to have one relationship
person as a link, who knows everyone’s roles in detail.
More often than not, it turns out to be the key factor in a
transition. Fluent German is absolutely crucial to exploit
the German market opportunities for a transition manager.
BUYSIDE/SELLSIDE/AGENCY/PRINCIPAL?
FRANCESCA: It cannot be that I turn up, speak German,
communicate well and know the German market and that
means I win business. There has to be more. Is a transition
manager’s project management ability, trading ability, or
capability in fixed income, for instance, a factor as well?
CHRISTOPH: It is a mixture of many factors. As I mentioned
before we look for operational excellence. Each large
transition has its moments where afterwards you say, we
were really lucky to complete the transition successfully, due
to technical restrictions, the breakdown of SWIFT
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TRANSITION MANAGEMENT ROUNDTABLE
60
communication, or other operational events. To avoid bad
surprises you need a clear definition of responsibilities – a
transition manager must be willing to take full responsibility
for the process and define up front its responsibilities vis à vie
the KAG, the custodian, and of course, the customer. I also
think that transition management is moving from being pure
execution business, doing a series of trades over a minimised
period of days, to more of an advisory business. This involves
the terms of risk management, exposure risk management,
managing the trade-off between potential opportunity cost
and market impact; coming up with hedging proposals,
showing the cost of a hedge, so
that you can weigh the trade off
between risk taking and the cost
of the hedge.Then of course, the
basis of the service has to be
excellent execution capabilities
and access to sufficient liquidity
sources in the markets. Last but
not least, two final points:
quality people and transparency,
transparency, transparency.
HOLGER: What is important
for the KAG is proper
execution. If you have a good
broker who is failing one, two
or three trades or they were not
communicated in the approved
format, you can do it manually.
However, think, if you get 500
or 1000 trades and they do not
fit in your system, you will not
be able to get the transition
finished by the agreed date.You
also have to think of the
additional risk of failed trades
and claims. This really could
hurt you. Operational strengths are important. Operational
strengths must also encompass the ability to create a
process that brings together all parties in an effective way,
even with the various custodians that are also involved.
FRANCESCA: Have you ever had a failed transition, or where
your transition manager hasn’t delivered to your satisfaction?
HOLGER: In the past, we have had to expand a transition
period as some of the trades were not executed or not all
the trades had been settled in time. The investor was
exposed to the risk that their portfolios were not really
managed for that period by the target manager.
FRANCESCA: At the tail end of a transition, you can be left
with some very difficult assets that you somehow you have
to trade away. Do you give undertakings to your clients that
you will complete a transition, whatever it takes?
GARY: It can be an unnecessary conversation to have
right at the start of a process. To say that by day three, for
example, we will be able to complete on this whole
portfolio without consideration being given during the
actual implementation is rather cavalier in approach.
Certainly you have to be able to identify the parts of the
portfolio that are going to take longer to trade and
whether you are going to treat them differently, and
whether you need to look at alternative strategies for
exiting them. You also have to find out whether the
customer is prepared to pay a premium or a discount to
complete that portion of the portfolio. A fund has to be
aware of the options available and the transition
manager must offer all the options that make sense when
dealing with a broad mix of assets: be it fixed income,
equity, or even how you interact with the FX part of the
process and provide options
perhaps to ensure that the
client’s assets are moving
across in a systematic and
structured fashion and avoid
unnecessary cost.
KARIN: Most transition
managers have tools that
enable them to identify
potential problems, not only on
the trading side, but
operationally as well. Before
the implementation of a
transition we conduct detailed
pre-transition analysis. We have
sophisticated systems that help
us identify liquidity constraints
or any difficult securities to
trade, which could affect the
cost of the restructure. This
technology enables us to define
the right trading strategy for
each of the asset classes. They
also help us in working out any
HOLGER KNAUER, manager, Universal Investment
potential hedging requirements
to reduce costs. Our tools and
our analysis form part of our transition management
agreement. Furthermore, during the implementation of a
transition we now have smart trading systems that help us
control and minimise costs and risks. We work with
algorithms, such as Portfolio Hedging Device (PHD), that
help us trade in a smart way.
ED: You should be aware of illiquid tails in the planning
stage. It can take a little bit longer, but at least, you can
make appropriate arrangements. If you do start making
undertakings, it is a very slippery slope. As soon as you
start giving undertakings, guaranteeing any sort of
benchmark or timeframe the conflicts of interest grow
significantly. As long as there is communication and you
plan it properly, everyone should be able to trade these
stocks and everyone should be able to access multiple
liquidity sources. It could be through crossing, agency
trading, arranged principal bids, or alternative trading
strategies, using hedging strategies to get you exposure to
the desired asset class, which allows you to take a little bit
longer to get out of the underlying position.
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

EXPLICIT VERSUS IMPLICIT COSTS
FRANCESCA: When you choose a transition manager, how
much is cost on your mind?
GARY: Just so that we are clear, explicit costs?
FRANCESCA: Explicit costs
PETER: Cost is a factor, for sure, because explicit costs are
easier to compare. Definitely it should not be the sole factor
in deciding on a transition manager. If you then talk to the
client and explain the significance of the implicit costs, such
as the costs of worst execution or perhaps the cost of failed
project management, then everybody will agree that explicit
costs are significant, but not the only decisive factor.
KARIN: We encourage potential users of transition
management services to look at the people and the
experience that they have in project management and the
types of assets they are looking to restructure. Furthermore,
it is important to look at global market access, technology
and language skills. Most of all, when you are selecting a
transition manager, it is important to go and visit the
operation, meet the people that are dealing with your
project and experience the systems they will employ.
PETER: It is not important whether you are number one in
the league tables, number five can probably be as good as
number one in most cases if you don’t have a really large
major transition. I agree with Karin, that soft skills are as
important as hard skills. Moreover, transparency as we first
GARY SPREADBURY, vice president, transition management,
Morgan Stanley
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
noted. That is absolutely key for us.
GARY: You have to be able to understand what that explicit
cost represents. Providers who offer their services for zero or
even enhancing exits are not necessarily being transparent
and clear on how they are being paid for the process. Our
approach is to be transparent from the start: i.e. this is how
much it is going to cost you; this is what you are paying for.
The fund can then begin to start looking at other parts of the
equation: the implicit costs, then very clear comparisons
between one provider and another can start to be formulated.
CHRISTOPH: When you do a portfolio trade, say €200m of a
European large cap equity portfolio, brokers offer you zero
commission for a bloc trade, with a guaranteed market close.
That is zero explicit cost, but is it a bad benchmark? Yes, a
terribly bad benchmark, because first the broker can influence
the benchmark and secondly, the impact of what is going to
happen in the market in a closed auction is going to outweigh
your explicit costs by a multiple. Therefore implementation
shortfall is a good benchmark, because it is the only one which
the manager, or the broker, cannot influence. Even so,
implementation shortfall is not sufficient, because there is a
component that is not covered: risk. Implementation shortfall
is only a target. At the end of a transition we all hope for a
good total result. But is it the consequence of high risk taking
and luck? Or, is it the desired result of a proper shaping of the
implementation shortfall distribution up front? That is what
you want to see in the process.
ED: Christoph mentioned luck. This is where it comes down
to looking at the experience and track record of the manager.
What did the transition manager say to the client in terms of
estimating implementation shortfall cost and what did he
actually deliver? Clients are more sophisticated and now ask
for correlation numbers between pre-trade estimates and
actual post-trade results.This is actually a very useful measure
to include when analysing transition managers. Furthermore,
any sort of guarantee of a benchmark implies a principal
trading strategy. I am not saying that there is anything wrong
with principal trading, because I don’t think there is. However,
when it combines with a transition management mandate, it
does present serious problems. Christoph is right to ask, how
do we measure the right benchmark? It is all about how you
use the benchmark. Do you trade before it is set, do you trade
into it, or do you actually use it as a clean, un-conflicted
reference point to measure yourself, after the benchmark is
set? Nevertheless, there are explicit costs, implicit costs and
hidden costs, and clients should ask more questions about
them. Any benchmark guarantee implies a hidden cost,
because after all nobody does this as a charity.
HOLGER: You are right. However, in practice in the past, if
investors were choosing a transition manager for the first
time, the focus was entirely on costs. Once the transition
manager provides a full breakdown of the costs in a transition,
then the investor begins to understand (sometimes for the
first time) the various factors that combined to make up the
costs and the benefit and/or the losses of the transition. It is a
process of education and to be fair, transition managers have
also spent time educating clients. Of course we also take up
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TRANSITION MANAGEMENT ROUNDTABLE
62
PETER DOMBECK, director, manager selection, Feri Institutional Advisors
these points and warn clients of potential pitfalls. However,
not all transition managers are equally transparent.We are not
always in a position to say this will be cheapest and/or best
transition manager, because everyone’s offers look quite
different and it is difficult to compare them.
GARY: Any providers’ pre-transition analytics should be
powerful enough to highlight risks before you go into the
trade. Just as an example, we worked on a portfolio which had
an extremely high weighting in commodity related stocks. The
commodity sector weighting was way beyond the benchmark.
This was in April/May time as commodity stocks were reaching
a peak. Volatility kicked in and the client made an active
decision, based on our analytics, not to transition during that
month. We could actually have just implemented and gone
back to them and said to them, look we said it would be bad,
it was bad. However, our process allowed them to make an
informed decision and deal with the risks accordingly.
HOLGER: We have a good benchmark for the trading
period: implementation shortfall and volatility
implementation shortfall. What worries an institutional
investor though is what happens from the moment where
you dismantle your portfolio and the first trade takes place.
That is the most interesting question and it is up to the
transition manager to come up with a reliable solution.
TO PRE-HEDGE OR NOT?
KARIN: I know we are going to talk about the T-Charter
later, but I think this is the right time to touch on the subject.
The T-Charter is a set of 10 principles that guide and protect
clients when transitioning and provides protection again
poor and questionable practices. One of the principles is to
disclose pre-hedging transactions and the performance
impact of pre-hedging activity in the implementation report.
When you have a transition manager, you choose him
because you trust him implicitly. You will have confidence
that he will not pre-hedge for his own gain. In fact, nothing
should happen before trading starts that could adversely
influence the ultimate result of the transition.
FRANCESCA: Alexandra, does it matter if your transition
manager pre-hedges as long as the portfolio that arrives with
your destination manager has the value that you wanted?
ALEXANDRA: It depends on who has selected the transition
manager. We always talk to our clients and ensure that if they
have chosen a transition manager that they provide us with the
model on which they made their decision and we then analyse
where any costs might be. I am not very happy if a transition
manager is involved in pre-hedging, because they have acted
for their own book. I don’t think it is the right way to go about
things. If the client says,“I’m okay with this,”it is his decision
and we have to accept it. However, if we had chosen a
transition manager, and he pre-hedged, it would be the first
and last transition that he did for us. It comes back to costs.
There has actually been very little constructive discussion and
debate about the true costs of transitions in recent years. I think
that is because at one time the market really did not
understand the difference between implicit and explicit costs.
That is no longer the case and the market is learning fast.
PETER: In the first place we would probably ask why a
manager would like to opt out of best execution. Moreover,
we would like to hear a very, very, good explanation for
that. Usually, we would say that I wouldn’t advise any
client to opt out of best execution and to say that prehedging
is OK. I can’t imagine a case where we would be
comfortable with it.
HOLGER: As a KAG, we have a contract with the transition
manager. We undertake all means to ensure best execution.
We have that explicitly stated in the contract, that we require
best execution for the portfolio. If we see something that
contradicts this clause that would be a breach of this contract
ED: What is pre-hedging? It sounds pretty warm and
fuzzy. However, really it is front-running. So let us just call
it what it is. I do not see any reason for anyone ever to prehedge.
Pre-hedging pretty much guarantees a nondisclosed
profit for the transition manager and renders any
benchmark irrelevant.
GARY: The key thing to understand is that pre-hedging and
front running are often referred to as one and the same thing;
but in certain circumstances they are different. Morgan Stanley
does not pre-hedge — FSA rules prohibit it. But, as an example,
one could argue that if you were looking to build a portfolio of
highly illiquid stocks that you are going to benchmark at the
end of the month and start performance at precisely that point,
one could rationally work with a house to provide capital to
help you passively build that portfolio beforehand and then, at
the benchmark point, you gain the immediacy of entry into the
portfolio. The house has executed a wholly transparent basis
with you beforehand and you can understand what the real
cost is. Transparency is the key message here.
CHRISTOPH: Don’t misunderstand me, I am not promoting
front-running, but I see this topic less dogmatically. It is a
question of transparency up front. If a transition manager
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

