Section 2 - FTSE

SUB-CUSTODY 

46 

In a hard hitting article, Tim Steel posits the 

view that the outlook for sub-custodian services 

in Europe will be much tougher than before. In 

an increasingly sophisticated and complex 

market, the resolve of many sub-custody 

providers will be tested as their infrastructure, 

reach and product set are stretched and tested 

again and again. 

SUB- 

CUSTODY 

RACING 

TO 

THE 

FINISH 

THERE IS PLENTY of anecdotal evidence to suggest 

that a significant number of sub-custodians in 

Continental Europe have yet to wake up to certain 

unpalatable realities. Market consensus has it that the 

majority of the region’s agent banks face a challenging 

future. Unable to offer the breadth of product set and 

geographic reach now demanded by an increasingly 

sophisticated and diversified client base – or indeed to fund 

the sort of infrastructure investment necessary to rectify 

those shortcomings – it is argued that the genus of monomarket 

sub-custodian that have traditionally serviced the 

local custody, clearing and settlement needs of institutional 

investors and intermediaries face imminent extinction. 

The past few years have seen the inexorable rise of pan- 

European providers, notably Citigroup and BNP Paribas, 

offering multiple product lines across multiple markets. 

While Europe remains a deeply fragmented proposition as 

far as post-trade processing is concerned – a tangle of 

diverse and at times flat out contradictory regulatory, 

legislative and tax environments give the lie to any notions 

of a single common market – it is still possible for these 

pan-regional players to build and leverage economies of 

scale. 

As Brian Todd, head of network management, EMEA for 

JPMorgan Investor Services – which is principally a buyer 

of sub-custody services in Continental Europe – notes: 

“Sub-custody is bought on the basis of service, but that 

service is pretty well defined in terms of what it takes to be 

a sub-custodian: custody, settlement, corporate actions, 

income collection, securities lending and borrowing. So 

ultimately it comes down to being a commercial 

conversation around price, settlement cut-offs, systems, the 

number of markets a provider can service – and if you buy 

in bulk, you can get a better price.” 

Consolidation in the sub-custody sphere in recent years 

has been driven by two engines: strategic reviews within 

individual banks – pace the merger of BNP and Paribas in 

France – and by banks deciding that they only to want to 

compete in those lines of business where they can build 

significant scale and/or market leadership. For many, this 

product set no longer includes sub-custody. “As a result 

we are now down to two or three quality providers in 

each market and at the same time we are seeing 

emergence of the pan-regional sub-custodians,” says 

Todd.“This trend is not one that is going to go away, and 

over time we will see the consolidation of individual subcustodians 

into those groups.” 

Stephen Brown, regional head of network management, 

Europe, Middle East, Africa and Americas at Northern Trust – 

another buyer of sub-custody services in Europe – stresses 

MAY/JUNE 2005 • FTSE GLOBAL MARKETS

that the shift towards pan-regional providers does not mean 

there are no longer any good indigenous mono-market 

providers to be found. Brown concedes that Northern’s 

network today largely comprises regional providers. “Over 

the last few years we have changed our custodians in a 

number of markets and on all but one occasion we have 

consolidated with a regional provider,”he says. 

Lack of scale and geographic reach is a problem for monomarket 

providers, he adds, while strong pan-regional players 

can boast credit and service quality across more than one 

location. “The fact that they are regional providers 

demonstrates clear commitment to the business,” Brown 

says. “They also tend to evidence greater investment in 

technology based upon capability and contingency planning, 

and typically also have broader experience and client base. 

For us as a global custodian we can certainly derive 

relationship, servicing and pricing advantages from using a 

single provider across multiple markets.” 

While sub-custody clients might give the impression that 

service is less important than cost, in reality they want the 

best of both worlds: top quality service allied to a keen price. 

“That is not an easy balance to strike,”says Jon Lloyd, head 

of clearing, settlement and custody at BNP Paribas 

Securities Services. “European integration and 

harmonisation is taking longer to achieve than predicted 

and it is also proving very expensive – 25-30% of my IT 

budget for the coming year is being spent on implementing 

mandatory market changes. Now, I have a broad franchise 

across Europe to amortise that against, but for a monomarket 

provider that is a huge amount of cost to take 

onboard. Factor in Basel II and TARGET 2, and the monomarket 

provider is extremely exposed.” 

Factor in the commercial aspirations of the region’s 

depositories (of which more later), and it is easy to 

understand why many of those sub-custodians that have 

not quit the business – casualties include Dresdner in 

Germany, Bank Leu in Switzerland, CSFB in Russia and 

most recently ABN AMRO, which sold out to Citigroup – 

are looking to alliances and white labelling in order to 

survive. Both ING Bank and Allied Irish Bank, for example, 

have tied the knot with The Bank of New York. The global 

custodian has also just signed a custody deal with Natexis 

Banques Populaires which is expected to evolve into a fully 

fledged alliance in due course. 

Giulio di Cerbo, managing director, Citigroup Global 

Transaction Services, sees white labelling as an important 

growth area going forward. “Sub-custodians are asking 

themselves whether they have the necessary scale and how 

core the business is to them,” he says. “They could 

obviously choose to sell or to enter a joint venture but a 

number of banks, while recognising there is a need for a 

pan-European solution, are looking to retain their clients 

and their business. In that situation we can white label the 

offering on their behalf. 

“They continue to service their client base and distribution 

channels, but rather than investing in other European 

linkages, they can leverage our scale and single common 

FTSE GLOBAL MARKETS • MAY/JUNE 2005 

Stephen Brown, regional head of network management, Europe, 

Middle East, Africa and Americas at Northern Trust 

technology across multiple jurisdictions. It makes little 

difference to Citigroup whether the volumes coming in 

originate from Germany, France or Italy, so we can provide 

one price across multiple jurisdictions, one set of standards, 

one set of reporting, one communication methodology – and 

those save costs both for the client and us,”says di Cerbo. 

New European directives mean major clients no longer 

buy or sell through a local country broker but rather are 

members of exchanges, he continues. “However, for many 

broker-dealers and banks that is an unwelcome cost burden. 

So we now provide on-exchange clearing and, in addition, 

peripheral services such as cross-border margining and 

access to multiple CCPs and depositories. Should securities 

not come in as expected, we will deliver them from our 

lendable portfolio to the exchange on behalf of our client, and 

we also provide inter-day liquidity and inventory financing 

where banks and brokers have residuals in their account at 

the end of the day.” 

Asian sub-custody 

In Asia, however, there are no such concerns.As Paul Hedges, 

global head of securities services at Standard Chartered Bank, 

notes a key difference between the post-trade environments 

in Asia and Europe is the harmony at the depository level.“I 

sit on the Asia Pacific Central Securities Depository Group 

(ACG) and while the depositories do communicate with each 

other, the level of harmonisation and linkages you see in 

Europe simply does not exist here,”says Hedges.“The ACG is 

talking about hammering out various Memorandums of 

Understanding between CSDs, but we are a long way away 

from that becoming a reality – and for the right reasons, as 

every market in Asia is clearly very different, with no common 

currency or regulatory framework.” 

For his part, Colin Brooks, deputy head of custody and 

47

SUB-CUSTODY 

48 

Giulio di Cerbo, 

managing director, 

Citigroup Global 

Transaction Services 

clearing at HSBC in Hong Kong, feels that Asia has come a 

long way in the last five or six years in terms of uniformity – 

“settlement cycles have come into line and all the markets 

are dematerialised, there is an overall view that markets 

need to be more transparent and there must be a level 

playing field between market participants” – but he agrees 

that the region remains some way away from seeing the sort 

of linkages between exchanges and depositories now so 

common in Europe. 

As for the sub-custody product in Asia, Brooks says it too 

has matured considerably in recent years. “In the past you 

were judged on your ability to settle a trade efficiently and 

process a corporate action,” he says. “These days, however, 

our clients want much more of us – they expect us to truly act 

as their eyes and ears on the ground, to act as their business 

partner and to really understand what their business entails 

and provide them with a customised suite of products.” 

Paul Hedges says that, whereas the region’s subcustodians 

have traditionally serviced ‘Western’ clients, there 

is now a fast growing Asian client base as a result of 

demographic changes, the rise of provident funds and 

personal retirement plans as well as new investment by Asian 

non-government and government institutions both within 

and without the region. He believes this shift will directly 

benefit pan-regional players like Standard Chartered and 

HSBC. “In Europe we have seen a move 

towards pan-regional sub-custody provision 

for a number of reasons: commonality of 

currency; harmonisation on the regulatory 

front but primarily due to acquisitions,” says 

Hedges. In Asia, however, the growth of the 

pan-regional providers has primarily been 

driven by consumer banking presence and 

latterly wholesale banking activities, he adds. 