comes up with the exclusive pre-hedging proposal to cover
the illiquid parts of the portfolio, or the high-alpha part,
because best execution as the KAG and the market
understands it, asking three different brokers to trade out
your portfolio, will produce serious market impact, then I
would say, let’s discuss the point. It is not front-running
anymore, if the customer agrees to it. So let’s discuss it and
compare it to the ideas of the other candidates who are
pitching for the mandate and let’s find out what is best for
our portfolio. So, it is probably an exotic view …
KARIN: It doesn’t really matter what the client and the
transition manager decide as the right way of trading, as
long as it reflects the interests of the client and it is a
transparent solution. This ensures that there is not going to
be an accusation of mis-selling, or the client
misunderstanding that he contracted into, or opted out of
best execution. If a client wants to opt out of and waive his
right to best execution and this is defined in the trading
strategy then I am in agreement with Christoph. However,
at Credit Suisse we do not pre-hedge.
CHRISTOPH: In most of the small cap portfolios which have
become attractive in a satellite-core environment and also
are still attractive for alpha generation, you will find stocks
where market impact neutral trading, based on the average
daily volume, takes you 20/40/60 trading days. And it must
be allowed that for these very illiquid parts of your portfolio,
maybe 2% or 3%, you have to think of more creative ways to
trade it. Asking the company to do a share buyback
programme for example, or it might be pre-hedging, but in
accordance with the investor, or other creative solutions.
MEASURING A SUCCESSFUL TRANSITION?
ALEXANDRA: As a KAG it is always important that the
operative things work really well and that we don’t have
failed trades. If I understand the model of the transition
manager and I see what has happened and I can
understand the whole process, I am satisfied.
PETER: It involves a timetable that is suitable for the
transition and that the whole transition starts and ends at
the time horizons within the schedule discussed and agreed
on beforehand. That’s one important factor. Another, surely,
is implementation shortfall. Although it can always happen
that you are off by about one or two basis points. OK, that
is natural, but it should be in the normal range and the third
point is probably the project management capabilities of the
manager. There is always something going wrong in a very
large transition and if you have someone you can call up or
you can have a daily conference call including the KAG and
the custodians, it is fine.You must always have someone you
can talk to if something is going wrong and you see that
after an hour, or sometimes after a day, the problem is
solved. That is perfect.
ALEXANDRA: If we have a problem or we need to change
to some process or something it is important that the
consultant, or the transition manager can say either that it
is not a serious problem, or that they can fix the problem.
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
There are always problems in transitions. It is vital that you
communicate often and directly about the problem and
show how it will be solved. That makes everyone feel a lot
better about the transition.
HOLGER: I know the day when the new managers should
start their business. That is the first time when I get hard
feedback. Is everything settled, for example? Moreover, can
he start managing the full portfolio on that day or not? If
he can, then it is good, it worked, we are on schedule. Then
we get information from the transition manager via the
transition report. In addition we and the client have the
opportunity to look at the details of the transition very
closely and look into the explicit and implicit costs, and
compare the execution with the original proposal. That’s
when we have a full view of the transition and can decide
whether it was really a perfect transition, or if there were
some surprises he/we did not think of.
CHRISTOPH: After every completed transition we don’t
always know what we feel. If the post-trade analysis looks
brilliant, obviously it was a good transition. But of course, in
evaluating the quality of a transition, the most important
quantitative fact is: what does the pre-trade analysis show?
And is the realisation, the result, compared to the ex-ante
analysis within a reasonable low amount of standard
deviations? You can’t tell me that unfortunately there is a six
standard deviation outcome and then that the ex-ante was
not wrong. Then I would like to add some soft factors that
give an investor a good feeling afterwards, that’s
communication, information updates at every stage and of
course a positive feedback from all three parties involved,
the KAG, the custodian and the transition manager. If this
matches then a lot speaks for a good transition, at least from
an operational point of view. Another soft factor is, whether
the transition manager created an extra value in the process.
For example, a target portfolio manager’s wish list of an
index tracking portfolio may show some very illiquid
government bonds. Then it is the time for the transition
manager to alternatively suggest more liquid government
bonds with comparable risk return characteristics. We must
realise the target portfolio manager is in a very convenient
situation. He gets the portfolio of his preferred choice
delivered by the transition manager and therefore he
doesn’t have to care about transaction costs. This is
obviously a conflict of interest as well and I see it as one of
the tasks of the transition manager, to point this out.
GARY: Christoph’s point is absolutely right. We have
instances where we have had bond portfolios, modelled
portfolios given to us, because the manager knows that we
are going to go away and do all of the work, trying to find
an issue that is 90% held and locked up. It may take two
weeks to do it. The bond manager gets the bond, he is
happy, but in reality he has delayed the portfolio coming
across to him for a period while we are out there looking
for the bond. Some managers do need to be policed a little
bit. We have to make sure that manager knows that is not
just a free rein to get a perfect portfolio and without all the
attendant costs of achieving that portfolio.
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TRANSITION MANAGEMENT ROUNDTABLE
64
THE T-CHARTER AND ITS EFFECTS
FRANCESCA: The T-Charter has been a strong talking
point, particularly in the UK market, and all the transition
managers around this table have been active participants in
the discussions to determine a workable code of practice
for transition managers. What are your expectations of it?
ALEXANDRA: It is a great idea. It will bring clarity and more
transparency as transition managers have to provide more
detail about the way they plan and execute transitions.You
are no longer looking at a black box when they speak to you
about how they want to do it. I also look to it to make it
easier for us to compare the different offers, as Holger said.
I hope that the T-Charter will become better known and
that the big transition managers will sign up to it.
PETER: Self regulation is always very welcome. The T-Charter
should not be the bible of transition management, but rather
it should provide minimum standards. We feel any transition
manager should explain why he didn’t sign up and give us
the reasons what made him opt out. If these explanations
aren’t clear we would definitely say that this is a definite key
disadvantage in the competition for new business. If a
transition manager doesn’t have very good reasons and
doesn’t explain which specific points encouraged him to opt
out I would say, if we can’t understand it, we would say that
we would feel more comfortable with a transition manager
who agrees with the T-Charter. However, as I pointed out
before, it is probably a minimum standard. There are
questions beyond the T-Charter that you have to ask, but I
would say that it is the benchmark for the future.
GARY: It is absolutely the right way to view it. If someone
is not really prepared to sign up to a standard that is there
to provide a level of integrity, to provide the client with a
degree of comfort that their transition manager is
operating with best practice, then you have to absolutely
understand why they are not signing. There is no question
about that. However, one risk of the T-Charter is that you
get a polarisation of providers and then you go almost full
circle. I am not necessarily convinced this will happen, but
it is a risk. Understanding a transition management team
and their strengths and what the business model is, is part
of the asset owner’s obligation to the fund. They must visit
the team and see how they ring fence their transition
business. Therefore, on the one hand you can understand
why some people will and some people won’t sign up to it.
You have to use that knowledge in conjunction with other
things.You cannot just rely on it alone. It becomes part of
the investor’s tool box, if you like.
CHRISTOPH: To me it is a sign of a maturing industry. It
seems to get to a high volume, low margin business now
and it is in line with the spirit of MIFID. Asking your active
managers for composite performance numbers is a
comparable issue. The managers need good reasons for
not doing that. I also see this completely in line with selfregulation
or external regulation in the field of brokerage
performance measurement over the last few years and of
course, we appreciate greater transparency very much.
ED: It is a good initiative and it could not go fast enough in
our opinion. As a firm we are very supportive of the highest
possible minimum standards and that for any sort of best
practice code to be meaningful and successful. You know
you can’t please everyone and the success of the T-Charter
depends where the debate is going hereon out. If you
accommodate everyone’s business model you may as well
not do it. If you do come up with a best practice, an
industry best practice, it has to be of a level that you can go
out with and that you are comfortable with so that it does
not just give credibility to anyone that is only willing to sign
up to a watered down version. We have seen people
disappearing from the panel. They have their reasons and I
am sure that you will be looking to find out what those
reasons are. I can only guess. It is important that there are
minimum standards that make us proud of being in a
business with unquestionable integrity.
KARIN: I believe the T-Charter helps clients differentiate
between transition managers. Christoph is echoing the
views of the market and his comments reflect the feedback
we are getting that self-regulation is a good thing. The BVI,
DVFA and the German CFA are associations in Germany
that are supportive of the T-Charter. You are right though
Ed, it has not been implemented as fast as we had hoped.
Linklaters, the law firm hired to transform the T-Charter
from a practitioners draft into a legal format, have now
delivered a legally revised draft of the code. It will now be
distributed to all transition managers, investors and
interested parties. True, some institutions will not be part
of the T-Charter. Surely though, the good thing is that
everyone has the chance to be part of it.
FRANCESCA: Given that there is a flight to quality these
days do you need the T-Charter?
GARY: We have talked to clients who have used other
transition managers and it’s almost as if they don’t like
talking about transition management because it has been
such a painful experience for them. This is why the T-
Charter will be a worthwhile standard. It will actually
provide benchmarks for providers. If they cannot show a
minimum competency then straightaway you can move on.
Even people who sign up to it will very quickly go out of
business if they cannot deliver that quality.
KARIN: The T-Charter reinforces transparency and
disclosure. Providers are all still different, even though they
are becoming more alike. They still apply different business
models. The T-Charter does not favour one institution over
another. It doesn’t matter how you do your business, or what
your model is, as long as you disclose what you do and how
you do it. In that way, the T-Charter will rule out poor
practices and it gives clients and consultants a clearer insight
into how we do our business.
ED: Signing off on the T-Charter is a good thing and we all
here support it, as long as the standards are at a level that
are sufficient. What I am not convinced of is that once you
sign up, that everyone is similar. Every one is not similar. At
the end of the day it comes down to experience and track
record, the access to liquidity, project management skills
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

CHRISTOPH KESY, portfolio management, E.ON Energie AG
and transparency. Anyone who puts an extra desk in his or
her trading room and says we are now a transition manager
may not necessarily be equipped for the task. There are
different business models and that will probably always be
the case and it is healthy, as it helps define choice.
FRANCESCA: Are you aware of the differences in offerings
between transition managers, subtle or otherwise? Or, at
the least, the differences between the three houses around
this table?
CHRISTOPH: We know which competitors are strong in
fixed income or equity, and those which are more agency or
principal focused. Then we start talking to other investors
and get references and share experiences, which I think is
a very important thing to do. Of course, we all know a bit
about agency theory and we can make up our minds how
the business model relates to these strengths and
weaknesses. Personally, I am a fan of letting consultants,
but also direct service providers like transition managers,
do some homework and give them a case study. Let’s get
away from the marketing slides. They are of no interest. I
say, give transition managers some homework and let
them show their experience in detail. This sort of thing will
help sort out the differences between them.
FRANCESCA: Are you typical, or are you particularly
demanding?
CHRISTOPH: In the field of transition management we are,
I think, particularly demanding. That derives from our
individual background of academic transition management
research of course. I don’t think it represents the standard
of the average investor.
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
KARIN RUSSELL-WIEDERKEHR, director, transition management,
Germany, Credit Suisse
FRANCESCA: Holger, are you equally as demanding?
HOLGER: We are, but our role is different. We interface with
the customer and we have to inform if he is not familiar with
transition management. Therefore, we have to be in a
position to give the client advice on which he can choose the
right transition manager for his project. We are required to
provide an overview and detail and understanding about all
our transition managers and their operational strengths.
That ability to provide an accurate picture is as important to
us as the transition itself.
KARIN: Some 80% of a transition manager’s time is spent in
the planning stage and finding out about each firm’s processes
and nuances, such as the reconciliation process of a KAG and
the custodian. Different firms have different processes. The
majority of my time is spent speaking with all parties involved,
defining processes and adding discipline to the reorganisation
initiative. Implementation makes up the other 20% and can be
the easier part of a transition.
THE KAG STRUCTURE
GARY: You have to have a lot more structure in the German
market because you have to work within the investment
guidelines particular to the German investment law, not just
with this point here or this point there from start to finish
when you take control of those assets you have to be fully
compliant and the only way you can do that is by spending
the time with the involved parties. So I think that in ensuring
that the portfolio is ready for transition, you are definitely
doing more work in the German market than you are doing
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TRANSITION MANAGEMENT ROUNDTABLE
66
in any other markets. From our point of view, we like the
KAG structure, we think it makes a lot of sense, because we
know that there is somebody that is looking after the client’s
assets and we can have objective discussions with them. The
KAG is there to act in the client’s best interests and help the
client select the most appropriate person for the job.
KARIN: I would like to add one point Gary. In my
experience, the biggest concern of a German client is the
possibility of having an asset management gap.
GARY: I agree
KARIN: The beautiful thing in Germany is that you have
three parties that ensure there is no gap: the KAG, the
consultant and the transition manager.
PETER: I agree. At any time during the whole process there
has to be someone responsible for the portfolio. That is
absolutely important for any client and for us as
consultants as well.
ED: It’s key. Actually, any transition manager should take
full responsibility for the portfolio and this goes back to the
outsourcing agreements that we are signing now with
KAGs for having that accountability. If something does go
wrong and again I come back to this fiduciary care term, it
is important for the transition manager to take that
opportunity and take responsibility and provide that
accountability.
PETER: Increasingly project management capabilities are
important and that the transition manager adheres to an
agreed timescale.
GARY: We have a very strong view of minimising the time
we are in control of portfolios. If you have active portfolios
within the transition environment and you don’t have
robust operational procedures and you can’t settle all those
positions on T+3 every day after the point at which the
portfolio should have been handed over increases risk.That
is because your active portfolio is potentially changing from
an investment managers point of view. If you have an
investment manager that is highly active, with a 7% or 8%
tracking error and he is turning over a significant portion of
the portfolio, by the time you give it to him a week later, he
is going to have to revamp it all in any case. And in that inbetween
period, does anybody account for the cost? The
target manager is now over there and you are sitting here.
So again, you have got another transition to do or the
manager has and no one really accounts for that
performance measurement.
KARIN: If a significant proportion of a wish list is unsettled,
a target manager may not be able to carry out his duties.
Of course, most custodians have access to borrowing and
lending facilities. This means that the matter could be
resolved through a lending/borrowing programme to make
the portfolio fully available on the handover date.
HOLGER: Looking back, having done the first transitions
in Germany with Universal Investments eight years ago, at
that time there were only very few participants in the
market. Then the main focus was on how to get a complex
transition project done. It also involved foreign asset
managers. This was a big change in the KAG world. Of
course the approach has changed somewhat over those
eight years. Now our main focus is achieving best
performance for the investor. That change has involved a
much closer relationship with transition managers. We sit
through their presentations and every time we meet them,
we asked more pertinent questions and we learnt more
about their business. Our side of the business has also
changed. Now many more people within the company are
involved in the process, although we centralise
communication through specific people in our relationship
team. It all means we are better placed to act as advisor,
intermediary and communicator with the client and the
transition manager and it is done more effectively.
ED: Those are good points. We find that KAGs are not so
much gatekeepers, but facilitators. Actually, it is often more
difficult in the UK where you have consultants that are
much more powerful in deciding for the clients. KAGs are
particularly concerned that all goes well from an
operational perspective, in addition to the cost aspect, and
rightly so. This is what the transition manager is
responsible for: operational risk and portfolio risk. There
has to be a balance between the two to make sure that you
have the right party that you deal with. You can’t just look
at things in isolation.
AVOIDING EXECUTION DRIFT
FRANCESCA: It would be useful to highlight your
thoughts on what are the most important risks that you
think should be mitigated in transitions and from the
client side, what particular assurances you look for from
your transition manager. So Ed, if you don’t mind starting
this process …
ED: Managing execution drift goes back to defining your
execution strategy. For us, execution strategy is driven by a
risk management strategy for which a framework is set in
the planning stage. Obviously things can somewhat drift
away from you. Things can take a bit longer and a
transition manager needs to have ways to manage those
risks. One could think of alternative trading strategies, such
as hedging with derivatives and forwards, ETFs, EFPs etc,
can be useful in mitigating these risks. Obviously you need
to take account of investment guidelines and make sure
that the client understands what you are trying to do and
that goes back to communications. Having the tools to
implement the trading strategy is absolutely key, however,
the risk management framework sets that trading strategy.
GARY: Taking advantage of crossing opportunities is what
you have to do, you have to make sure that the cross
benefits the transition portfolio and you are not just
crossing purely because you can cross. There are many
instances where you can cross too much of a portfolio
presenting liquidity problems: that is, you cross the liquid
part of the portfolio, you can’t neutralise that cash
exposure, so you have to be able to do it in the context of
trading less liquid positions quickly. Ed talked about
developing an execution strategy, and if you do that and
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

you go into a blind cross you can completely destroy that
strategy — as soon as you come out of it, you have to react,
you have to change the strategy. It is about being able to
use those opportunities intelligently.
ED: But of course, there are various definitions of crosses
and crossing is one of the sources of liquidity that a
transition manager has or doesn’t have. Some do not have
that opportunity. At State Street, we operate a regulated
crossing pool. We have done a lot of research on the
benefits of crossing and basically what came out of it is that
average execution costs are about 80% cheaper, so clearly
there is a benefit in it. I totally agree with not postponing a
transition just because of a crossing opportunity. If it is
there, then you should take advantage of it. And there are
very effective ways to manage the risks that come with it.
Do you want to wait two weeks for a crossing opportunity?
Probably not. Although in certain instances where you
know you have one client that is selling out of a particularly
difficult portfolio, a small cap or emerging market portfolio
for example, and another client is buying into that
structure, you may well want to wait two weeks.
FRANCESCA: Peter, from the gist of this, it seems that there
is pressure on transition managers to come up to the bar,
greater communication, greater preparation, pre-transition
management, adding value wherever possible, demanding
KAGs, and demanding consultants …
PETER: It’s been pointed out that we also have to do our
homework. Five or six years ago transition management
was not an important issue for us, but that is not the case
now, and consultants are now giving advice on selecting
transition managers. Not only that, we also help bring
together all the different elements in a transition (the KAG,
the client and the transition manager) and add value. While
there are some people out there that are well enough
educated about transition management; there are also
people out there who are not educated well enough or
sophisticated enough to deal with these three different
organisations, taking part in a transition.
FRANCESCA: As a key client, you have increasingly
sophisticated transition managers, you have increasingly
sophisticated consultants, and do you feel that your
portfolios and portfolio transitions reflect this?
CHRISTOPH: Developments in the market and responses
or steps taken by large investors over the few last years,
including greater use of advisors and transition managers,
foreign asset managers, and adopting core-satellite
strategies, etc., have had a remarkably positive effect on the
overall return of the portfolio. Although active returns are
not always what you wish in every single asset class. But the
trend is going in the right direction. You are also getting
away from using one single consultant for every piece of the
business: for manager selection, ALM, transition manager
selection, and the like. I would definitely recommend that
you use a consultant. It is not that consultants know for sure
who is the best transition manager, the topic is too young
and the best academic brains are already working for the
brokers or the buy-side. Consultants are excellent sparring
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
ALEXANDRA THIELE, senior manager, master KAGs, ACTIVEST
[Now PIONEER INVESTMENTS]
partners — all these guys are smart — but they should not
prevent you from thinking yourself.
PETER: We highly recommend that the clients do not only
rely on our recommendations but also ask their own
questions and to be critical about the responses. We would
really appreciate the opportunity to be a kind of sparring
partner for a client, definitely.
RESPONSIBILITY & TRANSPARENCY
ALEXANDRA: Communication is paramount. It is also
very, important that the transition manager has people
who speak German, and know German laws. From our
side, the KAG is someone who sits on top of the process is
a key contact point for the client, the consultant, and the
transition manager. So it is imperative that all these
elements are brought together and work well together and
that everyone sees and reacts to problems before they
become too serious, and really, that is where experience
counts in the market. And if something happens, that’s life.
It is important that you can talk openly and honestly with
all parties and understand what was good, what worked
well in a transition and what did not work, so that next
time we can avoid potential problems. Or, we can all agree,
that is was a beautiful transition, nothing went wrong and
we are all happy. That, of course, is the best outcome.
GARY: I agree, you have got to take that standpoint and
what is important is that the transition manager has to take
responsibility. If something has gone wrong, they have got
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TRANSITION MANAGEMENT ROUNDTABLE
68
The German transition management roundtable, held in Frankfurt, November 2006.
to be the first person to highlight that to the client, to the
KAG straightaway. The next step from there is the
resolution of that problem and ensures that ultimately the
client is not impacted by that. If there was a problem, work
out why it occurred and make sure that the fund, which is
not responsible, is made good. There’s nothing contentious
there and everybody should really agree with that.
CHRISTOPH: Basically all of the big houses seem to have a
strong product. It is an art to find the right one for a specific
transition profile. You must ask incisive questions, get an
impression of the capabilities and the sophistication of the
risk analysis process, and also of the risk management and
trading processes involved, and then decide on your
transition manager. However, the time is now past, where
the an investor can make a really, really bad choice.
KARIN: We have spoken about increased sophistication,
which is apparent at every level in the German market.
Furthermore, there is internal political pressure on the
funds, as well as performance pressure, which have
resulted in greater emphasis on transparency. I am not
referring to transparency on how performance is calculated
and measured, but instead real time execution
transparency. Clients look to play a part in the
implementation process. I experienced this recently with a
transition involving a regional fund in Germany, where the
client logged on to our internet site to watch trading taking
place real-time. They followed the event so intently that
they contacted us on completion to comment that we had
only traded 99.8% of their transition and were searching
for an explanation for what had happened with the
remaining 0.2%. The residual represented odd lots, which
had been dealt with off-exchange. However, this is a clear
example of the increased sophistication, political and
performance pressure which is compelling clients towards
greater transparency. I think it is something to watch.
HOLGER: With the benefit of experience of many, many
transitions over the years and having a kind of standardised
communication platform, being the SWIFT format, we find
we have a good working platform nowadays with many
transition managers. So really I think we now have the
chance to look forward at some recent developments,
meaning derivatives, foreign exchange forwards, which are
not always dealt with via these platforms and look at the
significance of these changes, particularly their influence
on the planning stages of a transition. I think things are
constantly changes and these are some of the newer
considerations for KAGs to focus on.
ED: Communication. Alexandra made that point quite
clearly and rightly so. A transition manager should have at
least the technical capability, at least quite clearly, both on
the trading side and operational side. If you don’t have that
then you probably should not be in the business.
Experience, track record also counts. Every transition is
different, but at the end of the day, whether you have a
fixed income, equity transition or a balanced transition, the
process, the steps are similar. Moreover, if you have done
enough of them, you know potentially what can go wrong.
Again, you need to know before a problem actually
happens that it can happen, so that you can do something
to pre-empt it. Finally, but certainly not least, transparency
and accountability are vital. If something does not go the
way it should, you need to be able to stick your hand up
and say,“Let us try to resolve this quickly.”
FRANCESCA: Can I get a consultant’s perspective as a final
sign off?
PETER: As Christoph mentioned earlier, transition
management will become a mature industry. With the T-
Charter, which will be a minimum standard, but at least a
benchmark, people can at least orient themselves on.
Additionally, Germany is obviously not a mature market; it
is a growth market for transition management, because
more consultants and practitioners are developing a deeper
awareness of the value created by a successful transition.
This consciousness paired with understanding the key
capabilities a transition manager must have can help them
decide on a transition manager if they need one.
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

A door was opened in 2004 by a US court
decision holding that Visa and MasterCard’s
exclusionary rules violated antitrust laws. The
ruling appears to give American Express Co., a
financial services powerhouse itself, and
Discover, a unit of the Wall Street firm Morgan
Stanley, a nice boost in the lucrative card
business. What does it signify for the credit
card market over the long term? Bill
Stoneman goes in search of answers.
The most interesting development to watch, observers say, will be the
response to public ownership at MasterCard, and at Visa when it takes
the plunge. Until now, both organisations have been managed for the
convenience of the banks that owned them, industry consultants and
stock analysts say, rather than as truly competitive entities.That is likely
to change.“There’s something about a free enterprise, being on your
own, that’s going to force these guys to think about satisfying
public owners,”says Duncan MacDonald, former general
counsel of Citigroup Inc.’s Europe and North
America card businesses. Photograph by
Scott Rothstein, kindly supplied by
Dreamstime.com,
December 2006.
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
ABANK OF AMERICA American Express card would
not have been possible or conceivable a little more than
two years ago. Visa and MasterCard association rules
flatly prohibited Bank of America (BofA) and the rest of their
members from issuing cards bearing the logo of an interloper
to the bank world, such as American Express. Today, however,
BofA and Citigroup, the two largest banks in the United States,
are both issuing American Express cards. In addition, HSBC
Group, a like-sized bank based in the United Kingdom, has
similarly teamed up with Discover Financial Services, another
outsider to the Visa-MasterCard circle, to issue Discover credit
and debit cards in the US.“It radically changed the industry
and opened up huge opportunities for us,” says Roger
Hochschild, Discover’s president and chief operating officer.
Only time will tell if Hochschild is right. Discover and
American Express both gained US market share in the first
half of 2006, according to the Nilson Report, a card industry
newsletter. Only however, by fairly small increments.
Nonetheless, the move by American Express and Discover
onto turf they had been excluded from does reflect big
changes rolling across the card business landscape, which
has long been led by two look-alike bank-owned clubs.
Most importantly, perhaps, those same banks sold a
controlling stake in one organisation, MasterCard
Worldwide, which is based outside of New York, in May
2006. In addition, the very same institutions are now
preparing to repeat the process with San Francisco-based
Visa. Neither bank issuance of American Express and
Discover cards, nor public stock offerings by MasterCard
and Visa necessarily change the overall balance in the
payments world. It remains greatly profitable for credit
issuers, funded primarily by companies selling everything
from pet supplies to neckties. Both, however, introduce a
host of new variables to businesses that provide payment
services and other businesses that depend on those
services. Moreover, they hold implications for investors and
consumers as well.
Among those variables is the possible impact on a wideranging
dispute over the “interchange fee”. These are fees
that merchants pay to banks in order to accept card
payments. Others are the level of interest among mobile
phone carriers in playing a role in payments, how well
American Express and Discover capitalise on their new
ability to make deals with banks and the extent to which
working for public shareholders lights a fire under
MasterCard and Visa managers.
SECTOR PROFILE: MASTERCARD / VISA
69

SECTOR PROFILE: MASTERCARD / VISA
70
MasterCard President & chief executive officer Robert Selander, center left, and New York Stock Exchange CEO John Thain, center right, applaud
as MasterCard’s stock begins trading in its initial public offering, Thursday May 25th, 2006. In one of the biggest IPOs of the year in the US,
MasterCard Inc. shares surged in their stock market debut even though the world’s No. 2 credit-card brand originally priced below expectations.
Photograph by Richard Drew, supplied by EMPICs/Associated Press, December 2006.
At about 50 years old, the card payment industry is the
most reliably profitable segment of the banking business.
Its great success is due largely to the willingness of large US
banks to invest heavily in the two associations, rather than
build networks on their own, explains David Robertson,
publisher of the Nilson Report. That enabled the creation of
an efficient system with near ubiquitous acceptance and
name recognition in the US by the end of the 1970s and
widespread acceptance and name recognition around the
world by the end of the 1980s.
MasterCard and Visa do not issue cards or take credit risk
themselves. Rather, they created the brands that consumers
recognise and they set rules that enable financial
transactions to occur. Banks that issue cards get three
separate streams of revenue — annual fees paid by
cardholders; interchange fees (which have raised the ire of
merchants over the past decade) and most importantly,
interest paid on outstanding balances. In the US, growth
has shifted from credit cards to debit cards.
Merchants alleged in a series of lawsuits in the US that
banks and the two big card associations illegally conspired
to set unreasonably high interchange fees. Those fees
amount to a weighted average of 2.19% of purchase price
to accept Visa and MasterCard credit card payments and
1.75% for Visa and MasterCard debit payments, according
to the Nilson Report. Credit card payments reflect an
extension of credit by a card issuer, while debit payments
draw directly from a consumer’s checking account.
Though neither MasterCard nor Visa says so explicitly,
market observers generally believe that the completed
public share offering and plans for Visa’s pending offering
were driven at least in part by desire to cap any liability
resulting from any lawsuits brought by merchants against
them and their shareholders. The thinking is that even if
merchants convince a court that the banks and the card
networks conspired to set unreasonably high fees, it would
be tougher to make the case that the conspiracy continued
after the banks had sold their controlling positions in the
organisations and left their management boards.
American Express and Discover, at least until they started
making deals with banks, were closed-loop systems, in
which they issued cards and credit at the same time that
they created the brands that consumers see when the shop.
MasterCard, perhaps unsurprisingly, has taken steps to
build warmer relations with merchants.“At the suggestion
of the merchants, MasterCard Worldwide has posted
comprehensive information about its US interchange rates
on its Web site,” says Chris McWilton, MasterCard’s chief
financial officer in an e-mail exchange.“We were the first
company in the payments industry to make a commitment
to this important step.”
Industry observers say MasterCard will probably seek
out marketing agreements with big merchants, such as one
announced last summer with Home Depot, in which
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

consumers are entered
into a drawing for a
$100,000 kitchen
makeover when they
make payments for a
purchase at the home
supply store with a
MasterCard card.
None of that, however,
necessarily changes the
interchange dynamics.
Even without controlling
ownership and seats on MasterCard and Visa boards, banks
may still call the shots on interchange fees. That is because
they can promote either brand to consumers and could
easily shift transaction volume to the card network that
produces the most revenue for them. The networks, by
contrast, do not really need to compete for the favour of
merchants. Merchants meantime are loathe to tell
customers that they accept one of the main global card
brands, but not the other.
While the outcome of complex antitrust litigation is
probably impossible to know, Nilson Report data shows
that a great deal is at stake. US merchants paid $25.13bn to
accept MasterCard and Visa credit card payments in 2005
and $9.76bn to accept debit card payments with cards
bearing the two big brand names. Most of those payments
find their way to the card issuers; the networks take a small
share of the total.
Even if merchants are unsuccessful in their litigation,
political pressure could well force down fees on debit card
payments, says Nilson Report’s Robertson. Credit card
acceptance probably helps merchants sell more than they
otherwise would, Robertson adds, as consumers spend more
than the money they have on hand. Debit card payments,
however, simply substitute for cash, since the consumer has
to have the funds available in order to use the card, he
explains. As a result, merchants are not as enamoured of
debit card payments. However, since consumer usage of
debit cards is growing rapidly, any cut in fees could be costly
to banks. “It is a staggering amount of money,” Robertson
says.“If it were cut in half that would hurt.”
Predicting a political solution to the dispute is risky
business. However, Craig Wildfang, the lead attorney for the
merchants and a partner with Robins, Kaplan, Miller & Ciresi
LLP in Minneapolis says that lawmakers and regulators
should note that the Reserve Bank of Australia ordered Visa
and MasterCard to roll back interchange fees from about
0.95% of a purchase transaction to 0.55% in 2003. When it
was implemented, he adds, card issuers were not suggesting
they had second thoughts about the business.
“The networks said disaster would happen,” Wildfang
explains, but it has not. After the possibility that banks will
lose interchange fee income, another threat to the status
quo comes from mobile phone operators, though observers
say this may be a couple of years away. Logic suggests
enabling mobile phones to serve as payments devices,
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
Industry observers say MasterCard will
probably seek out marketing agreements
with big merchants, such as one announced
last summer with Home Depot, in which
consumers are entered into a drawing for a
$100,000 kitchen makeover when they
make payments for a purchase at the home
supply store with a MasterCard card.
possibly a contact-less device, card industry analysts say.
“We go out with our mobile phones more frequently than
we go out with our wallets,”Robertson says.
Phone companies ought be interested as well, adds Bruce
Cundiff, an analyst with Javelin Strategy & Research, a
financial technology research firm in Pleasanton, Calif.
“Mobile phone carriers are always looking at ways to get
stickiness in their subscribers,” he says. Bank-owned
MasterCard and Visa would never would have allowed
Verizon Wireless or any of its counterparts to issue credit and
use their brands, just as they did not allow American Express
and Discover into the game until they were told that they
had to. However, as public companies, they ought to have
bigger interest in new revenue sources, observers note.“They
are no longer constrained to viewing their world strictly as a
bank world,”says Eric Grover, principal of Intrepid Ventures,
a payments consulting firm in Menlo Park, California.
Issuing credit and accepting attendant risk, of course,
would be a huge leap for phone companies and so perhaps
they would choose only to enable transactions in
partnership with a bank issuer. That would not divert as
much revenue from the incumbent bankcard issuers.
One likely result of the changing landscape is increased
market share for American Express and Discover. To be sure,
they are far behind the big networks that banks created.Visa
had 42.2% of the credit card purchase volume in the first six
months of 2006 in the US, the largest card market in the
world, according to the Nilson Report. It was followed by
MasterCard, which had 29% of the market, American
Express, with 23.2%, and Discover, with 5.6%. American
Express’s share rose from 22.5% a year earlier and Discover’s
share rose from 5.3%. The share gains, the newsletter says,
could be attributed to banks that also issue MasterCard and
Visa cards beginning to issue theirs as well.
Compared with the global scope of the three larger
brands, Discover is mainly a US card. It is moving, however,
to build acceptance in other parts of the world. It began
implementation in November of a reciprocal agreement
with China Union Pay, under which its cards will be accepted
in China and certain China Union Pay cards may be used in
the US. In August this year, it also announced a similar
agreement with JCB, the largest card issuer in Japan but has
not said when the necessary supporting systems will be up
and running. In addition, it has struck deals with marketing
companies to sign up merchants in Latin America.
71

SECTOR PROFILE: MASTERCARD / VISA
72
It is not clear yet that merchants have a big stake in the
likely gains by American Express and Discover.Their cost to
accept American Express payments is a bit higher than to
accept MasterCard and Visa cards. Their cost to accept
Discover payments is a bit lower. Banks, however,
presumably share some of their card revenue with
American Express and Discover when they issue cards
carrying those brands.
The most interesting development to watch, observers say,
will be the response to public ownership at MasterCard and
at Visa when it takes the plunge. Until now, both
organisations have been managed for the convenience of the
banks that owned them, industry consultants and stock
analysts say, rather than as truly competitive entities. That is
likely to change.“There’s something about a free enterprise,
being on your own, that is going to force these guys to think
about satisfying public owners,” says Duncan MacDonald,
former general counsel of Citigroup Inc.’s Europe and North
America card businesses.
MasterCard and Visa likely will face pressure to do more to
differentiate themselves in the eyes of banks that issue their
cards, even if differentiation among consumers and
merchants is nearly impossible. “You have got to wonder
why some financial institutions would go with Visa,
MasterCard and American Express,” says Nilson Report’s
Robertson. He explains that a bank might seek a better deal
from either Visa or MasterCard by delivering all of its
mainstream consumer volume to one network and then
issue American Express cards to its high-end customer base.
The organisations might compete on the basis of the
cost and efficiency of their networks and the effectiveness
of anti-fraud tools they each offer. If American Express and
Discover pick up significant market share or if they are
forced to cut interchange fees, MasterCard and Visa could
be forced to come up with new sources of revenue. In
addition to working with mobile phone carriers, the card
groups could move more aggressively into related
businesses, such as transaction processing, observers says.
MasterCard intends to do exactly that, says McWilton, the
chief financial officer, as well as continue to work to expand
acceptance into new merchant categories.
“MasterCard is expanding acceptance in electronic
commerce environments, fast food restaurants,
convenience stores, and in public sector payments,
including taxes, fees, fines and tolls,” McWilton says. If
there is an alternative to the basic model, however, that
merchants fork over to card issuers a slice of the payments
that customers make to them, McWilton offers no
suggestion of what it would be.
A number of observers say they see little sign of a more
aggressive management at MasterCard since it sold shares
worth $2.4bn last May. Maybe it is not an urgent or
pressing issue. MasterCard stock more than doubled its
initial public offering price of $37 by November to about
$94. Without tinkering with its business model at all,
MasterCard will see handsome growth in card payments
outside of the US for many years to come, says Anurag
Rana, a stock analyst with Key Bank Capital Markets.
Don’t work in the dark,
who knows what you might find
Emerging Markets Report provides a comprehensive
overview of the principal deals, trends, opportunities
and challenges in fast-developing markets. For more
information on how to order your individual copy of
Emerging Markets Report please contact:
Paul Spendiff
Tel:44 [0] 20 7680 5153
Fax:44 [0] 20 7680 5155
Email:paul.spendiff@berlinguer.com
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