“Certain markets – Malaysia, Korea, 

Indonesia, Japan – have traditionally been 

dominated by mono-market banks with 

immense local influence stemming from 

huge, predominantly corporate businesses,” 

says Hedges.“In addition, in some markets – 

Singapore for instance – the mono-market 

players have been protected by the regulatory 

environment and ownership rules, as we 

were restricted from offering certain services. 

“What has changed over the last couple of 

years, and indeed has gained significant 

momentum in the past 6-8 months, is that 

due to demographic and other changes the 

buyers of sub-custody services are starting to 

look at Asia as an investment destination in 

itself – but they only want to access the 

region through a single window. So the 

region will follow the same path as Europe – 

but for different reasons, and at a different 

level of intensity.” 

Colin Brooks believes that the traditional 

strengths of pan-regional providers – scale 

economies, deeper pockets, streamlined access to multiple 

markets – will prove compelling going forward.“The truth is 

that these days there are really only a few markets – such as 

Japan, Australia and Singapore – where you still have serious 

mono-market providers,” he says. “There was a huge 

shakeout during the Asian crisis at the end of the Nineties, at 

which time a lot of local banks saw their credit ratings 

lowered and they consequently lost a lot of business. As a 

result, many no longer offer sub-custody as a product, and we 

have since seen an approximate halving in the number of 

active sub-custody providers in the region.” 

As a pan-regional provider will often already be servicing a 

particular client in multiple markets, when that client comes 

to review their arrangements in another market, it is simpler 

to go with the provider they already know, adds Brooks.“We 

already know their priorities, and so are able to tailor our 

services to those requirements in a new market,”he says.“We 

are also very much aware of not just regional but also global 

best practice, which again puts us at an advantage.” 

Nonetheless, Brooks acknowledges that competition in 

the sub-custody arena remains fierce, with continued 

downward pressure on margins.“That said, I have been in 

this business 15 years and that has always been the case,” 

he adds. “One way to manage that is to bring on more 

clients and expand the breadth of product we offer to 


include higher margin offerings. If you are just offering 

vanilla custody, the attraction of investing in that product in 

isolation is far more limited than it was a few years ago, but 

if you view it as an essential foundation supporting other 

products it makes a lot more sense.” 

Flexible services and solutions 

Jon Lloyd believes there is now a greater appreciation of the 

role of the sub-custodian as a risk manager, a source of 

lobbying expertise and connectivity and a source of cost 

avoidance.“Clients also see us as a very important cushion 

against the volatility in the marketplace,” he adds. “As we 

push for consolidation and harmonisation in Europe, the 

sheer volume of change is so much greater than before and 

that leads to higher levels of risk. The fact that the client can 

avoid getting involved in that day-to-day, with us taking 

away that pain, is becoming an important part of the 

relationship.”Lloyd cites recent examples of market changes 

in two key markets: “In Italy there have been a number of 

issues with the Express II platform which we have sought to 

minimise; similarly there are currently changes going on in 

Spain which are causing major market disruption.” 

However, Lloyd feels it is important to strike a balance 

between consolidation and the competition issues it raises – 

not least on the depository front. As JPMorgan’s Brian Todd 

notes, the ability to access markets directly, in the process 

lowering costs and streamlining operations by eliminating 

multiple clearing and settlement interfaces, is a perennial 

threat to sub-custodians.“There are two types of clients,”he 

says.“Global custodians like ourselves who are buying subcustody 

for our traditional ‘buy and hold’ markets, and then 

there are the broker-dealers who are buying it in order to pass 

trades through the market in real time and support a trading 

operation – and they are opening up to the idea of becoming 

direct remote member participants.” 

This impingement by depositories into the sphere of 

commercial banking is seen as fundamentally uncompetitive 

by Lloyd. “There are ways and means of competing: either 

directly by attracting your competitors’ clients through the 

quality of your product offering; or you can compete via 

pricing,”he says.“While there has been a lot of fanfare in the 

UK market with CREST bringing down the cost of 

settlement, we are seeing the Dutch, French and Belgium 

central securities depositories (CSDs) all increasing prices. 

That is a great way to make the sub-custodian suffer, because 

they are being squeezed on one side by clients wanting lower 

prices and then on the other by rising prices at CSD level. 

That is not a healthy dynamic – depository consolidation was 

supposed to be about economies of scale, harmonisation and 

driving down costs for the market.” 

Over at Citigroup – which, like BNP Paribas, is a leading 

light within the Fair & Clear pressure group opposed to 

what its members see as the CSD’s unchecked 

expansionist tendencies – Giulio di Cerbo is equally blunt. 

“There are commercial entities like banks and then there 

are utilities, such as depositories, which should be user 

owned,”he says.“We want a strongly regulated post-trade 


environment just as there is the pre-trade world, and we 

do not want to see utilities running commercial or liquidity 

risks.” (The depositories, on the other hand, reject any 

suggestion that their move up the value chain is in any 

way uncompetitive or inappropriate). 

Stephen Brown says that Northern Trust already self-clears 

and self-custodies in the United States, United Kingdom and 

Canada. The bank will also have to consider this option in 

Europe “if the market can create a single quality asset 

servicing European CSD”.“Certainly Euroclear’s plans for its 

integrated custody and settlement engine for its markets – is 

on paper an attractive proposition, although it will no doubt 

also bring some new operational challenges,” he says. 

However, Brown concedes that, for now, sub-custodians still 

have an edge to servicing the more sophisticated and 

demanding global custodians. “Sub-custodians offer the 

experience, understanding, and broad local knowledge and 

expertise that depositories do not generally have,” he says. 

“However, some depositories, including Euroclear, are 

already in the sub-custody space, and they are working hard 

to offer the premier sub-custody service that global 

custodians demand.” 

“Providing core services is fundamental. But just as 

important is the ability to be flexible and create flexible 

solutions. That is not something depositories are not known 

for – they tend to provide a ‘one size fits all’ service, whereas 

as global custodians our clients are constantly challenging us 

to do different things, and so we need our sub-custodians to 

be flexible and innovative.That is not something depositories 

can yet offer,”Brown adds. 

Colin Brooks, deputy head of 

custody and clearing at 

HSBC in Hong Kong 

49

STRAIGHT THROUGH PROCESSING 

50 

Tony Freeman, head of European industry relations at Omgeo 

STP 

puts 

on a 

mature 

mantle 


Once considered the holy grail of securities 

trading, Straight Through processing (STP), the 

automated passage of a securities trade from 

execution to settlement, is no longer in the 

limelight these days. These days, say market 

watchers, there is a much more mature 

appreciation of what straight through 

processing is about. Firms are now focusing 

more at the business objectives underlying STP 

such as increasing efficiency between trade 

counterparties, improving margins, reducing 

transaction costs and minimising failed trades. 

Rekha Menon reports. 

WITH THE DEMISE of the Global Straight 

Through Processing Association (GSTPA), 

coupled with the indefinite postponement of the 

drive to reduce trade settlement cycles to T+1, it would 

appear that the industry’s romance with straight through 

processing has gone sour. However, this interpretation 

could not be further from the truth. While the term STP 

may have lost some of its shine, the proposition it offers – 

to reduce costs and operational risk through increased 

automation – is still as applicable today as it was earlier. 

“The reason why people 

aren’t actively talking about 

STP is because there are no 

grandiose initiatives in the 

pipeline such as GSTPA. 

Straight through processing 

is actually a stream of 

developments. Some events 

might grab the headlines, 

but the process continues 

unabated,” explains John 

Gubert, global head of HSBC Securities Services. “The 

securities industry is inherently inefficient and with 

continuously increasing volumes, the imperative is to 

increase the level of automation to reduce the cost and 

risks involved,”he says. 

STP might no longer be the buzzword in the securities 

industry, but the earlier intensity has given way to a more 

mature appreciation of what straight through processing is 

all about. Firms are now focusing more at the business 

objectives underlying STP such as increasing efficiency 

between trade counterparties, improving margins, reducing 

transaction costs and minimising failed trades. Despite 

there no longer being a pressing requirement to shorten 

settlement cycle times to trade plus one day (T+1), last year 

the Securities Industry Association (SIA) in the US 

reiterated its commitment to efforts to move the industry to 

an STP environment. 