Trends come and go and even the relatively staid world of fund administration is not immune from
the shifting winds of fashion. It was only a few years ago, that “lift-outs” of the back office function
was the talk of the town. Today however, ‘component’ outsourcing looks to be all the rage. Instead
of a blanket approach to outsourcing, fund managers are increasingly adopting a modular
methodology, contracting out only selected products and services. Lynn Strongin Dodds reports.
THE RISE OF
COMPONENT
OUTSOURCING
JAMES HOCKLEY, A principal in the operations practice at
Investit, a UK-based investment management consultancy,
notes,“There is a recognition that the days of the big end to
end lift-out are coming to an end. One of the reasons is that in
some of the deals, there have been problems with the
migration from the client’s legacy platform to the provider’s
dedicated outsourcing core platform. What we are now seeing
is that clients are looking more to outsource components of
their fund administration operations. This is not to say that
they will use 57 different providers, but will use a core group of
no more than three or four for most of their needs and then a
handful of specialists for their alternative assets.”
The theory behind the lift-out operation was for an
administrator to garner a significant number of deals from
household name asset managers and run them on its global
platform in order to churn out economies of scale for all
concerned.The reality was that out of the 30 or so outsourcing
deals struck over the past four years, only a handful actually
transferred over, according to Hockley. In other words, it was
not proving cost effective for anyone and the custodians
baulked at having to run and maintain multiple systems.
These issues were the main reasons behind the
unravelling of three major high profile deals in 2005.
Although Bank of New York still caters to the custody and
administration needs of Merrill Lynch Investment
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
Management’s, now rechristened BlackRock’s, assets, the
fund manager decided against a full blown outsourcing
deal, allegedly because the fund manager was reluctant to
move to Bank of New York’s SmartSource platform.
Schroders Investment Management also surprised the
markets with its decision to end its five-year back-office
outsourcing contract with JP Morgan Worldwide Securities
Services, while F&C Asset Management pulled the plug on
the Mellon Financial deal; reportedly because the parties
could not agree terms, particularly over the price.
The breakdown of these deals as well as changing market
conditions has led asset management groups to re-evaluate
their outsourcing intentions. They are opting for a much
more granular approach and have broken down the different
functions embedded within their middle and back office to
see where costs can be saved and value added. As Sebastian
Danloy, of Société Générale Securities Services, notes,“UK
asset managers had looked at outsourcing because they
thought it would make their lives easier. However, the
providers were not able to leverage off the infrastructure that
they had and some of the deals fell apart. Today, asset
managers are looking at their offering on a product by
product basis and opting for a more best of breed approach.”
Tom Abraham, managing director and global head of
strategic solutions for the global transaction services
FUND ADMINISTRATION
73

FUND ADMINISTRATION
74
Charlie Helmstetter, director, international
head of product specialists at Mellon
Financial Corporation, notes,“We are
definitely seeing a blurring between the
requirements of the pure alternative players
such as hedge and private equity funds and
the run of the mill equity fund investors.
Photograph kindly supplied by Mellon
Financial Corporation, December 2006.
division at Citigroup, concurs, adding, “We are definitely
seeing more component based arrangements. It is in a way,
a much more sophisticated form of supply chain
management where fund managers are focusing more on
how, where and with whom to buy their services. The
challenge for the providers is how to connect and integrate
all the pieces together in order to be that best provider.”
This is not an easy task as the days of the plain vanilla
funds are long gone. Equities and bonds are just one of
many investment vehicles on the menu. Today, an asset
manager is likely to have an ever increasing complex and
intricate array of products that typically include a family of
alternatives. Hedge funds and private equity are now
almost mainstream; with commodities, currencies and
emerging market bonds being increasingly added to the
mix over the past year.
This is not even mentioning the explosion of the use of
derivatives thanks to the introduction of UCITs III as well
as the increasing popularity of liability driven investing
strategies. They are now integral tools in a traditional
manager’s investment box used for either hedging or as
part of an absolute return strategy.
The goal for the fund administrator, of course, is to
ensure that they are offering top of the range, state of the
art services and products in as many of the functions as
possible. Flexibility is the key word. The bread and butter
core custody and fund accounting services are a must but
players must today also offer price calculations, risk as well
as transition management and performance measurement,
just to name a few, for the thornier alternative asset classes.
Real time information is also on the agenda although all
admit it will be some time before that becomes a reality.
In order to meet these more demanding requirements,
James Hockley, a principal in the operations
practice at Investit, a UK-based investment
management consultancy, notes,“There is a
recognition that the days of the big end to end
lift-out are coming to an end. One of the
reasons is that in some of the deals, there
have been problems with the migration from
the client’s legacy platform to the provider’s
dedicated outsourcing core platform. What we
are now seeing is that clients are looking
more to outsource components of their fund
administration operations. Photograph kindly
supplied by Investit, December 2006.
Stephen Turner, head of BNP Paribas’ Securities
Services’ global fund services products in the
UK, says,“We try to use the organisation in its
entirety and look to see how we can harness the
skills of the investment bank and fund
management group to enhance the performance
of our fund administration capabilities,
particularly in the area of structured products.
We were able to lift out the performance
measurement and analytics group from asset
management to create the Investment Reporting
and Performance team, and now we are looking
at opportunities around analysis of OTC and
derivative pricing.”Photograph kindly supplied
by BNP Paribas, December 2006.
full service providers have taken a leaf out of their clients’
pages and are creating core and satellite packages. Susan
Ebenston, senior vice president of JP Morgan Worldwide
Securities Services, explains,“The need to create a portfolio
with different instrument types is driving the complexity of
the business and as a result, fund administrators need to
reflect their client’s operations. We have created what we
call a hub and spoke approach. There is the hub of our
administration capabilities which we have been doing for
many years – custody, fund accounting, transfer agency, etc
– and around that we have created the spokes for
derivatives, hedge funds, property, private equity, etc.”
Although custom made has become the buzzword in the
industry, many players still have a set, albeit, expanding,
range of products that are configured to meet a client’s
specific needs. Fearghal Woods, director of business
development, at Bank of Ireland Securities Services, says
“Although a lot of the business is commoditised, it is rare,
for example, to get two clients who want the same report
or to distribute information to their customers in the same
way. An insurance company, for example, has different
requirements than a mainstream asset manager. In all
cases, the boundaries are being pushed out even further
and our job is not just to roll out solutions but to integrate
the different individual requirements on one platform.”
Jeremy Hester, senior vice president in Global Fund
Services business development at Northern Trust, notes,“It is
essential that you have an efficient core processing
architecture that provides clients with as much information
as possible but also offers the flexibility to tailor services and
deliver solutions such as, for example, in delivering analytics
using a fund manager’s own liability driven investment
benchmark. It is important to be able leverage the
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

Susan Ebenston, senior vice president of JP
Morgan Worldwide Securities Services,
explains,“The need to create a portfolio with
different instrument types is driving the
complexity of the business and as a result, fund
administrators need to reflect their client’s
operations. We have created what we call a
hub and spoke approach. There is the hub of
our administration capabilities which we have
been doing for many years – custody, fund
accounting, transfer agency, etc - and around
that we have created the spokes for derivatives,
hedge funds, property, private equity, etc.”
Photograph kindly supplied by JP Morgan,
December 2006.
capabilities you have and be able to redefine them to support
a client’s specific needs instead of having too many products
on offer, that are delivered in an un-integrated fashion. The
ability to do that is where you can add value for clients and
provide the basis for cost efficiencies for both the client and
yourselves. If you do not have that kind of service and
system flexibility then the proposition becomes less
attractive and the business will go elsewhere.”
Despite the cost and time, providers are more than willing
to assist clients moving into new and unchartered territories
if they believe there are benefits to be reaped and the service
can be eventually rolled out for others. For example,
Northern Trust was more than willing to lend Unilever, the
multinational consumer goods company, a helping hand in
launching a fully tax-transparent cross border pension
pooling vehicle, at the beginning of 2006.The pooling vehicle,
which is called Univest, was set up in the form of a
Luxembourg-domiciled Fonds Commun de Placement
(FCP) and the US-based house is providing the custody and
fund administration services. Now that the prototype is in
place, Northern Trust can leverage off its experience to other
clients wanting to go down the pooling path.
Bank of Ireland Securities Services, on the other hand,
developed a separate products development group in late
2005, which works with clients to design new solutions for
their structured products.“Take a client who has a private
equity structure. We do not just tick a box but will create
additional capabilities that it can use,”notes Woods.
Meanwhile, BNP Paribas Securities Services taps into the
expertise of its investment bank and asset management
groups. Stephen Turner, head of the group’s global fund
services products in the UK, says, “We try to use the
organisation in its entirety and look to see how we can
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
Jeremy Hester, senior vice president in Global
Fund Services business development at
Northern Trust, notes,“It is essential that you
have an efficient core processing architecture
that provides clients with as much information
as possible but also offers the flexibility to tailor
services and deliver solutions such as, for
example, in delivering analytics using a fund
manager’s own liability driven investment
benchmark. Photograph kindly supplied by
Northern Trust, December 2006.
Brian Coughlin, IBT’s managing director for
US and European operations,“First, providers
need to be in an environment where they are
doing automated reconciliation and exception
identification on a daily basis. Particularly
with these types of securities transactions and
positions, you’re just not going to be fully
aware of your potential risk exposure if you
can’t reconcile in a timely fashion.”
Photograph kindly supplied by Investors
Bank & Trust, December 2006.
harness the skills of the investment bank and fund
management group to enhance the performance of our
fund administration capabilities, particularly in the area of
structured products. We were able to lift out the
performance measurement and analytics group from asset
management to create the Investment Reporting and
Performance team, and now we are looking at opportunities
around analysis of OTC and derivative pricing.”
If the fund administrator cannot create its own specialist
offering, it will buy the expertise.This has certainly been the
case in the hedge fund arena, which has seen an uptick in
demand for services ranging from daily net asset valuations
and pricing of over-the-counter derivatives to daily risk
reporting and weekly subscriptions and redemptions.
The past two years has seen a swirl of activity with JP
Morgan adding the middle and back office operations of
US hedge fund group Paloma Partners to its 2004 purchase
of Tranaut and State Street entering the fray with its
International Fund Services purchase. Other notable
mentions include HSBC buying Bank of Bermuda,
Citigroup taking over Forum Financial, Northern Trust
acquiring Baring Fund Services and Mellon Financial
Corporation buying DPM, which was one of the few
remaining independent hedge fund administration firms.
The irony, perhaps, is that these specialist services are no
longer limited to the confines of the pure hedge fund
players. The boundaries are converging and it is difficult to
find a long only fund manager who has not already jumped
on the hedge fund bandwagon or contemplating such a
move. As Ebenston, points out, “We created JP Morgan
Hedge Fund Services specifically to cater to hedge funds
but now we are extending it to traditional fund managers
as they are launching hedge funds.” The firm recently won
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FUND ADMINISTRATION
76
a mandate from Henderson Global Investors, an asset
manager with more than $126bn in assets under
management, to tend to its middle- and back-office
services for its hedge funds.
Charlie Helmstetter, director, international head of
product specialists at Mellon Financial Corporation, notes,
“We are definitely seeing a blurring between the
requirements of the pure alternative players such as hedge
and private equity funds and the run of the mill equity fund
investors. There has been a significant increase in demand
from long short players for the same types of services that
the hedge funds require, such as collateral management
and independent pricing of OTC derivatives. This not only
requires a fund administrator to invest in the technology
but also the intellectual capital.”
Offshore services are a further consideration in this regard.
Susan Clark, managing director of Fund Administration for
RBS International in Jersey notes that: “Over the past few
years we have noticed a definite shift in the requirements
THE ARCHEUS CASE:
BLAMING THE MESSENGER
Two years ago, Gary Kilberg and Peter Hirsch,
operators of New York-based hedge fund Archeus
Capital, presided over a mountain of assets totalling
$3bn. Their focus on convertible-bond market
arbitrage was seemingly unshakeable. That was then.
Within months, the strategy began to falter.
Redemptions soon piled up and before the year was
out Archeus was in the midst of an irreversible freefall.
By the autumn of 2006, the haemorrhage had
reduced assets to less than $700m, forcing Archeus
to finally throw in the towel. Dave Simons reports.
Archeus showed a year-to-date return of less than 2%
at the time of closing. In a two-page farewell letter to
investors, chief executive officers Kilberg and Hirsch chose
not to focus on the fund’s poor performance, but instead
cited “negative sentiment” that had resulted from their
third-party administrator’s “failure to properly maintain the
books and records of our funds.” That, coupled with an
inability to properly re-reconcile the funds’ records in the
months following the revelation, had “led to a series of
investor withdrawals from which we have not been able to
recover,” according to management.
The allegation that less than precise accounting was
somehow to blame for the demise of the once-powerful
Archeus—the second major hedge-fund death of 2006—
has, understandably, received mixed reviews around the
industry. For its part, Archeus’ administrator, GlobeOp
Financial Services, has stayed out of the fray. In an
interview with newsletter FINalternatives a GlobeOp
spokeswoman said that the company “totally disagrees
offshore with regard to outsourcing arrangements, with
“insourcing” often being the preferred route. For historic
plain vanilla funds it was possible to operate on an
outsourced basis where a “factory processing” model could
prevail. In recent times, with increasingly innovative and, as
a result, more complex structures being created, that model
is no longer sustainable.
The emphasis and focus has changed with the
administrator performing a more significant role in fund
structuring from the outset of a project and transitioning
from inception to launch, and ensuring a high level of
customer service is attained and sustained.“We have found
it to be more efficient and cost effective all-round to
perform the functions offshore as a “one stop shop”and, to
this end, we have worked to up-skill [sic] both resources
and technology to meet client and market demands. This
has resulted in a more flexible, tailored approach with
customer service standards within our own control and the
ability to create centres of excellence,”adds Clark.
with the allegations.” She added, “While it is easy to point
fingers at third parties, investors typically liquidate based
on fund performance results.” While some commentators
have suggested that Archeus might even take legal action,
proving liability could be an uphill battle, note experts.
The Archeus hubbub comes at a time when the
outsourcing of administrative functions has reached a
fever pitch—particularly among hedge funds. Faced with
an increasingly diverse investment climate and lacking
sufficient in-house resources, fund managers find it
advantageous to outsource rather than build
infrastructure. At the same time, the evolving market for
outsourcing compels providers to constantly sharpen their
skill sets and include innovative services such as daily
accounting and derivatives processing and reporting. The
recent introduction of Moody’s Investors Service
Operations Quality (OQ) hedge-fund rating system
underscores the need for transparency with regard to such
critical functions as valuation process, accounting controls
and regulatory compliance.
“While we cannot offer an opinion as to who is at fault in
this situation, it certainly does keep quality and riskmanagement
front and center when folks are making this
type of a decision,” says Rob Mancuso, senior vice
president of Boston-based Investors Bank & Trust (IBT),
which provides fund administration services. “The more
incidences of big hedge funds collapsing, the more
government may get involved, which adds yet another level
of oversight and compliance.”
Adds Brian Coughlin, IBT’s managing director for US
and European operations, “First, providers need to be in
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

Against this background of increasing sophistication
and customisation, one question looming overhead is the
cost of supplying these niche products. There is no doubt
that clients have become more demanding but are fund
administrators confident enough to charge the
appropriate price for their services, particularly on their
higher value end range. The consensus seems to be yes.
One reason is that in today’s relatively buoyant markets,
cost is not as big a factor. The dark, bleak days of 2000 and
2001 seem like a long time ago and memories are short,
particularly when times are good and markets are on a
relative roll.
As Hockley puts it,“Three to four years ago, economic and
market conditions were much more of a factor. There was a
big focus on cost reduction but now fund managers are more
profitable and there is a realisation that the cost of
administering an OTC derivative, say, is ten fold more than,
for example, a straightforward equity trade, and the cost has
to be passed through.”
an environment where they are doing automated reconciliation
and exception identification on a daily basis. Particularly with
these types of securities transactions and positions, you’re just
not going to be fully aware of your potential risk exposure if you
can’t reconcile in a timely fashion. The longer it’s out there,
combined with the volatility of the markets, you’re just setting
the fund and its potential investors up for a big fall.”
Of equal importance, says Coughlin, is a solid understanding
of risk management and regulatory processes. “Firms like ours
that have been heavily involved in the regulated 40Act world
can leverage off of that knowledge, as opposed to the offshore
type of administrator who has a more relaxed set of
regulations, and therefore is not completely customer-tuned to
this kind of scrutiny and pressure.” IBT has been a strong
proponent of increasing independence in transparency, says
Coughlin, “and to that end we’ve created a modelling solution
for OTC instruments so that we are able to actually remove the
hedge-fund manager from the pricing decisions associated with
the instruments, which helps us maintain a proper level of
independence.”
If in fact the independent body is at least partially to blame
in the case of Archeus, how does one go about restoring
investor confidence? For starters, by encouraging openness
and ease of communications, says Coughlin. “Because it is not
only about what the investment manager may be doing to
achieve targeted results—investors also want to know who
they’re hiring, what kind of quality control is in place behindthe-scenes,
and so forth. It’s important that investors know
that they’re welcome to come in and take a look at the
process procedures and controls at a moment’s notice…they
should be able to kick the tires when they feel like it.”
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
Another factor is that fund administrators are no longer
willing to give away services for a song. Developing top of
the line products for alternative assets has a higher price
tag than for example a mainstream equity fund, and they
want to be reimbursed for their efforts. Investment
managers, on the other hand, have also realised that the
firms boasting the lowest prices may not have the best
wares under their showcase.
Mark Kerns, executive vice president of fund manager
services, Europe, at Bank of New York notes,“I think there has
been a real change when it comes to price.There is much more
emphasis on the relationship between the fund administrator
and client, and the price today better reflects the level of overall
activity and types of services that the fund administrator
provides.”Woods echoes these sentiments, adding,“In terms of
putting a deal together, it has become a much more
consultative process between the fund administrator and the
asset manager. The client needs to fully understand what is
being provided and how much it will cost.”
Rob Mancuso, senior vice president of Boston-based
Investors Bank & Trust (IBT), which provides fund
administration services says,“The more incidences of big
hedge funds collapsing, the more government may get
involved, which adds yet another level of oversight and
compliance.” Photograph kindly supplied by Investors Bank
& Trust, December 2006.
77

SOCIALLY RESPONSIBLE INVESTMENTS
78
Responsible
& Profitable
It used to be that investing with a conscience
meant sacrificing returns for the sake of the
planet. However, growing concerns over issues
ranging from global warming to corporate
accountability have helped raise the profile of
socially conscious investment platforms, making
responsible stock picking a potentially promising
endeavor. From Boston, Dave Simons reports.
THE OLD NOTION that it is cheaper to run a business
without worrying about the raw sewage running into
the nearby water supply was not lost on Al Gore,
presidential candidate turned environmental crusader. In
his eye-opening documentary about the impact of global
warming, An Inconvenient Truth, Gore, quoting Upton
Sinclair, affirmed that “you can’t make somebody
understand something if their salary depends upon them
not understanding it.”
However, as Gore himself observes, that attitude is
rapidly changing, as mainstream business begins to see the
long-term profitability of adopting more environmentally
sound operating practices. Last summer, California’s
Republican governor Arnold Schwarzenegger announced
that his state would launch a broad initiative aimed at
trimming greenhouse-gas emissions by 25% over the next
15 years. Spearheaded by eco-minded chief executive
officer (CEO) Jeff Immelt, General Electric has said it will
increase research and development (R&D) investments in
renewable technologies to $1.5bn by 2010, with the added
goal of doubling revenues from clean technologies to
nearly $20bn over the next three years. Even Wal-Mart, that
favorite punching bag for the political left, has retrofitted its
freight trucks with an alt-power converter that cuts fuel
usage by 90% when idling.
Underscoring the trend is a report from Merrill Lynch coauthored
with the non-profit World Resources Institute
Green City. Underscoring the trend is a report from Merrill Lynch
co-authored with the non-profit World Resources Institute (WRI),
which links the demand for eco-friendly solutions with an increase in
compatible investment opportunities. In a world of finite resources,
higher consumer expectations are stimulating a technology race to
meet them, according to the report, which will in turn “present a
compelling investment opportunity for investors worldwide.”
(WRI), which links the demand for eco-friendly solutions
with an increase in compatible investment opportunities.
In a world of finite resources, higher consumer
expectations are stimulating a technology race to meet
them, according to the report, which will in turn “present a
compelling investment opportunity for investors
worldwide.” Typical of such opportunities is a newly
announced partnership between Fortis Investments and
environmental research firm Trucost Plc, which identifies
cost-saving environmental benefits generated by certain
companies, allowing investors to capitalise through Fortissponsored
sustainability funds.
Indeed, the push for green alternatives — from energy to
whole foods to paper-conserving electronic
communications — has helped raise the profile of so-called
socially responsible investment (SRI) products. Unlike
conventional fund managers, SRI stewards “screen” their
stock selections using a variety of social and environmental
factors, hold a company’s feet to the fire through active
shareholder engagement, and ultimately drop a company
altogether if standards fail to be met.
In addition to green or clean causes, SRI fund managers
are continually on the lookout for companies that actively
encourage workplace diversity or promote the equitable
treatment of workers at overseas factories. However, they
traditionally avoid “vice” or “sin” commodities, such as
tobacco, alcohol and weaponry, SRIs have no qualms with
technology and have championed industry giants such as
Microsoft and Yahoo. Thanks to SRIs’ emphasis on
corporate governance, socially conscious investors were
largely shielded from the fallout surrounding Enron,
WorldCom and other accounting-related scandals of the
past several years.
“Responsible investment covers a range of issues and
investment management approaches,” says Will Oulton,
head of the responsible investment unit for London’s FTSE
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

Group and an architect of the FTSE4Good Index Series.
“Our index selection criteria are based on a model of
corporate best practice and cover environmental impact,
human rights, countering bribery, supply chain labor
standards and stakeholder relations,”he says.
The idea of influencing corporate policy through
personal investment has been enormously enticing to a
cross-section of investors, as evidenced by the sizeable
increase in SRI fund flows. Since 1995, SRI-based assets
have risen from $639bn to over $2trn, and currently
represent more than 10% of all assets under management.
SRI fund choices have more than quadrupled during the
same period.
Not that all of this social consciousness necessarily comes
with a cost. With one-year returns in the 25% range, the
industry’s preeminent SRIs, the New Alternatives Fund
(NALFX) and Parnassus Fund (PARNX), have managed to
achieve that perfect marriage of above-average profitability
and investment responsibility. Others, such as the Aquinas
Value Fund (AQEIX), Citizens Value Fund (CVALX) and
Vanguard FTSE Social Index Fund (VFTSX) have posted solid
gains while maintaining a stringent set of investment criteria.
Green and growing
One of the more notable high-flyers of late is Bostonbased
Winslow Green Growth Fund (WGGFX), which
seeks capital appreciation through environmentally
responsible investing in small-capitalisation companies.
Launched in 2001 by Jack Robinson, founder and
president of Winslow Management Company, the fund
currently totals $190m in assets and sports a five-year
return of 15.10% (as of October 31st 2006), some six points
ahead of the benchmark Russell 2000 through the same
period. For his achievements, Robinson recently netted first
place in the aggressive-growth category in Barron’s-Value
Line 2006 Annual Fund Manager’s Survey.
Robinson disputes the notion that SRI managers are
somehow limited by their selection of “correct”
companies. “There are a number of factors that really
allow us to be casting into a pond that has more fish and
bigger fish,” says Robinson. “For instance, during the
screening process you are addressing potential
environmental problems that, in the long run, could wind
up becoming real financial problems as well. So you are
screening in companies that are incorporating the
environment into their overall thinking and strategy, and
by definition should be able to reduce their costs and
enhance their revenues. At the same time, you are also
including within your universe companies that should not
have governance problems, with the idea that you are
ending up with companies that are better managed than
the ones you are screening out.”
Among Robinson’s rotating roster of holdings—which
includes tech firms such as VA Software and Sonic
Solutions, to green-energy producer Zoltek—a few heavy
hitters have emerged, including Whole Foods, a leading
retailer of natural-foods products that has reached nearly
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
Will Oulton, head of the responsible investment unit for London’s FTSE
Group and an architect of the FTSE4Good Index Series.“Our index
selection criteria are based on a model of corporate best practice and cover
environmental impact, human rights, countering bribery, supply chain
labor standards and stakeholder relations,”he says. Photograph kindly
supplied by FTSE Group, December 2006.
large-cap proportions. “It is sort of the Holy Grail of the
green investment universe,”says Robinson.“The company
has a very dynamic and decentralised management that is
really driving it forward—it is not a top-down type of
management. We continue to own it, recognizing that the
returns of the next 10 years probably will not be quite as
large as they were over the previous 10 years. But the story
is still very compelling for a host of reasons, not only
because it has worked so well for us, but to also remind us
of what it is we need to be looking for in other companies.”
Challenging times
Because their social screens prevent them from rotating
into whichever sector happens to be heating up at the
moment, SRI managers often have to work twice as hard
once the going gets tough. Such has been the case for Amy
Domini, founder and CEO of Boston-based Domini Social
Investments and the acknowledged “first lady of social
investing.”In 1990, Domini and partners Peter Kinder and
Steve Lydenberg established the Domini 400 Social Index
(the first index based on social-screening factors), a
companion Domini Social Equity Fund (DSEFX) a year
later, then rode the 1990s bull for all it was worth.“It was a
perfect market for indexing, and social screens put us right
in the sweet spot of the market for many of those years.
And then the inverse happened.”
79

SOCIALLY RESPONSIBLE INVESTMENTS
80
Heavily invested in tech stocks
when the downturn began in
early 2000, Domini has spent the
past six years “facing a headwind”
while her non-SRI competitors
exploited big gains in oil and
weaponry. Though the fund
currently maintains a respectable
year to date return of 9.56% (as of
November 22nd 2006), early last
year Domini — who Time
magazine named one of the 100
most influential people in the
world in 2005—decided to move
away from indexing in favour of
an actively managed strategy.
Wellington Management, the
company that helped Domini’s
newly launched European Social
Equity Fund to a robust 1-year
gain of 42.64%, will serve as
DSEFX’s steward.
“For the first four years I was
willing to ignore the trend,” says
Domini,“because I have absolute
confidence that over the march of
history the application of social
criteria, universe to universe, is an enhancement.
Nevertheless, at a certain point you start to think, ‘Don’t I
owe it to the majesty of social investing to try and win in any
kind of market that’s presented to me?’ With an index-toindex
plan, you can always find a better stock, but because
you’re weighted by the market capitalization, it’s sometimes
hard to structurally adjust for the better companies.”
By combining her company’s leadership with
Wellington’s quantitative approach to delivering the active
portfolio, Domini is confident that she is hit on the right
formula for her geographically distinct brand of funds.
“Even though the Wellington track record is brief, the
work arrangement and information exchange has been
excellent. It was obvious that the same model could work
for the Social Equity Fund
as well.”
While societal changes
have prompted some SRI
proponents to call for a
review of certain social
screens, Domini is not
about to alter her core
beliefs just yet. “Alcohol,
tobacco and gambling
are highly addictive, they
destroy the addicted
person as well as that
person’s family, and as
such, I’m not sure that
those kinds of products
Amy Domini, founder and CEO of Bostonbased
Domini Social Investments and the
acknowledged “first lady of social investing.”In
1990, Domini and partners Peter Kinder and
Steve Lydenberg established the Domini 400
Social Index (the first index based on socialscreening
factors); a companion Domini Social
Equity Fund (DSEFX) a year later, then rode
the 1990s bull for all it was worth.“It was a
perfect market for indexing, and social screens
put us right in the sweet spot of the market for
many of those years. And then the inverse
happened,”she says. Photograph kindly supplied
by Domini Social Investments, December 2006.
5 Year Performance of FTSE Korea Index vs. FTSE World
Index in USD terms
Index level rebased (30 Nov 2001=100)
160
140
120
100
80
60
40
20
0
Nov-01
May-02
Nov-02
May-03
FTSE4Good Europe (EUR)
Nov--03
should be distributed in unfettered
capitalism without more restrictive
mechanisms involved. In the case of
nuclear power, we ask, do you want
raw materials distributed as broadly
and as cheaply as possible? As such, we
think that our screens are important in
order to make a statement about the
proper function of capitalism in this
world. So at the end of the day, I don’t
think you are going see these screens
changing all that much.”
Sticking with it
The notion of commitment has been an
integral part of the SRI story, with
investors showing a willingness to stick
with their funds, even during periods of
pronounced volatility. “While some
might climb into an SRI because it is hot
and dump it when it is not,” says
Robinson, “for the most part, Winslow’s
shareholders are individuals and
corporations who are committed to the
environment, understand the philosophy
and rationale and therefore won’t jump
ship just because we’ve had a down
quarter. This is exactly the kind of investor we want.”
With baby boomers accounting for the lion’s share of
pension investments today, managers such as FTSE’s
Oulton view the SRI as a modern extension of the old
social consciousness of the past. “SRI investors have a
values set which is reflected in their investment choices,”
says Oulton.“All things being equal, these values issues are
as important to SRI investors as the short term investment
performance of their funds.”
“The way you use your investment capital is the
perfect mandate to start living your life in a way that is
‘green,’” adds Robinson. “Rather than ignoring these
issues or having negative feelings about them, more and
more people are looking for positive solutions, and one
May-04
Nov-04
May-05
FTSE4Good Global (USD)
Nov-05
May-06
Nov-06
FTSE4Good UK (GBP) FTSE4Good US (USD)
Source: FTSE Group. Data as at December 2006
of those solutions is
through your own
portfolio.” From Domini’s
vantage point, the
underlying message from
shareholders is still very
positive. “Through our
surveys, we keep hearing
how people love the idea
that they can make a
difference in the world
and at the same time be a
financial steward for their
family’s future. I think it is
a really elegant solution,”
she maintains.
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

ALPHA GENERATION IS what active managers get
paid for. Before 1964, long-only investors who
outperformed a market index in absolute terms
would have imagined themselves to be successful. Stanford
University professor William F. Sharpe amply
demonstrated in various papers issued between 1962 to
1994, that the performance of an active manager should be
measured on a risk-adjusted basis by differentiating policy
return from active return. These days active asset managers
know they are judged, not only on the quantity but also on
the quality of alpha they are able to deliver. That is because
investors will no longer allow managers use beta
management to leverage the systematic risk exposure of
their portfolios.This situation has led to the growth of coresatellite
management, by which part of the portfolio is
managed passively while the remaining is invested in
satellite strategies.
Skill is what matters for generating positive alpha. Even
so, empirical surveys suggest that, on average, active
managers are not skilled at generating returns above their
respective benchmarks. In fact, around two-thirds are
unsuccessful in generating a positive alpha. As in all zerosum
games, what is lost by some is gained by the others
and therefore only talented active managers can durably
add value in an inefficient market.
The Capital Asset Pricing Model (CAPM) framework
implies that, at equilibrium, uncorrelated assets have no
particular value in portfolio construction. Specific risk
associated with individual assets can be diversified out and
only systematic risk will be rewarded. Contrary to the
Efficient Markets Hypothesis (EMH), empirical evidence
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
ETFs:
Marketing gimmick
or a new paradigm?
Since the introduction of the first exchange-traded fund more than
15 years ago, the ETF market has recorded double-digit annual
growth and now represents more than $400bn of assets under
management on a global basis. Increasingly, institutional and
individual investors realise that ETFs offer cheap and convenient
access to a variety of investment styles, sectors, countries and asset
classes, allowing the construction of both simple and more
sophisticated investment strategies. Yannick Daniel, head of
quantitative research at Société Générale explains how ETFs can add
value in a core-satellite portfolio construction process by offering
not only a pure beta return on the core side, but also an alternative
for generating alpha in the satellites.
shows that financial markets are not perfectly efficient,
therefore generating alphas is possible. Market participants
have different risk preferences, time horizons, skills and
cognitive processing capabilities. Individuals also react to
market information differently, for instance different
individuals may buy or sell a security given the same piece
of news hence creating market inefficiencies.
Because alpha is not homogeneously distributed among
market participants, it can be thought of as the inefficient
component of the market; whereas beta represents the
efficient component. Skills of active managers differ,
thereby creating opportunities for talented managers. Only
luck and skill play a role in beating the index, but ultimately
skill is the key to generating alpha over the long term.
Measuring the talent of an active manager
To assess the real talent of a manager, one needs to
differentiate skill from luck when looking at the
manager’s past performance. One interesting metric for
this is the Information Ratio (IR). IR measures the amount
of active return generated per unit of active risk, making
it possible to compare managers despite different active
risk budgets. The ratio can be used to measure the
statistical level of confidence that the alpha generated by
the manager was due to skill and not simple luck. There is
indeed a direct link between the level of information ratio
and its level of confidence:
t–statistic = IRx√n
n= the number of years over which the alpha and the tracking
error have been observed
GENERATING ALPHA WITH ETFs
81