According to Gubert there are three key imperatives for 

the industry to achieve an STP environment – 

harmonisation of market practices, message 

standardisation and reference data management. 


“Improving back end operational 

efficiency is, more often than not, 

considered secondary,” explains Guy 

Eden, solutions director at Sungard 

Business Integration.” 

“Harmonisation of market practice is essential to eliminate 

unnecessary differences between markets and thus enable 

single developments to accommodate the needs of 

different markets. Message standardisation too is 

extremely important for STP. The ISO 15022 standard for 

instance, is a very powerful tool that has enabled 

automation in areas such as corporate actions where it was 

not possible earlier," he says. 

The securities industry is currently involved in a variety 

of STP-related projects, right from implementing 

messaging protocols like FIX to automating the trade 

allocation, confirmation and matching process. While the 

sell-side is broadly acknowledged as having invested 

heavily in STP, the buy-side has often been the target of 

criticism for its reliance on fax machines to interact with 

counterparties.“The buy-side’s primary goal is to pick the 

right investment, manage investment performance and 

manage client relationships. Improving back end 

operational efficiency is, more often than not, considered 

secondary,” explains Guy Eden, solutions director at 

Sungard Business Integration. 

However, it would be unfair to tar the entire buy-side 

with the same brush. UBS Global Asset Management, for 

instance, is currently in the process of implementing a 

global STP hub for the firm’s global trade confirmation 

system based on STP 

vendor Checkfree’s trade 

confirmation and settlement 

solution. Another large asset 

management firm T. Rowe 

Price is working on a large 

internal in-house STP 

project and is in the process 

of implementing STP 

vendor Smartstream’s 

solution for reconciliation, 

confirmation and settlement. In fact, a buy-side survey 

conducted last year by Investit, a UK-based investment 

management consultancy, revealed that in equities and 

fixed income, most large investment managers are 

achieving acceptable levels of STP in the post-trade 

processing environment. “The UK is one of the most 

advanced countries in terms of buy-side automation for 

equities trading, with a large majority of the trade 

allocation-confirmation process in London being 

automated. In contrast, the US has a much lower level of 

automation with continental Europe falling somewhere in 

between. In the US, even some of the large investment 

managers use paper to manage the allocationconfirmation 

process,”says Eden of Sungard. 

In the current economic environment, cost is the biggest 

deterrent for investment managers looking to automate 

their manual processes. The effort and expense involved in 

automating the trade process is just too high. Operating 

under tight budget constraints, many investment managers 

are now choosing to focus on their core competencies 

while outsourcing their back office operations. The last few 

51

STRAIGHT THROUGH PROCESSING 

52 

years has seen a rapid rise in the number of such 

outsourcing deals among the buy-side, with the main 

beneficiaries of this trend being the large custodian banks 

such as State Street, Bank of New York, BNP Paribas, JP 

Morgan and Mellon. For instance, JP Morgan Investor 

Services (JPMIS), the custody arm of JP Morgan, provides 

middle and back office 

outsourcing to leading buy- 

side firms such as Schroders 

and Morley Fund 

Management, while State 

Street provides outsourcing 

services to firms including 

ABN Amro Asset 

Management, Investec and 

AXA Investment Managers. 

Recently ING Investment Management in Europe 

announced that it would be outsourcing its investment 

operations from post-trade to settlement to Bank of New 

York (BNY). 

By providing access to better technology than they could 

otherwise afford, outsourcing provides investment 

managers with the opportunity to achieve high levels of 

automation. ”While cost reduction and risk mitigation are 

the main triggers for such outsourcing deals, STP is an 

“While cost reduction and risk 

mitigation are the main triggers for 

such outsourcing deals, STP is an 

important by-product for the asset 

management firms” 

John Gubert, global head of HSBC Securities Services 

important by-product for the asset management firms,” 

says Pamela Brewster, senior analyst at research firm, 

Celent Communications. 

The number of investment management transactions 

that can be concentrated within an outsourcing 

organisation is ultimately the key to achieving high STP 

levels, says Tony Freeman, 

head of European industry 

relations at Omgeo, the joint 

venture company of 

Thomson and the US 

Depository Trust & Clearing 

Corporation (DTCC) which 

provides technology for the 

post-trade pre-settlement 

arena. Freeman believes that 

although currently outsourcing is still an immature 

business idea, it does have the potential to significantly 

improve STP levels in the future. 

Omgeo itself has recently come out with a new product 

that is directly targeted at low-to-medium volume 

investment managers that are still using manual processes. 

This light web based interface to Omgeo’s central trade 

matching solution, CTM (Central Trade Manager) will 

allow small buy-side firms to process their domestic and 

cross-border trade allocations electronically.“Omgeo CTM 

allocation interface will provide an easier and cheaper 

route for lower volume fund managers to realise the 

significant cost savings and risk reductions that come with 

automated trade processing,”explains Freeman.The launch 

of this new service is the result of extensive collaboration 

between Omgeo and six leading broker/dealers, ABN 

AMRO, Citigroup, Credit Suisse First Boston (CSFB), 

JPMorgan, SG Corporate & Investment Banking and UBS. 

Recent analysis conducted between Omgeo and a 

number of clients indicates that by capturing details earlier 

in the life-cycle of a trade and through the electronic 

automation of the trade allocation process, operating costs 

and trade failures can be reduced by up to 70%, with sameday 

affirmation rates rising by as much as 80% or higher. 

Roddy Scotland, investment admin manager at Edinburgh 

Partners, an investment management firm piloting Omgeo 

CTM allocation interface, voices the firm’s expectations 

from the service,“Using Omgeo’s new solution will enable 

us to achieve same or next day settlement for cross-border, 

domestic equity and fixed income trades. This means that 

we can focus on maximising returns and delivering 

superior customer service to our clients.” 

With a similar aim of helping investment managers 

achieve higher levels of automation, JP Morgan Investor 

Services (JPMIS), the custody arm of JP Morgan, has 

launched a thin, web-enabled solution for the entry and 

transmission of global custody instructions by fund 

managers called ‘Browser Trade Input’ (BTI). “Straight 

through processing has already been achieved by major 

financial institutions, largely through SWIFT ISO15022 

progress. Now smaller players who are not on the SWIFT 


network can be brought into an electronic age using tools 

such as BTI,” says David Kane, securities processing 

executive at JPMIS. 

The industry is finally waking up to the potential of 

improving the STP environment by involving smaller 

players. Keeping the classic 80/20 rule in view - small nonautomated 

firms contribute only 20% of the volume, but 

account for nearly 80% of the total population of firms 

active in the investment management space – the 

potential efficiency gains achieved by automating small 

buy-side firms are bound to be enormous. 

James Daniels, head of European client service team 

at CSFB sums it up,“One of the reasons why I think this 

solution (Omgeo Allocation Interface) is important is 

that it offers another choice for the smaller investment 

managers who until now have had very few choices. If 

they were unable to invest in heavyweight technology 

like the full Omgeo product or to build a FIX link with 

their brokers, their only option was to continue ‘as is’ or 

to outsource. Now they have another option. The 

investment manager community is diverse and has 

different needs and we need to provide as many options 

as we can for those investment managers to improve 

their processes.” 


David Kane, 

securities processing 

executive at JPMIS 

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53

PORTFOLIO TRADING 

54 

It is a truth universally acknowledged that a basket of shares in need of rebalancing is in want of 

a good portfolio trader. These are lambent days, as demand for their specialist (and sometimes 

arcane expertise) is on the rise. But even while portfolio trading grows apace, the sector is itself in 

transition – facing a new set of opportunities and challenges. Trading strategies, benchmarks and 

the market structure are set to become even more sophisticated and competitive. 

Zachary Tuckwell, 

global head of portfolio 

trading at Dresdner 

Kleinwort Wasserstein (DrKW) 

AFTER A PERIOD of lacklustre growth throughout 

the 1990s a noticeable uptick in volumes has 

occurred during the last four years. Market talk has 

it that in 2005 portfolio (or program) trading is finally 

walking tall. Back in 1995 portfolio trading accounted for 

barely 12% of all trades on the New York Stock Exchange 

(NYSE). By 2000 this ratio had crept up to just under 20%. 

According to specialist research house Greenwich 

Associates, the proportion of portfolio trades in relation to 

total trades now executed on the exchange rose from 44% 

in 2003 to 50% last year. That percentage appears to be on 

the rise again, as in early March the NYSE reported that 

portfolio trading accounted for 52.8% of its average daily 

trading volume. 

Money managers routinely use portfolio trading to 

invest cash inflows, implement tactical asset allocations, 

manager or portfolio transitions and rebalance portfolios. 

There are myriad reasons why portfolio trading is gaining. 

Not least is the increased availability of technology, a 

THE UPSIDE OF 

PORTFOLIO 

TRADING 

trend towards quantitative ‘top down’ portfolio 

management, a greater focus on transactions costs, and a 

growing requirement for asset managers to respond 

quickly to market movements explains Emad Morrar, 

managing director, Lehman Brothers International 

(Europe). In that context he says, “portfolio trading is a 

critical execution method.” Portfolio trading also allows 

asset managers to help control commission payments, the 

market impact and the opportunity costs associated with 

their trades. And “put simply, the price of program trading 

is lower than that of single stock trading,” says Stavros 

Siokos, head of alternative execution sales at Citigroup. 

The ability to deliver high quality executions for a large 

list of stocks is one of the main reasons for its increasing 

acceptance. Efficiency is a cornerstone of the business and 

automation of portfolio traders is of particular benefit to 

asset managers and bankers both. The ability to break 

down a sizeable (and otherwise market-seismic) block of 

shares into different combinations (say into specific 


countries or sectors) which can be traded more easily, is a 

plus for asset owners and the market, explains Garth 

Ritchie, head of European equities trading at Deutsche 

Bank in London. The algorithms used in automated 

trading facilitate easier and more liquid orders and also 

give traders the time needed to structure and effect the 

trading of more complex baskets, he adds. Automation 

also helps keep the business efficient – a point noted by 

the rather tight numbers of traders in portfolio trading 

operations. However, as important is the fact that 

customers are sensitive to execution quality and prefer a 

greater degree of discretion when entering the market, 

something which automation confers effectively. 

One of the benefits of a good portfolio trading desk is 

to be able to understand and accommodate diverse 

investment styles and approaches. In some instances, for 

example, orders from clients have special limitations, such 

as cash neutrality, sector neutrality, derivative overlays, or 

volume-controlled execution. 

“The flexibility provided by computer-based portfolio 

trading systems means we can meet our customer’s 

requirements precisely,” explains Ritchie. Lehman’s 

Morrar agrees. A key element of using portfolio trading is 

its ability to handle the complexity that results from 

intra-day market volatility. “Managing a quantity of 

futures to trade throughout the day while staying market 

neutral is a complexity easily handled,” he notes. The 

speed with which a trader can prepare a list and get it to 

the exchange is considerably faster than if done via block 

trades, he adds. 

Two approaches to execution dominate the business. 

The first is risk execution, which incorporates a variety of 

trading strategies specific to benchmarks or specific prices 

set by the client. It is also quite common for trades to be 

accompanied by a ‘best 

efforts’ mandate. Generally 

these are referred to as 

agency trades, where the 

prices the asset manager 

gets are the prices the broker 

achieves on his behalf. “In 

this case, no particular 

benchmark is given and 

execution decisions will be 

made directly by the 

portfolio trader on a multitude of factors, including 

liquidity and expected market direction,”explains Andrew 

Freyre-Sanders, vice president, portfolio trading at 

JP Morgan Securities Ltd. At DrKW, explains says Zachary 

Tuckwell, global head of portfolio trading at Dresdner 

Kleinwort Wasserstein (DrKW), the business is split three 

ways: “with the bulk being a combination of pure agency, 

where the client takes the risk, and pure risk, where the 

bank takes the risk. The remainder is a mix that includes 

guaranteed close and guaranteed volume weighted 

average price [VWAP], where the risk is generally split 

equally between either the bank or the client.” 


Leading index providers have steadily 

moved to free float adjusted indices – 

a move designed to avoid supply and 

demand distortion of share prices. 

Stavros Siokos, 

head of alternative execution 

sales at Citigroup 

Like a number of houses, Deutsche Bank and DrKW 

have aligned the portfolio trading business with cash 

equities. Ritchie, prior to being promoted to head of 

European equities trading was in fact head of portfolio 

trading.“Our focus is for our FPT client base to mirror our 

cash client base,” expands DrKW’s Tuckwell, though he 

points out that this is a relatively recent phenomenon as 

previously the bank’s global portfolio trading operations 

had been aligned to the bank’s derivatives business. 

“DrKW offers clients an 

integrated and bespoke 

approach where our GPT 

cash equity teams will visit 

clients together and 

strategise together, whether 

it is a transition or agency 

deal. We listen to a client’s 

objectives and then provide 

a best fit trading strategy to 

accommodate their needs.” 

This linkage with cash equities has invariably created 

opportunities for small, niche players to leverage business, 

particularly among the rising independent brokerages. 

Competition is invariably growing and the established 

historical dominance of houses such as Citigroup, Lehman 

Brothers, Deutsche Bank, JPMorgan and others in the 

portfolio trading segment is beginning to come under fire 

from quarters such as ITG and Instinet. These are not your 

typical custody firms with natural access to portfolios from 

either custody or transition management flow. ITG does 

claim transition management expertise, but Instinet for 

one sells its portfolio trading services instead” on being a 

55


56 

Emad Morrar, 

managing director, 

Lehman Brothers 

International (Europe) 

pure agency broker, with the same sophisticated tools and 

expertise, but without the conflicts of interest,” explains 

Natan Tiefenbrun, president of Instinet Europe,“we earn 

our money entirely through commissions and never by 

competing with clients”. It is a pivotal selling point for the 

specialist broker. Tiefenbrun would have it that some of 

the investment banks do not, in fact, act in the best 

interests of clients. He cites the potential for front-running 

or pre-hedging which, which he says, could compromise 

the relationship between the client and broker. He 

explains: “If a portfolio trade is undertaken on a risk basis 

(where the broker guarantees the price) then how the 

broker subsequently unwinds the portfolio is his own 

business. However, in seeking risk bids for a portfolio, the 

client has already given them the information on the 

characteristics and constituents of the portfolio, and that 

can allow them to trade against the client, if they wanted 

to do so, even before the risk-price has been set. For 

agency trading, the question is whether you can get a true 

agency execution from a firm that conducts agency and 

principal trading side by side – data mining of customers’ 

algorithmic trading to fee a 

bank’s own proprietary 

trading decisions is 

commonplace.” 

Instinet’s business model is 

different, says Tiefenbrun. “The 

way we pay our staff ensures it is 

aligned with our customer’s best 

interest. We do not undertake 

principal trading, we preserve 

anonymity and confidentiality 

and an assured code of conduct 

ensures fair treatment, whether 

you are a large or small 

customer,” he explains. 

The response of most of the 

houses to the gauntlet of 

Instinet is phlegmatic.“DrKW 

offers a comprehensive and 

high quality GPT service and 

our risk offering is, as with 

other houses, very competitive 

and therefore our client 

business has been increasing 

steadily – we do not preposition 

trades,” says plain 

speaking Tuckwell, at DrKW, 

agency, guaranteed VWAP, 

and exchange for principal, or 

EFP.“Our risk offering, as with 

other houses, is very 

competitive and our business 

has been increasing steadily. 

We have no need and are not 

going to pre-position.” 

For some, the competitive 

argument is on a different plane. To compete at a high 

level in this business investment banks now provide a 

comprehensive range of execution services including 

“global agency and risk portfolio trading, hybrids, 

derivative portfolio strategies with futures and 

exchange-traded funds (ETFs) quantitative portfolio 

trades,”says Ritchie. Within that the portfolio trader also 

has to provide liquidity, comprehensive risk 

management services, cash collateral financing and 

various analytic tools which can be applied before and 

after trading. Though Tiefenbrun concedes that there are 

significant differentials in structure and form and even 

breadth of total product offering between firms such as 

Instinet and the global investment banks, he believes 

that trade for trade Instinet provides the same if not 

more degree of care and support. Tiefenbrun insists “on 

an unprecedented level of transparency and we also 

have the advantage of not undertaking principal trading, 

which gives our customers comfort.” 

But there are other competitive considerations. Instinet, 

just like the investment banks, has a high level proprietary 


portfolio trading system, “built up over many years,” says 

Tiefenbrun. He concedes however that new entrants in 

today’s market would require a significant investment in 

technology, “which would 

put the business out of the 

hands of the smaller 

investment banks wanting to 

enter the business, for sure.” 

Perhaps the highest 

degree of competitive 

pressure has been felt most 

in the area of analytics. “A 

few years ago, for example, 

very few offered pre-post 

trade tools. Now, it is a sine 

qua non,” interjects JP 

Morgan’s Freyre-Sanders. 