GENERATING ALPHA WITH ETFs
82
This relationship is represented graphically in the chart
below for IRs between 0.2 and 1.2
The level of confidence in information ratios
120%
100%
80%
60%
40%
20%
0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
IR=0.2 IR=0.5 IR=0.7 IR=0.9 IR=1.2
The higher the information ratio, the higher the confidence the alpha generated is a
consequence of talent and not simple luck and the shorter the time horizon required
to evaluate the manager’s talent.
Source : Société Générale Equity Research paper, Portfolio Engineering, Spring 2006.
Portable alpha strategies can be more than a marketing
gimmick. Portable alpha strategies allow for the separation of
market (or beta) returns from investment strategies that add
value (or alpha) to a portfolio. They are known as portable
alpha because they can be tranposed to any existing strategy
irrespective of the underlying systematic risk exposure.
Removing the policy risk of a long-only strategy is
called alpha purification. The main objective of such
purification is to retain the added-value of the strategy
and combine it with other pure alphas and/or another
systematic risk layer. As a result, most portable alpha
strategies are built on “purified alphas”derived from longonly
strategies. The purification process requires
separating alpha from beta using derivative instruments
or a short position on ETFs.
ETFs have become popular instruments for core-satellite
management. ETFs are already widely used by institutional
investors as perfect vehicles for managing the core. By
making it possible to acquire beta exposure cheaply and
quickly, ETFs allow investors to create efficient portfolios
for managing policy risk. ETFs can also be used in the
satellites to remove the systematic exposure from a long
strategy and create a portable alpha component. To achieve
this, portfolio managers need to know which beta exposure
provides the best hedge against systematic risk, or in other
words, versus which equity index the portfolio exhibits the
lowest tracking error and the highest correlation.
To illustrate this point, we could take the example of the
following long-only strategy that exhibit a non constant
beta over a given observation period. Regressing the
returns of the strategy against a set of European indices, its
returns’ variance is mostly explained by the DJ Stoxx 600
index, having the highest coefficient of determination (rsquared).
Once the best hedge is identified, we can
neutralise the beta exposure by taking a short position in a
DJ Stoxx ETF and get the following rolling beta.
3-Y rolling betas
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
-0.2
Apr-93
Apr-94
Apr-95
Apr-96
Apr-97
Apr-98
Apr-99
Apr-00
Apr-01
The synthetic position exhibits a low beta to the
European market, thus making it a portable alpha vehicle
that could be used with another beta exposure, for example
a long position in an ETF on the FTSE 100 index.
Using ETFs in the alpha generation process
Alpha can be extracted from many sources. The most
common alpha bets undertaken by investment managers are
stock selection, sector/style rotation and tactical asset
allocation strategies. At the stock picking level, the use of
ETFs is clear. Suppose for example that a portfolio manager
wants to play the European telecom sector but thinks that
Deutsche Telekom is not attractive at the moment and does
not want to be exposed to the specific risk on this stock. The
traditional – and expensive – way to play this strategy is to
buy all the sector constituents but Deutsche Telekom. The
alternative is to buy an ETF tracking the telecommunications
sector and take a short position in Deutsche Telekom.
This simple example could be duplicated with more
sophisticated strategies but the advantage of ETFs versus
futures in this case is quite clear. When sectors are
involved, ETFs represent a better alternative than futures
for which the liquidity is very low. We observed a bid/ask
spread of more than 30 basis points (bps) for future
contracts on the DJ STOXX Telecom while the
corresponding average bid/ask spread for the ETFs tracking
the same index was around 10 bps.
Academic research has demonstrated that sectors benefit
differently from the phases of the economic cycle and their
prices do not follow the same patterns over time. A strategy
based on dynamic sector allocation may therefore generate
a positive alpha. We observe however, limited application of
this insight in portfolio management. There are two main
reasons for this: first the difficulty to identify ex-ante the
rotation criteria to follow for switching amongst sectors, and
second the fact that such a strategy can only be
implemented with a pure exposure to the sector. Managing
a sector allocation through direct positions in individual
stocks is not optimal because of the presence of implied
stock selection bets. Only a detailed performance
attribution analysis allows separating allocation from
selection alpha embedded in the total alpha of the portfolio.
Apr-02
Long strategy Long strategy + short position in ETF DJ STOXX
Source: SG Equity Research
Apr-03
Apr-04
Apr-05
Apr-06
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

Performance of sector allocation =
∑ [(Wpi - Wbi) x (Rbi -Rb)]
Wpi = weight of the sector in the portfolio,
Wbi = weight of the sector in the benchmark,
Rbi = sector return, Rb = benchmark return
Moreover, every stock exhibits sensitivity to several
macro factors, including industry risk. Managing sector
bets would imply constant monitoring of the active sector
risk through direct positions in stocks, which is difficult and
generates frequent rebalancing. The best means to create
alpha from pure active sector exposure is to implement a
strategy using ETFs, tracking the sector indexes as an
overlay to an ETF tracking the whole market index.
Then, the most difficult task is finding a sector rotation
alpha engine that exhibits a high IR ; that is, persistence in
the alpha generation process. Suppose we can implement
an active sector rotation model that generates an average
quarterly alpha of 5% from a long short market neutral
strategy. The optimal construction would be to overlay this
alpha to a sector-neutral stock selection strategy. The two
alphas will have close to orthogonal risk vectors, thus
creating a high information ratio strategy.
At the global portfolio level, the investment sphere is
typically divided into the strategic and tactical sides of asset
allocation. In the longer term, strategic asset allocation
provides the benchmark portfolio – typically with a horizon
of at least one or two years. Investment managers try to
create excess return by actively altering portfolio
composition through over and underweighting particular
asset classes at various points in time, usually with
investment horizons of between three to 12 months.
The goal of Tactical Asset Allocation (TAA) is to improve
the overall return per unit of risk of the portfolio through
active management of asset allocation deviations. This is
designed to facilitate portfolio’s long-term goals by
seeking added value. As for stock selection or sector
allocation alphas, tactical asset allocation alphas reflect
successful asset classes bets versus the strategic asset
allocation benchmark of the portfolio.
TAA looks to alpha generators to generate excess return
over the passive benchmark, a simpler way to manage this
being to divide it into beta and alpha drivers. Beta engines
govern the overall risk profile of the fund as well as its
expected return while alpha engines are used when markets
are misaligned, producing a tactical bet.This can change the
overall return pattern of the strategic asset allocation.
Dynamic core satellite strategies with an ETF
portfolio
The CPPI approach has largely been used in structured
asset management. The technique offers investors the
possibility of an asymmetric risk/reward profile by
protecting downside performances. Most so-called
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
‘protected funds’ use Constant Performance Portfolio
Insurance (CPPI), Dynamic Portfolio Insurance (DPI) or
Option Based Portfolio Insurance (OBPI) techniques to
achieve their investment targets. We can apply these
techniques to the active risk framework. In this case, the
global risk budget is determined by the tracking error risk
and the portfolio manager will dynamically manage his
exposure between active and passive investments to
achieve the targeted tracking error budget. The main
advantage of this technique is the asymmetric active risk
profile of the resulting portfolio. Most of the positive
tracking error will be captured with a floor on the
downside active risk.
What is important to keep in mind when applying the
CPPI approach on active risk management is that the
portfolio manager has a much greater control over the
active return generated by the satellite portfolio than over
the passive return of the core part. As risk is measured in
the active sphere, the global strategy is thus exposed to a
lesser extent to market shortfalls and early immunisation
that can be a limitation in the traditional CPPI approach
based on total risk.
Dynamic management of the beta using a two-ETF
portfolio
175
165
155
145
135
125
115
105
95
Index
Active risk budget increases
as long as the market is going up
0 1 2 3 4 5 6
Portfolio
Source: SG Equity Research, Spring 2006.
Conclusion
A recent survey conduced by EDHEC Risk and Asset
Management Research concluded that following their
rapid development, ETFs have established themselves as
a widely used instrument among European institutional
investors and their asset managers. More than half of the
respondents are current or planned users of ETFs in
equity investments and a majority of them think that the
use of ETFs will increase in the near future. The results
also reveal that the full potential of these instruments for
asset allocation and portfolio construction is not fully
explored by the majority of investment management
professionals, suggesting that the use of ETFs and the
organisation of portfolio management into a coresatellite
approach are bound to increase. This leaves a
significant growth margin for the future development of
the ETF industry.
83

MARKET REPORTS BY FTSE RESEARCH
84
FTSE Global Equity Index Series – Global
30 December 2005 to 30 November 2006
FTSE All Cap Regional Indices (USD)
140 140 140 140 140 140 140 140
130
120
110
100 100 100 100 100 100 100 100
90 90 90 90 90 90 90 90
80
31-Dec-05
31-Jan-06
28-Feb-06
31-Mar-06
30-Apr-06
31-May-06
30-Jun-06
31-Jul-06
31-Aug-06
30-Sep-06
31-Oct-06
30-Nov-06
FTSE All Cap (AC) Regional Indices – Capital Returns YTD (USD)
%
40
30
20
10
0
FTSE Global AC
FTSE All-World Index
FTSE Large Cap
FTSE Mid Cap
FTSE Small Cap
FTSE Developed AC
FTSE Adv Emerging AC
FTSE Secondary Emerging AC
FTSE All-Emerging AC
FTSE Latin America AC
FTSE Middle East & Africa
FTSE North America AC
FTSE Emerging Europe AC
FTSE Asia Pacific ex Japan AC
FTSE Japan AC
FTSE Dev Europe AC
FTSE All-Emerging Country All Cap Indices – Capital Returns YTD
%
50
40
30
20
10
0
-10
FTSE Australia AC
FTSE Austria AC
FTSE Belgium/Lux AC
FTSE Canada AC
FTSE Denmark AC
FTSE Finland AC
FTSE France AC
FTSE Germany AC
FTSE Greece AC
FTSE Hong Kong China AC
FTSE Ireland AC
FTSE Italy AC
FTSE Japan AC
FTSE Netherlands AC
FTSE New Zealand AC
FTSE Norway AC
FTSE Portugal AC
FTSE Singapore AC
FTSE Spain AC
FTSE Sweden AC
FTSE Switzerland AC
FTSE UK AC
FTSE US AC
FTSE Global AC
FTSE Developed Europe AC
FTSE Japan AC
FTSE Asia Pacific AC ex Japan
FTSE Middle East & Africa AC
FTSE Emerging Europe AC
FTSE Latin America AC
FTSE North America AC
Dollar Value
Local Currency Value
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

FTSE All-Emerging Country Indices – Capital Returns YTD
%
70
60
50
40
30
20
10
0
-10
-20
FTSE Global All Cap Sector Indices – Capital Returns YTD (USD)
%
40
30
20
10
Stock Performance
Best Performing FTSE All-World Index Stocks (USD/%) Worst Performing FTSE All-World Index Stocks (USD/%)
Minara Resources AU 235.1 ITV PCL THAI -76.3
Zijin Mining Group (H) CHN 209.7 Partygaming UK -76.1
Shanghai Zhenhua Port Machinery (B) CHN 207.7 Tokyu Construction JA -62.0
Shenzhen Investment (Red Chip) HK 204.6 UFJ Nicos JA -66.9
Great Wall Motor Company (H) CHN 201.0 Yukos RUS -72.6
Overall Index Return (USD) No. of Value 3 M (%) 6 M (%) 12 M (%) YTD (%) Actual DIv
Consts Yld (%)
FTSE Global AC Index 8,008 393.03 8.0 10.8 20.2 17.3 2.03
FTSE Global LC Index 1,177 374.85 7.0 10.6 18.4 16.0 2.27
FTSE Global MC Index 1,728 538.01 9.2 10.3 22.3 18.2 1.83
FTSE Global SC Index 4,983 483.39 10.6 10.0 23.6 20.1 1.69
FTSE All-World Index 2,917 233.88 7.6 10.9 19.7 16.9 2.10
12%
FTSE Asia Pacific AC ex Japan Index 1,793 503.21 13.4 15.9 31.2 24.9 2.62
FTSE Latin America AC Index
10%
FTSE All Emerging Europe AC Index
204
115
895.84
856.03
13.8
7.9
23.9
17.3
33.9
39.8
31.9
32.8
2.94
1.55
FTSE Developed 8% Europe AC Index
FTSE Middle East & Africa AC Index
1,691
210
449.83
588.37
9.3
10.2
14.0
6.8
33.1
18.9
28.4
8.1
2.66
2.76
FTSE North 6% Americas AC Index 2,622 343.27 7.7 9.9 13.3 13.1 1.68
FTSE Japan AC Index 1,373 398.30 -0.3 -1.1 9.3 0.6 1.07
4%
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
2%
0%
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
-2%
0
Dollar Value
Local Currency Value
Capital
FTSE Argentina AC
FTSE Brazil AC
FTSE Chile AC
FTSE China AC
FTSE Colombia AC
FTSE Czech Republic AC
FTSE Egypt AC
FTSE Hungary AC
FTSE India AC
FTSE Indonesia AC
FTSE Israel AC
FTSE Korea AC
FTSE Malaysia AC
FTSE Mexico AC
FTSE Morocco AC
FTSE Pakistan AC
FTSE Peru AC
Oil & Gas Producers
Oil Equipment, Services & Distribution
FTSE Philippines AC
Chemicals
FTSE Poland AC
Industrial Metals
Mining
FTSE Russia AC
Construction & Materials
FTSE South Africa AC
Aerospace & Defence
General Insutrials
FTSE Taiwan AC
Electronic & Electrical Equipment
FTSE Thailand AC
Industrial Engineering
Industrial Transportation
FTSE Turkey AC
Support Services
Automobiles & Parts
Beverages
Food Producers
Household Goods
Personal Goods
Tobacco
Health Care Equipment & Services
Pharmaceuticals & Biotechnology
Food & Druug Retailers
General Retailers
Media
Travel & Leisure
Fixed Line Telecommunications
Mobile Telecommunications
Electricity
Gas, Water & Multiutilities
Software & Computer Services
Technology Hardware & Equipment
Banks
Nonlife Insurance
Life Insurrance
Real Estate
General Financial
Equity Investment Instruments
Total Return
85

MARKET REPORTS BY FTSE RESEARCH
86
FTSE Global Equity Index Series – Developed ex US
30 December 2005 to 30 November 2006
FTSE Developed Regional Indices – Large/Mid Cap (USD)
130
130
125
125
120 120 120 120 120 120 120
115
115
110
110
105
105
100
100
95 95 95 95 95 95 95
90
90
31-Dec-05
%
31-Jan-06
28-Feb-06
31-Mar-06
30-Apr-06
31-May-06
30-Jun-06
31-Jul-06
31-Aug-06
30-Nov-06
FTSE Developed Regional Indices – Capital Returns YTD (USD)
30.0
22.5
15.0
7.5
0.0
FTSE Developed
FTSE All-Emerging
FTSE Developed ex US
FTSE Developed Europe
FTSE Developed Asia Pacific
FTSE Developed Asia Pacific ex Japan
FTSE Eurozone
FTSE US
FTSE Developed AC ex US
FTSE Developed ex US Sector Indices (LC/MC) – Capital Returns YTD (USD)
%
50 50
40
30
30
20
20
10
10
0
0
30-Sep-06
FTSE Developed LC ex US
31-Oct-06
FTSE Developed MC ex US
FTSE Developed SC ex US
Oil & Gas Producers
Oil Equipment, Services & Distribution
Chemicals
Industrial Metals
Mining
Construction & Materials
Aerospace & Defence
General Insutrials
Electronic & Electrical Equipment
Industrial Engineering
Industrial Transportation
Support Services
Automobiles & Parts
Beverages
Food Producers
Household Goods
Personal Goods
Tobacco
Health Care Equipment & Services
Pharmaceuticals & Biotechnology
Food & Druug Retailers
General Retailers
Media
Travel & Leisure
Fixed Line Telecommunications
Mobile Telecommunications
Electricity
Gas, Water & Multiutilities
Software & Computer Services
Technology Hardware & Equipment
Banks
Nonlife Insurance
Life Insurrance
Real Estate
General Financial
Equity Investment Instruments
Oil & Gas Producers
Oil Equipment, Services & Distribution
Chemicals
Industrial Metals
Mining
Construction & Materials
Aerospace & Defence
General Insutrials
Electronic & Electrical Equipment
Industrial Engineering
Industrial Transportation
Support Services
Automobiles & Parts
Beverages
Food Producers
Household Goods
Personal Goods
Tobacco
Health Care Equipment & Services
Pharmaceuticals & Biotechnology
Food & Druug Retailers
General Retailers
Media
Travel & Leisure
Fixed Line Telecommunications
Mobile Telecommunications
Electricity
Gas, Water & Multiutilities
Software & Computer Services
Technology Hardware & Equipment
Banks
Nonlife Insurance
Life Insurrance
Real Estate
General Financial
Equity Investment Instruments
FTSE Developed (LC/MC)
FTSE Developed Europe (LC/MC)
FTSE Developed Asia Pacific (LC/MC)
FTSE All-Emerging (LC/MC)
FTSE Developed ex US (LC/MC)
FTSE US (LC/MC)
FTSE Developed Asia Pacific
ex Japan (LC/MC)
FTSE North America AC (US$)
Capital
Capital
Total Return
Total Return
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