Pre trade analysis gives 

investors “the necessary data to make informed trading 

decisions at both a macro and micro level and provides 

the necessary inputs for trading algorithms,” explains 

Adam Toms executive director, global portfolio trading 

and advisory at Lehman Brothers. “Post trade analysis 

meanwhile concentrates on cost measurement and the 

performance of the trading algorithms.” 

Mounting complexity means few banks can compete at 

these service levels, suggests Freyre-Sanders, who 

explains that “the launch of structured portfolio trading 

involves producing an all-encompassing service, which 

invariably means high barriers for entry.”Technology is a 

particular consideration, he suggests “because our clients 

have differing technology preferences and security 

concerns we can deliver our analytics either as a desktop 

application or through a web-based browser. It helps 

make us single stop guys. The underlying premise is the 

search for execution to live on its own.” 

Given the breadth of service it makes sense that more 

often than not portfolio trading services are provided in 

conjunction with global custody business and transition 

management services and because of that, most 

investment banks provide a multi-asset execution 

capability, although portfolio trading is, specifically, an 

“equities-only business,”explains Lehman’s Toms.“From 

that point of view, we note a dealing desk progression,” 

adds Seema Arora, vice president, portfolio trading, JP 

Morgan Securities in London.“These days most buy side 

firms will use a centralised dealing desk to manage the 

execution of trades. However, we are now seeing a 

different breed of buy side dealer, especially on larger 

dealing desks, who require a variety of trading tools 

including: direct access to the market and the use of sell 

side algorithms for greater control and anonymity.” As 

early as the spring of 2003 Fidelity Capital Markets, the 

institutional trading arm of Fidelity Investments largely 

began the direct access trend, utilising the enhanced the 

quantitative modelling capabilities of its portfolio trading 

operation as a key selling point of its service. 


Mounting complexity means few banks 

can compete at these service levels, 

suggests Freyre-Sanders, who explains 

that “the launch of structured portfolio 

trading involves producing an allencompassing 

service, which invariably 

means high barriers for entry. 

On the surface that kind of development appears to be 

every traditional portfolio trader’s nightmare. 

Nevertheless increasing customer sophistication is seen 

as a benefit rather than a 

challenge. For one, “at 

Citigroup portfolio trading 

allows institutional 

investors to implement 

simultaneous investment 

decisions across a large 

number of securities 

throughout the world,” 

maintains Stavros Siokos at 

Citigroup.“That by itself can 

not be achieved by direct 

market access. Asset 

managers will invariably 

have to access that global 

capability through us and houses like us.”Like Deutsche 

Bank, Lehman Brothers, and JP Morgan, Citigroup’s 

portfolio trading group encompasses around key teams 

situated around the world. “The bank’s global market 

share provides a distinct advantage in our ability to 

service our clients,”says Siokos. 

Although Siokos notes “significant direct market access 

Adam Toms, executive 

director, global portfolio 

trading and advisory at 

Lehman Brothers. 

57


58 

flow” it is “not as popular as 

you might expect.” To be 

effective, he points out, you 

need a big sized trading desk 

and not every buy side 

institution can afford ten to 

fifteen traders to hand, backed 

by a small quant team. 

Equally, if something does go 

wrong you have no broker to 

help cover your position – so 

there is the added comfort of 

transferring those operational 

risks to the specialist.” 

While portfolio trading 

remains a high volume, low margin business, it will 

continue to suffer particular stresses. The downside to the 

changes in portfolio construction is the transactions costs 

There are myriad reasons why portfolio 

trading is gaining. Not least is the 

increased availability of technology, a 

trend towards quantitative ‘top down’ 

portfolio management, a greater focus 

on transactions costs, and a growing 

requirement for asset managers to 

respond quickly to market movements. 

Natan Tiefenbrun, president 

of Instinet Europe 

that investors are subject to 

in rebalancing portfolios. 

Combine that with 

regulatory pressures to 

understand the costs and 

fees that are being charged 

in the industry and the 

strain builds and builds. 

Consequently, “there is 

incessant pressure on 

margins and margins are 

being pressed to 

sub-economic levels,” 

acknowledges Deutsche 

Bank’s Ritchie. “There is 

always a new entrant to break ranks and come in at a 

favourable price, to win business,” – a point not lost 

in the market. “It is question of positioning, expands 

Lehman Brothers’ Morrar. We compete on 

product quality, not price – that is a losing 

game.” DrKW’s Tuckwell agrees. “Relationships 

are an incredibly important consideration, 

putting a human face on the trade and then 

trying to add value at every level. Everyone 

has their particular strength. You can win 

business just on price, but you can not keep it, if 

you are not adding value throughout the 

execution chain.” 

It is a complex balance, suggest Lehman 

Brothers’ Toms between “people, systems such 

as algorithms and the value-added analytics 

and advisory on a pre and post trade basis and 

getting the balance right all the time.” Morrar 

expands, saying that portfolio trading cannot be 

commoditised.“If you do that, there is no need 

for the quant teams or the analytics. Once you 

have made the decision to commoditise the 

business you have lost the game.”Utilisation of 

algorithmic trading strategies alone does not, in 

fact, guarantee better results. Investors need to 

specify appropriate macro level strategies and 

select brokers who can align micro level pricing 

algorithms with their overall objectives. Ritchie 

meanwhile takes the pragmatic stance that “at 

some level market forces will prevail and the 

buyside will comprehend the level of service 

they get for the price they pay.” 

For the time being however portfolio trading 

volumes are pushing through at a heady rate 

and volumes are still compensating for the lack 

of really healthy margins. “We have seen 

geometric growth,” admits Ritchie, 

acknowledging “portfolio transitions a key 

customer of the portfolio trading desk.” For 

Deutsche Bank this note has particular 

resonance as the bank remains one of the top 

two transition management houses in the world 


y volume of portfolio assets 

transited.“It certainly gives us 

an edge,”he concedes. 

The importance of an inhouse 

transition management 

business however is neither 

ubiquitous, nor always 

fundamental to portfolio 

trading volumes. Siokos, for 

example, anticipates that only 

around 20% of portfolio 

trading undertaken by 

Citigroup this year will be a 

direct result of portfolio 

transitions. “In our firm,” he 

says, “‘Chinese walls’ exist 

between the transition 

management team and 

portfolio tracing.”However, he 

concedes that “transition 

management is a particularly 

strong element this year as a 

number of major indices have 

undergone a restructuring. 

Imagine how many index 

funds have had to readjust 

because of this.” 

Since 2000, leading index 

providers have steadily moved 

to free float adjusted indices – 

a move designed to avoid 

supply and demand distortion 

of share prices. In turn, 

capitalisation weight has 

shifted from low free-float 

companies to high free-float 

companies, requiring 

significant change or 

rebalancing of passive 

investment portfolios benchmarked against specific 

indices. Index providers FTSE and MSCI were early 

movers, moving to free float adjusted indices in stages 

between 2001 and 2002. Now a broad range of free float 

calculated indices are available in the market, ranging 

from the Dow Wilshire Indices to the SENSEX (Malaysia) 

and TSE (Japan) indices in Asia. Last year Standard & 

Poor’s (S&P) announced it was moving to free float index 

calculations in two stages: half the float adjustments for 

each constituent were made in March, with the remainder 

scheduled for September. 

As portfolios are continually rebalanced to compensate 

for changes, there is no doubt that portfolio traders have 

benefited and continue to benefit from portfolio 

transitions. At the top end explains Lehman Brothers’ 

Morrar “with more complex multi-asset business, we 

would work directly with our transition team, which has 

separate reporting lines from our portfolio trading 


Garth Ritchie, head of European 

equities trading at Deutsche 

Bank in London 

business. If it is equity only then it is in practice just a big 

portfolio trade, unless the client specifically wants a 

transition management project team around it.” It is not 

an uncommon request, adds Adam Toms, “some clients 

want the trades undertaken behind Chinese walls. And 

with the equity markets on something of a rebound we 

are seeing more equity-only transitions.” 

The relationship between portfolio trades and portfolio 

transitions would suggest seasonal peaks and troughs 

though DrKW’s Tuckwell notes that traditional trading 

patterns are in flux as “many passive managers are 

working smarter. There are a lot of people, both active 

and passive, who are looking at index make-up and 

starting to anticipate which way things will move. Some 

managers are not waiting for specific announcements 

and are moving slightly before or after an expected 

rebalancing of an index. It is changing the pace and 

tempo of the business.” 

59

SECURITIES LENDING 

60 

Andy Clayton, 

head of 

securities lending 

at Northern Trust 

CUSTODIAN 

LENDERS 

FIGHT BACK 

The big changes in the $2trn securities lending market have perhaps already 

happened as increased competition from new lenders and the umbilical cord 

which largely kept securities lending and custody tied together was finally cut. 

Today’s market is living with the consequence of those changes. Diverse lending 

routes and new providers of liquidity are changing the structure of the market. 

But now the custodians are fighting back, arguing that they alone are the true 

providers of transparency and proper risk management and, they say, 

regulatory requirements are playing onside. Francesca Carnevale reports. 


Better process, better price. 

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info@eseclending.com 

www.eseclending.com


62 

NORTH OF THE River Thames, Wayne Burlingham, 

head of securities lending, institutional fund 

services, EMEA, at custodian lender HSBC’s 

Mariner House offices in London, ruminates as he ponders 

the evolving structure of today’s market. “I think we all 

agree the big concern these days is the effect of competition. 

Margins have been drifting down for years and it is a 

challenge to construct operations to handle higher volume 

and lower margins.” Meanwhile, almost in frustration, Tim 

Smollen, managing director and global co-head, agency 

securities lending at Dresdner Kleinwort Wasserstein 

(DrKW) in London, says “tell me something different about 

securities lending. It has been about the same issues for too 

long.” Both cut to the heart of the matter. That is that the 

growing segment of third party agent lenders is successfully 

challenging the traditional foundations of the business, but 

at a price. How that challenge will pan out over the next few 

years is still to be decided. According to Andy Clayton, head 

of securities lending at Northern Trust, “competition isn’t 

necessarily a bad thing. Custodian lenders are doing a good 

job for clients but need to spend more time telling them 

about it. Securities lending being item 7 on a custody service 

review agenda is not the way to respond to the threat of 

third party agent lender sales professionals.” 

Securities lending involves the temporary exchange of 

securities, generally for cash or other securities of equal or 

greater value. Borrowers of the securities are also obliged to 

redeliver the same quantity of the same securities at a 

determined future date. Equities, government bonds and 

other fixed income instruments are all included in the asset 

mix. Bonds are among the largest area of securities lent, 

though equities “are more lucrative,” says Burlingham. 

“Portfolio return is affected by the utilisation rate (the 

proportion of securities out on loan),” explains Smollen, 

and that depends on the demand for particular stocks. 

Securities ‘borrowers’ borrow on an ‘open’competing basis 

with other counterparties or sometimes on an exclusive 

basis. The assets they borrow are generally used to supply 

two areas of demand. First is the demand from banks and 

brokers (including the securities borrower’s proprietary 

Fredrik Carstens, DrKW’s 

managing director of 

agency lending and head 

of EMEA marketing 

trading desk) who will need the securities to support market 

positions. A second and fast growing area of demand is from 

prime brokers which provide support for the wide varieties 

of trading strategies employed by hedge funds. 

Until a few years ago the securities lending market was 

pretty linear and straightforward. Securities lending was a 

key component of the custody offering. Asset (or beneficial) 

owners bundled their custody and securities lending 

mandates and custodians, such as State Street, Citigroup, 

HSBC, Northern Trust and JP Morgan, competed on price 

knowing they could pick up additional fee revenue for 

lending securities in their client’s portfolio on a ‘best efforts’ 

basis. It created relative cosy relationships as each side 

benefited from the structure. It was a classic ‘win-win’ 

relationship as the lender paid the client revenue resulting 

from securities on loan and the client paid fees to the 

lender for the privilege of lending out the assets. 

Even in recent days, custodian lenders have benefited from 

the tendency for asset managers to outsource back office 

operations, with securities lending mandates often part of the 

package. There are various examples that can be quoted. 

Mellon was selected by F&C to provide investment 

administration services, the functions outsourced included 

securities lending, among others. AXA Investment 

Management, meanwhile, agreed an outsourcing 

arrangement with State Street in March, with a securities 

lending arrangement attached. Equally, HSBC recently 

scored ‘the double’ with UK fund management company 

Gartmore. With that kind of stickiness inherent in the 

business, it is no wonder that custodian lenders are peddling 

hard to retain their dominance. Ed O’Brien, executive vice 

president and head of State Street’s securities finance/lending 

business thinks the issue is clear cut.“In today’s market an 

established player with expertise and inventory becomes a 

valuable player. We work as a custodian lender, but also as a 

third party lender. People choose us not only because of the 

synergy we have with our custody operation, but also 

because of our robust reporting capabilities, cash investment 

processes and our large client base.” 

Even so, both O’Brien and Burlingham acknowledge 

growing competition for securities 

mandates from other sources. Pure third 

party lending agents such as DrKW (that 

act as a specialist lending agent and do not 

provide custody securities) for instance, are 

picking up substantial business volumes. 

Some of that business is resulting from new 

clients bringing in new liquidity. Equally 

some of the business is coming at the 

expense of the custodian lenders. There is 

much to play for – particularly outside the 

United States. “There’s a big push with 

pension plans and insurance companies in 

Europe,”agrees State Street’s O’Brien. Asia 

is also opening up, he adds. Today 

approximately 20% of Japanese funds lend. 

There are growing opportunities out there.” 


But the custodian lenders are not just discomfited by the 

loss of fee revenue. Burlingham explains, “The rise of the 

third party agents invariably adds to operational risk. If a 

third party lender is included in a chain handling corporate 

actions, dividend payments and recalls, it all adds up to the 

potential for mistakes being made.” Certainly, “the 

avoidance of the additional challenges of supporting a third 

party agent provides extra incentive to win the business,” 

adds Clayton. DrKW’s Smollen is quick to disagree.“With 

advances in technology, particularly on the SWIFT front, 

there is a minimal amount of operational risk in what, in 

many instances, is a straight-through process.” 

Nonetheless, business for the third party agents is brisk 

and building apace. For example, from a standing start in 

August of 2002, DrKW’s third party agent lending business 

is now approaching $100bn out on loan, says Smollen. 

Third party agents vary widely in service offering and in 

market expertise. DrKW’s market position, for instance, is 

built upon the securities lending team’s extensive capital 

markets expertise.“We started this business at JP Morgan,” 

explains Fredrik Carstens, DrKW’s managing director of 

agency lending and head of EMEA marketing, “then at 

Deutsche Bank and then here.”One of DrKW’s competitive 

advantages is the positioning of the agency business in 

capital markets alongside the bank’s trading desks which 

 

 

 

 

 

 

 


provide invaluable access to services such as research as 

well as trading and risk management tools. Carstens states 

that DrKW is now the world’s second biggest repo house. 

“We compete on performance,” says Smollen and “we 

simply have more assets on loan at better spreads, 

benefiting from the fact that we are smaller and are able to 

maximise revenues on every portfolio,” adds Carstens. 

DrKW’s specialist niche however is difficult to replicate and 

 

 

 

 

 

Wayne Burlingham, 

head of securities 

lending, institutional 

fund services, EMEA 

 

 

 

 

63


64 

Tim Smollen, 

managing director 

and global co-head, 

agency securities 

lending at Dresdner 

Kleinwort Wasserstein 

the contenders in the securities lending market often hover 

in both the custody and third party agent camps. 

RBC’s third party agent business has a totally different 

approach and model. RBC’s approach is based around the 

concept of broker-dealer as principal.“Clients authorise us 

to on-lend on a discretionary basis within our 

programme,” explains Fred Francis, vice president, RBC 

Global Services. RBC acts as a principal and “borrowers 

only see RBC as the counterparty,” he explains. “Record 

keeping and documentation is simpler in that legally we 

areliable. This programme model is a big seller to both 

borrowers and lenders. Clients clearly understand where 

the risk lies,” he adds. What this means however is that 

RBC is particularly careful with whom it deals and secondly 

that cash as collateral is limited to small portion of the total 

collateral it accepts. “While some borrowers will want to 

Ed O’Brien, 

executive vice president 

and head of State Street’s 

securities finance/lending 

business 

provide cash as collateral, cash is the most expensive 

commodity there is,” explains Francis. However, he 

continues, for this approach to work effectively the 

technology infrastructure supporting the business must be 

extensive. On a proprietary basis,“RBC has created a loan 

and collateral inventory that provides it with the asset 

management capability required to handle large volume 

business. We’ve made sizeable investments to ensure a 

seamless process with our third party clients,”he says. The 

bank is also making strides in conduit lending – another 

variation on the overall theme. Francis explains: “a client 

can hire us to direct the securities lending programmes of 

other custodians,”which, he says, is gaining in popularity. 