Stock Performance
Best Performing FTSE Developed ex US Index Stocks (USD/%) Worst Performing FTSE Developed ex US Index Stocks (USD/%)
Minara Resources AU 235.1 Partygaming UK -76.1
Shenzhen Investment (Red Chip) HK 204.6 UFJ Nicos JA -66.9
Boliden SWED 195.3 Tokyu Construction JA -62.0
Metrovacesa SP 189.0 Aiful JA -61.7
Zinifex AU 166.4 NIS Group JA -59.7
Overall Index Return (USD) No. of Value 3 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div
Consts Yld (%)
FTSE Developed ex US Index (LC/MC) 1,346 264.93 6.7 10.4 26.0 20.6 2.41
FTSE US Index (LC/MC) 705 581.25 7.6 10.3 12.2 12.3 1.74
FTSE Developed Index (LC/MC) 2,051 226.00 7.2 10.4 18.7 16.3 2.08
FTSE All-Emerging Index (LC/MC) 866 428.06 12.7 16.4 32.3 24.1 2.29
FTSE Developed Europe Index (LC/MC) 515 267.41 8.5 13.5 31.4 27.0 2.78
FTSE Developed Asia Pacific Index (LC/MC) 771 239.00 3.1 4.5 15.7 8.6 1.75
FTSE Developed Asia Pacific ex Japan Index (LC/MC) 285 407.59 10.9 16.4 27.9 25.5 3.28
FTSE Developed ex US AC Index 3,885 447.98 7.2 10.5 26.7 21.1 2.33
FTSE Developed ex US LC Index 555 412.06 6.2 10.1 24.8 19.8 2.58
FTSE Developed ex US MC Index 1,728 542.97 9.2 12.1 31.7 24.6 1.83
FTSE Developed ex US SC Index 4,983 586.29 10.5 10.9 32.3 25.0 1.69
FTSE Global Equity Index Series – Asia Pacific
30 December 2005 to 30 November 2006
FTSE Asia Pacific All-Cap (AC) Regional Indices (USD)
125
120
115
110
105
100
95
90
31-Dec-05
31-Jan-06
28-Feb-06
31-Mar-06
30-Apr-06
31-May-06
30-Jun-06
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
31-Jul-06
31-Aug-06
30-Sep-06
31-Oct-06
30-Nov-06
FTSE Global AC
FTSE Developed
Asia Pacific (LC/MC)
FTSE Developed Asia Pacific
ex Japan (LC/MC)
FTSE Asia Pacific (LC/MC)
FTSE All-Emerging
Asia Pacific AC
FTSE Japan (LC/MC)
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
87

MARKET REPORTS BY FTSE RESEARCH
88
FTSE Asia Pacific Regional Sector Indices – Capital Returns YTD (USD)
%
30
25
20
15
10
5
0
FTSE Asia Pacific AC
FTSE Asia Pacific All Cap Sector Indices – Capital Returns YTD (USD)
%
80
70
60
50
40
30
20
10
0
-10
FTSE Global AC
Stock Performance
Best Performing FTSE Asia Pacific Index Stocks (USD/%) Worst Performing FTSE Asia Pacific Index Stocks (USD/%)
Minara Resources AU 235.1 ITV PCL THAI -76.3
Zijin Mining Group (H) CHN 209.7 UFJ Nicos JA -66.9
Shanghai Zhenhua Port Machinery (B) CHN 207.7 Tokyu Construction JA -62.0
Shenzhen Investment (Red Chip) HK 204.6 Aiful JA -61.7
Great Wall Motor Company (H) CHN 201.0 NIS Group JA -59.7
Overall Index Return (USD)
FTSE Developed
Asia Pacific (LC/MC)
Developed Asia Pacific
ex Japan (LC/MC)
FTSE All-Emerging
Asia Pacific AC
FTSE Developed
Asia Pacific AC
FTSE Japan Index (LC/MC)
FTSE Asia Pacific (LC/MC)
FTSE Asia Pacific MC
FTSE Asia Pacific SC
FTSE Asia Pacific LC
Oil & Gas Producers
Oil Equipment, Services & Distribution
Chemicals
Industrial Metals
Mining
Construction & Materials
Aerospace & Defence
General Insutrials
Electronic & Electrical Equipment
Industrial Engineering
Industrial Transportation
Support Services
Automobiles & Parts
Beverages
Food Producers
Household Goods
Personal Goods
Tobacco
Health Care Equipment & Services
Pharmaceuticals & Biotechnology
Food & Druug Retailers
General Retailers
Media
Travel & Leisure
Fixed Line Telecommunications
Mobile Telecommunications
Electricity
Gas, Water & Multiutilities
Software & Computer Services
Technology Hardware & Equipment
Banks
Nonlife Insurance
Life Insurrance
Real Estate
General Financial
Equity Investment Instruments
Capital
Total Return
No. of Value 3 M (%) 6 M (%) 12 M (%) YTD (%) Actual DIv
Consts Yld (%)
FTSE Global AC Index 8008 393.03 8.0 10.8 20.2 17.3 2.03
FTSE Asia Pacific AC Index 3166 442.75 6.0 6.5 19.1 11.2 1.83
FTSE Asia Pacific Index (LC/MC) 1299 252.22 5.8 7.1 19.8 12.1 1.83
FTSE Asia Pacific LC Index 526 427.86 5.7 7.7 20.6 13.2 1.91
FTSE Asia Pacific MC Index 774 483.75 6.1 4.1 16.0 7.0 1.79
FTSE Asia Pacific SC Index 1851 490.33 7.2 2.4 13.7 4.6 1.91
FTSE Developed Asia Pacific ex Japan Index (LC/MC) 285 407.59 10.9 16.4 27.9 25.5 3.28
FTSE Developed Asia Pacific Index (LC/MC) 771 239.00 3.1 4.5 15.7 8.6 1.75
FTSE All-Emerging Asia Pacific Index (LC/MC) 528 306.71 14.7 15.5 34.0 23.9 2.08
FTSE Japan Index (LC/MC) 486 149.73 0.0 -0.1 10.9 2.4 1.05
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

%
FTSE Global Equity Index Series – Europe
30 December 2005 to 30 November 2006
FTSE European Regional Indices Performance (EUR)
120 120 120 120 120 120 120
115 115 115 115 115 115 115
110
105 105 105 105 105 105 105
100
95 95 95 95 95 95 95
90 90 90 90 90 90 90
31-Dec-05
31-Jan-06
28-Feb-06
31-Mar-06
30-Apr-06
31-May-06
30-Jun-06
FTSE Europe All Cap Indices – Capital Returns YTD (EUR)
25
20
15
10
5
0
FTSE Global AC
FTSE Europe AC
FTSE Europe LC
FTSE Europe MC
FTSE Europe SC
FTSE Developed Europe AC
FTSE All-Emerging Europe AC
FTSE Developed Europe All Cap Sector Indices – Capital Returns YTD (EUR)
%
70
60
50
40
30
20
10
0
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
31-Jul-06
FTSE Eurozone AC
31-Aug-06
30-Sep-06
FTSE Developed Europe
ex UK AC
FTSE Eurofirst 300
FTSEurofirst 80
31-Oct-06
FTSEurofirst 100
30-Nov-06
Oil & Gas Producers
Oil Equipment, Services & Distribution
Chemicals
Industrial Metals
Mining
Construction & Materials
Aerospace & Defence
General Insutrials
Electronic & Electrical Equipment
Industrial Engineering
Industrial Transportation
Support Services
Automobiles & Parts
Beverages
Food Producers
Household Goods
Personal Goods
Tobacco
Health Care Equipment & Services
Pharmaceuticals & Biotechnology
Food & Druug Retailers
General Retailers
Media
Travel & Leisure
Fixed Line Telecommunications
Mobile Telecommunications
Electricity
Gas, Water & Multiutilities
Software & Computer Services
Technology Hardware & Equipment
Banks
Nonlife Insurance
Life Insurrance
Real Estate
General Financial
FTSE Global AC
FTSE Developed Europe
ex UK LC/MC
FTSEurofirst 300
FTSE Developed Europe AC
FTSEurofirst 100
FTSE Eurobloc AC
FTSEurofirst 80
FTSE North America AC (US$)
Capital
Total Return
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
89

MARKET REPORTS BY FTSE RESEARCH
90
Stock Performance
Best Performing FTSE Developed Europe Index Stocks (EUR/%) Worst Performing FTSE Developed Europe Index Stocks (EUR/%)
Boliden SWED 195.3 Partygaming UK -76.1
Metrovacesa SP 189.0 EADS FRA -21.8
Sacyr-Vallehermoso SP 161.7 Tietoenator Oyj FIN -21.7
Vallourec FRA 145.0 PagesJaunes FRA -21.6
Vestas Wind Systems DEN 136.0 Sogecable SP -16.6
Overall Index Return (EUR)
No. of Value 3 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div
Consts Yld (%)
FTSE Global AC Index 8008 393.03 8.0 10.8 20.2 17.3 2.03
FTSE Europe AC Index 1806 395.36 5.5 10.7 18.6 14.5 2.62
FTSE Europe LC Index 225 422.11 4.0 9.2 14.8 11.3 2.98
FTSE Europe MC Index 332 519.13 8.8 14.2 27.3 21.8 2.37
FTSE Europe SC Index 1073 556.96 11.0 14.0 30.2 24.6 2.11
FTSE Developed Europe AC Index 1691 390.77 5.5 10.5 18.3 14.3 2.66
FTSE All-Emerging Europe AC Index 115 743.63 4.2 13.6 24.3 18.2 1.55
FTSE Eurobloc AC Index 866 411.26 6.5 11.2 20.6 16.1 2.67
FTSE Developed Europe ex UK AC Index 1203 416.81 6.6 11.3 20.2 15.7 2.50
FTSEurofirst 300 Index 300 1432.43 4.4 9.6 15.9 12.3 2.79
FTSEurofirst 80 Index 80 5032.79 5.0 10.1 17.2 12.8 3.09
FTSEurofirst 100 Index 100 4573.44 3.1 7.8 12.8 9.5 3.15
FTSE UK Index Series
30 December 2005 to 30 November 2006
FTSE UK Index Series (GBP)
125
125
120 120
115
115
110
110
105 105
100 100 100
100 100 100
95
95
90
90
85
85
31-Dec-05
31-Dec-05
31-Jan-06
31-Jan-06
28-Feb-06
28-Feb-06
31-Mar-06
31-Mar-06
30-Apr-06
30-Apr-06
31-May-06
31-May-06
30-Jun-06
30-Jun-06
31-Jul-06
31-Jul-06
31-Aug-06
31-Aug-06
30-Sep-06
30-Sep-06
31-Oct-06
31-Oct-06
30-Nov-06
30-Nov-06
FTSE FTSE 100 100
FTSE 250
FTSE 350
FTSE SmallCap
FTSE
FTSE
All-Share
All-Share
FTSE Fledgling
FTSE Fledgling
FTSE AIM All-Share
FTSE AIM All-Share
FTSE techMARK
FTSE techMARK
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
FTSE North America AC (US$)
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS
FTSE North America AC (US$)

FTSE All-Share Sector Indices – Capital Returns YTD (GBP)
80
60
40
40
20
20
0
0
-20
FTSE UK Indices – Capital Return YTD (GBP)
25
20
15
10
5
0
-5
%
FTSE 100
-20
FTSE 250
Stock Performance
Best Performing FTSE All-Share Index Stocks (GBP/%) Worst Performing FTSE All-Share Index Stocks (GBP/%)
UK Coal 186.2 Stanelco -91.3
Aquarius Platinum 141.7 iSOFT Group -89.92
Aveva Group 130.2 Plasmon -86.13
Chemring Group 112.8 Partygaming -79.1
London Stock Exchange Group 110.6 Instore -67.36
Overall Index 8% Return (GBP)
No. of Value 3 M (%) 6 M (%) 12 M (%) YTD (%) Actual Div Net P/E
6%
FTSE 100 Index
Consts
100 6048.85 2.4 5.7 11.5 7.7
Yld (%)
3.15
Cover
2.46
Ratio
12.88
FTSE 250 Index4% 8%
250 10673.95 11.2 14.8 28.2 21.4 2.12 2.45 19.28
FTSE 350 Index 350 3173.54 3.7 7.0 13.8 9.6 3.00 2.46 13.56
FTSE SmallCap 2% 6% Index 328 3650.96 5.9 6.6 14.1 10.5 1.83 1.43 38.24
FTSE All-Share Index 678 3119.85 3.7 7.0 13.8 9.6 2.96 2.44 13.85
FTSE Fledgling 0% 4% Index 246 4190.66 8.4 9.8 16.9 11.8 1.69 -0.91 0
FTSE AIM Index 1156 1018.95 -2.6 -9.2 0.7 -2.6 0.53 -0.76 0
FTSE techMARK -2% 2% 100 Index 100 1434.49 4.0 4.6 6.6 0.2 1.43 - -
-4%
0%
-6%
-2%
-4%
Mining
Oil & Gas
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
-6%
FTSE 350
Chemicals
FTSE SmallCap
Construction & Building
Materials
ng
Oil & Gas Producers
Oil Equipment, Services & Distribution
Chemicals
Industrial Metals
Mining
Construction & Materials
Aerospace & Defence
General Insutrials
Electronic & Electrical Equipment
Industrial Engineering
Industrial Transportation
Support Services
Automobiles & Parts
Beverages
Food Producers
Household Goods
Leisure Goods
Personal Goods
Tobacco
Health Care Equipment & Services
Pharmaceuticals & Biotechnology
Food & Druug Retailers
General Retailers
Media
Travel & Leisure
Fixed Line Telecommunications
Mobile Telecommunications
Electricity
Gas, Water & Multiutilities
Software & Computer Services
Technology Hardware & Equipment
Banks
Nonlife Insurance
Life Insurrance
Real Estate
General Financial
Equity Investment Instruments
Oil & Gas Producers
Oil Equipment, Services & Distribution
Chemicals
Industrial Metals
Mining
Construction & Materials
Aerospace & Defence
General Insutrials
Electronic & Electrical Equipment
Industrial Engineering
Industrial Transportation
Support Services
Automobiles & Parts
Beverages
Food Producers
Household Goods
Leisure Goods
Personal Goods
Tobacco
Health Care Equipment & Services
Pharmaceuticals & Biotechnology
Food & Druug Retailers
General Retailers
Media
Travel & Leisure
Fixed Line Telecommunications
Mobile Telecommunications
Electricity
Gas, Water & Multiutilities
Software & Computer Services
Technology Hardware & Equipment
Banks
Nonlife Insurance
Life Insurrance
Real Estate
General Financial
Equity Investment Instruments
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
Forestry & Paper
r
FTSE All-Share
Steel & Other Metals
ls
Aerospace & Defence
ce
FTSE Fledgling
Diversified Industrials
ls
Electronic & Electrical
Equipment
al
FTSE AIM
All-Share
ryEngineering
& Machinery
Automobiles & Parts
ts
FTSE
techMARK 100
Household Goods &
Textiles
&
Beverages
Food Producers &
Processors
&
Health
old Personal Care & Household
Products
Capital
Capital
Total Return
Total Return
Pharmaceuticals &
Biotechnology
&
Tobacco
General Retailers
s
Leisure & Hotels
ls
Media & Entertainment
nt
Support Services
91
s
Transport
Food & Drug Retailers
rs