A different handle again is provided by Swiss American 

Securities Inc., in New York (SASI), whose special niche is 

introducing US securities from non US institutions – “supply 

that is not typically available,”says Ed Anselmin, senior vicepresident 

of operations. Anselmin explains that the key 

opportunity for his operation is the institution’s ability to 

bring in substantial new liquidity. However, while acting as 

an “intermediary”in the securities lending market, Anselmin 

acknowledges that supply often originates from its custodial 

operations, particularly in Europe. Anselmin says that SASI 

adopts a highly aggressive market approach. “It hangs on 

level of service, and the ability to pay the best rate. We will 

trade at spreads that maybe other people don’t want to do.” 

Enter then eSecLending, majority-owned by financial 

services firm Old Mutual plc, with its specialist auction 

process. Known as eSecAuction, it provides principal 

borrowing arrangements with multiple users through a 

proprietary web application. “We are providing borrowers 

with access to reliable supply – under circumstances where 

borrowers bid competitively for access in a blind auction,” 

explains Susan C. Peters, eSecLending’s chief executive 

officer. To date, the firm has auctioned just over $500bn of 

securities since its inception back in 2000 and in January 

this year was utilised by the Ohio Public Employees 

Retirement System, in a mega-auction which allowed a 

group of major financial institutions to access $31bn in US 

equities, for a period up to one year – after which time the 

rights to the securities will be auctioned again. 

Direct lending or direct market access (DMA) is also a 

feature of the market, though few fund managers 

undertake the activity themselves, given the investment in 

technology and business volumes required to justify a goit-alone 

strategy. Dutch mutual fund giant Robeco has 

gone down this route, having obtained the necessary 

regulatory clearance. According to RBC’s Francis,“DMA is 

growing in the North American market, but in Europe it is 

diminishing as few houses could really extract value. The 

prospect of single digit returns, the focus on outsourcing 

and the increasing demands on performance and 

innovation will drive outsourcing of securities lending. I 

think the trend to outsource by European beneficial owners 

will gather pace for some time to come.”As a consequence 

of this diversity clients too, view the business differently.“In 

these revenue and cost conscious days, a few extra basis points 


here and there really mean something and this is feeding the 

competitive cycle,”explains Burlingham. 

Change has come about for a confluence of reasons. In 

some cases, fund management firms have themselves 

become more sophisticated and complex structures; more 

insistent on separating different churches and states within 

their organisation. Consequently, securities lending 

mandates are not necessary awarded by the same managers 

that award custody mandates. Smollen backs this approach: 

“our view is that custody is a back office function and 

securities lending is increasingly a front office activity.” 

Burlingham thinks the issue is less clear cut.“Much depends 

on the approach of the asset owners,” he maintains. 

“Significant UK funds such as Morley and M&G see 

securities lending as core fund management business – that 

is, front office. AXA on the back of their reported discussions 

with State Street, seem to be viewing it as more of a back 

office business that is suitable for potentially outsourcing to a 

custodian lender,” Burlingham says. According to Northern 

Trust’s Clayton,“for a large client, the selection of a securities 

lending agent should be considered in the same manner as 

an investment manager appointment, particularly given the 

value a good lending agent can add.”Jamie M. Ball, managing 

director and head of capital markets of ABN AMRO Mellon 

Global Securities Services, agrees.“Different fund managers 

YOU’LL ENJOY MANY ADVANTAGES WORKING WITH 

US. SLEEPING NIGHTS IS JUST THE BEGINNING. 


view securities lending in different ways. And that fact that 

proxy voting is very important to fund managers does define 

how they are willing to have their portfolios lent. Third party 

lending structures do not generally work when managers 

actively seek to vote their holdings.“ 

eSEcLending’s Peters thinks that it is less of an issue in 

the United States, where more beneficial owners are 

prepared to lend out their portfolios.“We are seeing both a 

greater number of clients as well as the continued 

expansion of existing client mandates,” she says. “It’s an 

exciting time as we work with managers directly to 

optimise their overall investment returns.” 

Burlingham also points to the structural differences 

between the United States (US) and European markets.“It 

would be more unusual for US asset owners to handle 

securities lending operations internally. In the United 

Kingdom, it is the exact opposite,” and that he thinks is a 

key driver of the rise of third party lenders in the US. 

Equally, in the US, large pension funds such as the 

CalPERS at one time would have often outsourced all their 

securities lending requirement to one custodian lender. 

“Now that’s changed and CalPERS uses a multitude of 

securities lenders,”he adds. 

DrKW’s Smollen is adamant about the advantages 

inherent in the third party agent offering. “The business 

Peace of mind is just one of the rewards of working 

with people who share your high standards, care as 

much as you do, and treat your business as if it were 

their own. 

That’s why you should be talking to RBC Global 

Services. Our clients enjoy custom-fit solutions that 

let them rest assured. We tailor each solution to your 

exact needs and exacting standards. 

To find out more, visit www.rbcglobalservices.com 

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which is authorised by the FSA. 

65


66 

Jamie M. Ball, 

managing director 

and head of capital 

markets of ABN 

AMRO Mellon 

Global Securities 

Services 

becomes more transparent,” he maintains – a key 

consideration these days. “We also compete on 

performance, as there is generally better revenue generated 

and the interests of the parties are more effectively aligned 

as a high degree of customisation is possible.” 

Stephane Haot, global head of securities lending at Dexia 

Fund Services, thinks that while in the short term there is 

room for everyone, over the medium to long term important 

market developments will once again push the business 

back into the hands of the custodians.“Our belief is that not 

everyone will be able to cope with new regulations, new 

trading strategies, IT investments and risk concerns, 

particularly in the light of Basel II implementation,”he says. 

“The market is becoming more challenging, will lead to 

concentrations, and custodians will eventually win the battle 

for business.”Jamie Ball adds that custodian lenders are also 

increasing the flexibility of their offerings to clients.“As an 

example, we have I-Bid, our own internet auction product. 

With 297 clients, we find they range across the spectrum of 

client types. We need to be as flexible as possible in order to 

meet their needs, particularly those of the largest, who often 

want to have different approaches to the market.“ 

Haot believes the battleground in the marketplace rests in 

the large beneficial ownership sector. “At the moment, 

everyone is tempted to try the various methods of lending 

available to them, internal methods, third parties, auctions 

and via custodians,”he adds.“For the time being the market is 

assisted by generally bearish conditions and the 

acknowledgement by asset managers that these days 

securities lending is part of the strategic investment equation.” 

HSBC’s Burlingham concurs. “The obvious connotation 

of that is an increased awareness of risk,” he says, 

explaining that these days the bank provides 

indemnification, if required. For banks with such a large 

balance sheet, indemnification is an easy sell, but says 

Burlingham “if someone does not have that level of balance 

sheet backing, what is their indemnity worth?” 

Ed O’Brien acknowledges the advantages that custodian 

lenders have in this regard.“We are Basel II compliant already, 

having introduced an advanced risk management system. We 

have also received exemption from the US Federal Reserve 

Bank to net certain activities because we have already met the 

Basel II criteria. But we know there are institutions out there 

working under a Basel II lite [sic] scenario because full 

compliance is proving a challenge to some.”Northern Trust’s 

Clayton, meanwhile, says “custodian lenders should always be 

strong on risk management – it is a key attraction to many 

clients of Northern Trust that we have not experienced a loss 

in our lending business. Staying in step with regulatory 

changes is key to business retention, but custodians need to 

evolve from this base and be more innovative in order to grow 

the business.” 

Minimising risk is a key component of Dexia’s approach 

and compartmentalising its onshore and offshore businesses 

per similar client types. “Our strategic view is that 

considering lending advances, tax harmonisation trends, 

cost contingents coupled with risk regulation, we believe you 

need a large supplier for all these developments,”says Haot. 

He cites as an example of the attention to detail the way the 

bank operates its offshore securities lending operations.“We 

treat it separately, and build up specific baskets which we 

trade, on an internal auction basis, with prime brokers to 

maximise utilisations and related revenues. Of course the 

follow up work is more complex and detailed.”The bank has 

also built up an extensive internal grading system for all 

counterparties to extract the best value for its clients. He 

acknowledges Dexia has a highly risk averse approach,“but 

it gives clients an exceptional degree of comfort in all the 

lending stages,”he states. 