MARKET REPORTS BY FTSE RESEARCH
92
FTSE Xinhua Index Series
30 December 2005 to 30 November 2006
FTSE Xinhua Index Series (CNY/HKD)
200 200 200 200 200 200
180 180 180 180 180 180
160 160 160 160 160 160
140 140 140 140 140 140
120 120 120 120 120 120
100 100 100 100 100 100
FTSE Xinhua Index Series
Index Name Consts Value 3 M (%) 6 M (%) 12 M (%) YTD (%)
Actual Div
Yld (%)
FTSE/Xinhua 25 Index (HKD) 25 13977.39 18.6 27.8 56.6 51.9 1.86
FTSE/Xinhua China 50 Index (CNY) 50 7246.89 41.2 37.2 96.8 85.6 1.37
FTSE Xinhua All-Share Index (CNY) 977 3950.56 22.1 22.7 97.0 87.4 1.33
FTSE Xinhua 600 Index (CNY) 600 4293.07 24.4 23.7 99.3 88.4 1.42
FTSE Xinhua Small Cap Index (CNY) 377 2626.38 6.1 13.9 79.4 76.3 0.67
FTSE Xinhua China Bond Total Return Index (CNY)
*Annual Redemption Yield
32 97.25 1.5 1.3 4.1 2.5 2.94*
FTSE Hedge Index Series
FTSE Hedge Management Styles (USD) – 5-Year Performance
140
130
120
110
100
80 80 80 80 80 80
31-Dec-05
90
80
Nov-01
31-Jan-06
May-02
28-Feb-06
Nov-02
31-Mar-06
May-03
30-Apr-06
Nov-03
31-May-06
May-04
30-Jun-06
Nov-04
31-Jul-06
Based upon indicative index values as at 30 November 2006
31-Aug-06
May-05
30-Sep-06
Nov-05
31-Oct-06
May-06
30-Nov-06
FTSE Hedge
FTSE Hedge Directional
FTSE Hedge Event Driven
FTSE Hedge Non-Directional
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
Nov-06
FTSE/Xinhua China 25 (HKD)
FTSE Xinhua All-Share (CNY)
FTSE Xinhua Small Cap (CNY)
FTSE/Xinhua China A50 (CNY)
FTSE Xinhua 600 (CNY)
FTSE Xinhua China Government
Bond Total Return Index (CNY)
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

FTSE Hedge – Management Styles & Strategies (NAV Terms)
Index 3 M 6 M 12 M YTD 5 Year 5-Year Ann 3-Year
Level (%) (%) (%) (%) Return (%) Volatility (%)
FTSE Hedge Index 5414.40 1.9 1.5 6.2 4.9 27.1 4.9 6.3
Directional 3300.74 3.8 2.9 7.5 5.7 39.2 6.8 8.6
Equity Hedge 2323.72 4.4 4.3 9.8 6.8 42.5 7.3 9.8
Commodity Trading Association (CTA) / Managed Futures 2007.04 -2.9 -4.6 -3.0 -0.4 35.8 6.3 11.5
Global Macro 1982.37 2.5 1.1 4.9 2.6 26.7 4.8 8.3
Event Driven 3401.44 1.8 2.6 8.5 7.2 21.7 4.0 7.7
Merger Arbitrage 2169.25 0.8 3.0 8.0 7.1 9.8 1.9 6.9
Distressed & Opportunities 2353.49 2.6 2.1 8.8 7.2 32.8 5.8 8.8
Non-directional 3105.85 0.2 0.6 4.5 4.0 15.3 2.9 3.7
Convertible Arbitrage 2058.82 0.5 2.1 7.1 6.7 34.9 6.2 5.7
Equity Arbitrage 2105.92 0.1 0.2 6.6 5.9 17.4 3.3 6.1
Fixed Income Relative Value 2056.32 0.1 0.2 2.2 1.8 5.5 1.1 1.9
Based upon indicative index values as at 30 November 2006
FTSE EPRA/NAREIT Global Real Estate Index Series
FTSE EPRA/NAREIT Global Real Estate Indices (Total Return Basis)
150
140 140 140 140 140
130 130 130 130 130
120
110
100
90
31-Dec-05
31-Jan-06
28-Feb-06
31-Mar-06
30-Apr-06
31-May-06
30-Jun-06
FTSE EPRA/NAREIT Global Real Estate Indices (Total Return)
Actual Div
Index Name Consts Value 3 M (%) 6 M (%) 12 M (%) YTD (%) Yld (%)
FTSE EPRA/NAREIT Global Index (USD) 326 3493.16 13.5 26.4 44.3 38.6 3.07
FTSE EPRA/NAREIT North America Index Index (USD) 138 4217.06 13.4 28.2 39.1 38.5 3.53
FTSE EPRA/NAREIT Europe Index (EUR) 99 3543.23 12.9 23.9 42.6 37.3 2.17
FTSE EPRA/NAREIT Euro Zone Index (EUR) 42 3707.53 11.7 22.5 41.2 38.4 2.60
FTSE EPRA/NAREIT Asia Index (USD) 89 2499.71 11.5 22.7 43.7 29.3 2.99
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
31-Jul-06
31-Aug-06
30-Sep-06
31-Oct-06
30-Nov-06
EPRA/NAREIT Global
Total Return Index (USD)
EPRA/NAREIT North America
Total Return Index (USD)
EPRA/NAREIT Europe
Total Return Index (EUR)
EPRA/NAREIT Eurozone
Total Return Index (EUR)
EPRA/NAREIT Asia
Total Return Index (USD)
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
93

MARKET REPORTS BY FTSE RESEARCH
94
FTSE Bond Indices
FTSE Bond Indices (Total Return Basis)
FTSE Bond Indices (Total Return)
Annual
Redemption
Index Name Consts Value 3 M (%) 6 M (%) 12 M (%) YTD (%) Yld (%)
FTSE Eurozone Government Bond Index (EUR) 239 156.46 1.4 3.4 1.9 0.8 3.83
FTSE Pfandbrief Index (EUR) 375 178.96 1.1 2.6 1.6 1.0 3.90
FTSE Euro Emerging Markets Bond Index (EUR) 38 214.53 1.4 3.9 3.7 2.8 4.69
FTSE Euro Corporate Bond Index (EUR) 315 145.66 1.3 2.9 1.8 1.2 4.31
FTSE Gilts Index Linked All Stocks Index (GBP) 11 2104.05 1.8 5.8 6.6 4.6 1.29*
FTSE Gilts Fixed All-Stocks Index (GBP) 29 1971.79 1.4 3.1 3.3 1.9 4.27
FTSE US Government Bond Index (USD) 126 152.73 2.5 5.3 4.9 3.6 4.64
FTSE Japan Government Bond Index (JPY) 243 110.61 0.3 1.7 0.1 0.2 1.55
FTSE China Government Bond Index (CNY) 32 97.25 1.5 1.3 4.1 2.5 2.94
* Based on 0% inflation
FTSE GWA Index Series
FTSE GWA Index Series – 5-Year Performance (Total Return Basis)
250
200
150
100
50
106
104 104 104 104 104 104 104 104
102 102 102 102 102 102 102 102
100 100 100 100 100 100 100 100
98
96
31-Dec-05
Sep-01
31-Jan-06
Mar-02
28-Feb-06
Sep-02
31-Mar-06
Mar-03
30-Apr-06
Sep-03
31-May-06
Mar-04
30-Jun-06
Sep-04
31-Jul-06
Mar-05
31-Aug-06
Sep-05
30-Sep-06
31-Oct-06
Mar-06
30-Nov-06
FTSE GWA Developed
Index (USD)
FTSE GWA Developed
ex US Index (USD)
FTSE GWA Developed
ex Japan Index (USD)
FTSE GWA Developed Europe
Index (EUR)
FTSE GWA UK Index (GBP)
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
Sep-06
FTSE Eurozone Government
Bond Index (EUR)
FTSE Euro Corporate
Bond Index (EUR)
FTSE US Goverment
Bond Index (USD)
FTSE Pfandbriefe Index (EUR)
FTSE Gilts Index Linked
All Stocks (GBP)
FTSE Japan Government
Bond Index (JPY)
FTSE Euro Emerging Markets
Bond Index (EUR)
FTSE Gilts Fixed All-Stocks (GBP)
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

FTSE GWA Indices (Total Return)
Actual Div
Index Name Consts Value 3 M (%) 6 M (%) 12 M (%) YTD (%) Yld (%)
FTSE GWA Developed Index (USD) 2051 4010.01 8.0 12.2 23.9 21.1 2.30
FTSE GWA Developed ex US Index (USD) 1346 4333.39 7.8 12.4 31.1 25.7 2.61
FTSE GWA Developed ex Japan Index (USD) 1567 4170.75 7.3 18.6 30.6 28.4 2.40
FTSE GWA Developed Europe Index (EUR) 517 4015.31 5.9 12.1 21.8 17.6 2.93
FTSE GWA UK Index (GBP) 684 3817.03 5.0 9.2 17.5 13.0 3.10
FTSE RAFI Index Series
FTSE RAFI Index Series – 5-Year Performance (Total Return Basis)
250
200
150
100
50
Nov-01
May-02
Nov-02
May-03
Nov-03
FTSE RAFI Indices (Total Return)
May-04
Actual Div
Index Name Consts Value 3 M (%) 6 M (%) 12 M (%) YTD (%) Yld (%)
FTSE RAFI US 1000 Index (USD) 985 5962.30 7.9 12.0 17.7 17.5 2.06
FTSE RAFI Developed ex US 1000 Index (USD) 1001 6468.59 8.0 12.2 30.6 25.2 2.54
FTSE RAFI Kaigai 1000 Index (USD) 1013 5711.71 8.6 13.7 26.3 24.0 2.48
FTSE RAFI Europe Index (EUR) 454 5941.63 6.5 12.3 22.9 18.8 2.84
FTSE RAFI Eurozone Index (EUR) 264 6040.70 7.2 13.2 24.6 20.8 2.86
FTSE Research Team contact details
Andy Harvell Andreas Elia Kamila Lewandowski Sandra Jim
Head of Research Research Executive Index Development Executive Research Manager, Asia Pacific
andy.harvell@ftse.com andreas.elia@ftse.com kamila.lewandowski@ftse.com sandra.jim@ftse.com
+44 20 7866 8986 +44 20 7866 8013 +44 20 7866 1877 +(852) 223 0-5814
FTSE GLOBAL MARKETS • JANUARY/FEBRUARY 2007
Nov-04
May-05
Nov-05
May-06
FTSE RAFI US 1000 Index (USD)
FTSE RAFI Developed ex US
1000 Index (USD)
FTSE RAFI Kaigai 1000 Index (USD)
FTSE RAFI Europe Index (EUR)
FTSE RAFI Eurozone Index (GBP)
Key: AC = All Cap, LC = Large Cap, MC = Mid Cap, SC = Small Cap, LC/MC = Large and Mid Cap
Nov-06
95

CALENDAR
96
Index Reviews January – June 2007
Date Index Series Review Type Effective Data Cut-off
(Close of business)
11-Jan TSEC Taiwan 50 Quarterly review 19-Jan 29-Dec
Mid Jan PSI 20 Semi-annual review 30-Jan 31-Dec
Mid Jan OMX H25 Quarterly review of number of shares 20 Jan 31-Jan
Feb BEL 20 Annual review 1-Mar 31-Dec
Feb AEX Annual review 1-Mar 31-Dec
9-Feb Hang Seng Quarterly review 1-Mar 29-Dec
12-Feb MSCI Standard Index Series Quarterly review 28 Feb 31-Jan
Early Mar ATX Semi-annual review / number of shares 30-Mar 28-Feb
Early Mar CAC 40 Quarterly review 16 Mar 28-Feb
Early Mar S&P / TSX Quarterly review 16-Mar 28-Feb
2-Mar S&P / MIB Semi-annual review 19 Mar 12 Mar
2-Mar S&P / ASX Indices Annual / Quarterly review 16-Mar 28-Feb
3-Mar DAX Quarterly review 16-Mar 28-Feb
7-Mar FTSE Asiatop / Asian Sectors Semi-annual review 16-Mar 28 Feb
7-Mar FTSE UK Quarterly review 16-Mar 6-Mar
7-Mar FTSE All-World Annual review Asia Pacific ex Japan 16-Mar 29-Dec
7-Mar FTSEurofirst 300 Quarterly review 16-Mar 28-Feb
7-Mar FTSE techMARK 100 Quarterly review 16-Mar 28-Feb
7-Mar FTSE eTX Quarterly review 16-Mar 28-Feb
9-Mar NASDAQ 100 Quarterly review / Shares adjustment 16-Mar 28-Feb
12-Mar NZSX 50 Quarterly review 30-Mar 28-Feb
13-Mar S&P MIB Quarterly review - shares & IWF 19-Mar 12-Mar
14 Mar DJ STOXX Quarterly review (components) 16 Mar 20-Feb
14-Mar DJ STOXX Quarterly review (style) 16-Mar 1-Mar
14-Mar S&P US Indices Quarterly review 16-Mar
14-Mar S&P Europe 350 / S&P Euro Quarterly review 16-Mar
14-Mar S&P Topix 150 Quarterly review 16-Mar
14-Mar S&P Asia 50 Quarterly review 16-Mar
14-Mar S&P Global 1200 Quarterly review 16-Mar
14-Mar S&P Global 100 Quarterly review 16-Mar
14-Mar S&P Latin 40 Quarterly review 16-Mar
16-Mar Russell US Indices Quarterly review - IPO additions only 31-Mar 28-Feb
8-Apr TSEC Taiwan 50 Quarterly review 20-Apr 30-Mar
11-Apr FTSE Nordic 30 Semi-annual review 20-Apr 30-Apr
Mid April OMX H25 Quarterly review 20-Apr 31-Mar
Late April FTSE / ATHEX Semi-annual review 31-May 30-Mar
11-May Hang Seng Quarterly review 1-Jun 30-Mar
16-May MSCI Standard Index Series Annual review 31-May 30-Apr
Early Jun ATX Quarterly review 29-Jun 31-May
Early Jun KOSPI 200 Annual review 8-Jun 31-May
Early Jun IBEX 35 Semi-annual review 2-Jul 31-May
Early Jun CAC 40 Quarterly review 15-Jun 31-May
Early Jun OBX Semi-annual review 15-Jun 31-May
Early Jun S&P / TSX Quarterly review 15-Jun 31-May
1-Jun OMX C20 Semi-annual review 15-Jun 31-May
1-Jun S&P BRIC 40 Semi-annual review - constituents 15-Jun
1-Jun S&P / ASX Indices Quarterly Review 15-Jun 31-May
1-Jun DJ Global Titans 50 Annual review of index composition 15-Jun 30-Apr
4-Jun OMX S30 Semi-annual review 30-Jun 31-May
Sources: Berlinguer, FTSE, JP Morgan, Standard & Poors, STOXX
JANUARY/FEBRUARY 2007 • FTSE GLOBAL MARKETS

MARHedge Presents:
12th Annual
European Conference
on Alternative Investments
5-7 February 2007 • Hotel President Wilson • Geneva, Switzerland
The MARHedge 12th Annual European Conference on Alternative Investments, 5-7 February in Geneva,
Switzerland, will gather leading hedge fund and fund-of-funds managers, institutional and high-net-worth
investors from all over the world to delve deeply into the next generation of alternative investments. Through
keynote speeches, as well as general and targeted breakout sessions, investors and those who control the
most lucrative distribution channels will reveal what they are looking for from managers. Managers will also
detail the challenges of executing strategies in emerging markets and unique investment styles in more
established arenas.
MARHedge Geneva 2006 attracted a delegate mix of 46% hedge funds, 35% investors and 19% service
providers.
Speakers Include:
Albert Pinzón, Brown Rudnick Berlack Israels LLP
Andrew Alford, Goldman Sachs & Co
Charles Lemonides, ValueWorks LLC
Gabriel Bousbib, Gottex Fund Management
Alper Ince, Pacific Alternative Asset Management Co LLC
Jeffrey Solomon, Ramius Capital Group
Rubin Chen, ING Alternative Asset Management
John Godden, IGS Group Limited
Leila Kardouche, RAB Capital PLC
Marcel Giacometti, Auda (UK) Ltd.
Paul Ross, Arundel Iveagh Investment Management Ltd
Sebastian Dovey, Scorpio Partnership
Sebastian Stubbe, Landmark Investors LLC
Tushar Patel, Hedge Funds Investment Management Ltd
Barbara Rupf Bee, HSBC Republic Investment Ltd
Hrishi Parandekar, Private Wealth Advisory
To Register Today! Contact Jeannie Lee:
jlee@marhedge.com or +1 646 274 6213

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