An added consideration says SASI’s Anselmin is that in 

the US market regulation has resulted “in some tightening 

away from anticipated settlement failures.There used to be a 

market,” he explains, “in securities which were difficult to 

settle.” The passage of the Securities and Exchange 

Commission’s SHO regulation last August, which defines 

ownership of securities and specifies aggregation of long 

and short positions and which also requires broker-dealers 

to market sales in all equity securities as long, or short, or 

short exempt, has changed the willingness of clients to 

“short those transactions,”he says. As well, he points out the 

same regulation has insisted on real transparency in the 

market.“I am in full support of the SEC’s efforts in increasing 

transparency,” says Anselmin, “especially regarding the 

technical reporting of beneficial ownership – an initiative 

backed by the SIA Securities Lending Division.” 

Stephane Haot, 

global head of 

securities lending at 

Dexia Fund Services 


change 

discontinuous 

The pharmaceutical industry faces a critical five 

years ahead. After its spectacular bull run 

which lasted from 1994 to 2001 and which saw 

the market valuations of big US and European 

companies in the sector soar by more than 

400% – share prices have stagnated or fallen 

over the past four years as investor confidence 

has ebbed away. While profits remain high, 

there is little incentive to change. Is there a 

new approach in the offing? Andrew 

Cavenagh reports. 

INVESTORS FEAR ESTABLISHED drug manufacturers 

are poorly positioned to cope with the pressures of a 

changing world, in which the demand for wider access 

to an acceptable level of healthcare is growing year on year. 

A continuing supply of innovative, life-enhancing – and 

affordable – prescription drugs is clearly vital to realising 

this goal. If the industry fails to deliver them, more 

government intervention is inevitable. 

Last year a group of 15 private-sector industry 

‘stakeholders’ undertook a detailed investigation into the 

challenges that confront the sector and its likely future 

direction. The Pharma Futures group was set up and 

sponsored by three of the world's largest pension funds – 

Algemeen Burgerlijk Pensioenfonds (ABP) of the 


Netherlands, the Ohio Public Employees Retirement 

System, and the UK's Universities Superannuation 

Scheme, which – as long-term owners of pharmaceutical 

stocks – have a substantial interest in the sector's 

continuing profitability. 

The findings of the Pharma Futures report, published in 

December last year, made uncomfortable reading for 

everyone involved in the business. The report finds that 

fundamental change for the industry is inevitable since 

“muddling through” on the basis of the current business 

model will mean increasingly unsuccessful fire-fighting on 

a growing number of fronts. The report also highlights 

ways that the sector can manage this change and emerge 

profitable and successful. Critically, the report shows that 

these challenges will only be met if both the sector and its 

institutional investors change their thinking and adapt to 

the new circumstances. 

It concluded that unless the companies manage to bring 

innovative treatments to the market more quickly, the 

decline in the sector’s value will continue – as will the 

growing pressure from a broader society to see it 

overhauled. As well, the report said investor confidence in 

the sector’s ability to deliver sustainable shareholder value 

had eroded. Perhaps most worryingly – the report added 

that “trust is a key issue for this highly regulated sector and 

is under serious threat”. 

“People really are going through a crisis of confidence 

SECTOR REPORT: PHARMACEUTICALS 

67


68 

with this sector,”says Stewart Adkins, 

senior pharmaceuticals analyst at 

Lehman Brothers and one of the 15 

members of the Pharma Futures 

panel.“In a global context, I think it is 

going down.” He suggests that 

annual growth rates in the sector will 

drop from 10% to 6-7%, unless the 

big companies make drastic changes 

to their business models. 

The companies are all too aware 

that a watershed looms. As Hank 

McKinnell, chairman and chief 

executive officer (CEO) of the US 

world-leader Pfizer, told his 

shareholders in February at the 

presentation of the company's 2004 

results,“there can be no doubt that 

Pfizer, along with other researchbased 

pharmaceutical companies, is 

facing the headwinds of an 

operating environment quite unlike 

any we have ever seen.” McKinnell 

explained that “We face severe 

pricing pressures, a contentious 

political atmosphere, and a maze of 

new regulatory demands. We are in 

a period of ‘discontinuous change’ 

– where many of the assumptions 

of the last half century no longer 

hold true”. 

Bizarrely, the sector’s current 

financial performance gives no 

inclination of such impending crisis. 

Pfizer and the other three US and 

European giants – 

GlaxoSmithKline, AstraZeneca, and Merck – collectively 

made profits of over US$30bn in 2004 on a combined 

turnover of more than US$130bn [see table]. Furthermore, 

Pfizer’s net income of US$11.36bn came from sales of 

US$52.5bn – double the level of just five years ago – and 

the sector continues to command high credit ratings.“The 

highly rated US pharmaceutical industry reflects strong 

credit profiles due to healthy balance sheets, superior 

margins, excellent liquidity and solid cash-flow 

generation,”Fitch concluded in a report on the sector at the 

end of last year. 

“Even the more troubled credits are still in the single-A 

category,” adds Michael Zbinovec, the Fitch analyst in 

Chicago who wrote the report. 

So why does this performance fail so utterly to impress 

the investment community? Despite its figures for 2004, 

Pfizer’s share price dropped 24% over the year. According 

to Adkins at Lehman Brothers, the disparity between the 

sector’s financial performance and investor sentiment 

reflects the difference between its last 10 years and future 

prospects. “They’ve got huge legacy balance sheets and 

Stewart Adkins, senior pharmaceuticals analyst 

at Lehman Brothers 

“People really are going 

through a crisis of 

confidence with this 

sector,” says Stewart 

Adkins, senior 

pharmaceuticals analyst at 

Lehman Brothers. 

huge legacy cash flows from the 

glory years,”he explains. 

Looking forward, by contrast, 

investors see mounting pressures 

on drug company revenues and 

profits from a number of sources – 

the fast-approaching expiry of 

patents of a number of ‘blockbuster’ 

drugs, increasing pressure to 

regulate prices in the US and a 

proliferation of expensive lawsuits – 

arising from both civil litigation and 

regulatory investigations. “Longer 

term, I do not have a positive view 

in pharmaceuticals,” says Martin 

Eijgenhuijsen, the senior portfolio 

manager at ABP Investments who is 

responsible for the fund’s equity 

investments in healthcare (about 

4% of €156bn) and was another 

member of the Pharma Futures 

panel. “I think it is a lot more 

attractive than a couple of years ago, 

but I don’t see real signs that the 

industry is recovering.” 

The big concern on the near 

horizon is the expiry of patents, 

which undoubtedly represent a clear 

and present danger to companies’ 

earnings. The loss of revenue on an 

‘expired’drug is now estimated to be 

between 70% and 80% within a 

matter of months, as opposed to the 

figure of around 50% that was 

generally assumed a few years ago. 

“Investors and analysts consistently 

underestimate the impact this can have on earnings,” 

maintains Adkins at Lehman Brothers. He adds that there 

has been no “meaningful pick-up”in new patent approvals 

to replace the revenue streams that are about to be lost. 

Zbinovec at Fitch, on the other hand, says expirations 

will not be too much of an industry-wide issue this year. 

The loss of patent protection for Abbott Laboratories’ 

immediate-release form of Biaxin and Johnson & Johnson’s 

Duragesic are likely to be the two largest instances. 

However, he acknowledges, there will be a large number of 

significant expiries in 2006.“That concerns me quite a bit,” 

comments Eijgenhuijsen at ABP. Affected companies will 

include Merck, Bristol-Myers Squibb and Pfizer. McKinnell 

warned his shareholders in February that the company 

would “lose patent protection on several of its best-selling 

medicines between this year and the end of 2007”. 

The impact of expirations will not be uniform across the 

sector, however, and Zbinovec at Fitch says: “You almost 

have to look at it on a company-by-company basis.” 

At the same time, the companies will have to face up to 

a big change in the drug-purchasing arrangements in the 


US. This is significant. The US alone accounts for 48% of 

the industry’s global sales and probably nearer two thirds 

of its profits. 

Further, it is the only significant market that is not 

subject to price controls 

The Medicare Drug Improvement and Modernisation 

Act (MMA) will offer senior citizens – who are incurring 

increasing out-of-pocket expense for their medications – 

a comprehensive drug benefits package for a premium 

from the beginning of 2006 and is expected to lead 

millions of retired people to abandon the private pension 

plans that presently meet part of their requirements. 

This will, in effect, turn the Federal government into the 

drug companies’ biggest customer in the US. "The 

Government will become the largest funder [sic] of drugs 

from 2006," says Adkins. “That changes the outlook for 

the market quite considerably.” 

Although the Bush Administration is not in favour of the 

government setting drug prices and believes the task is 

better left to the private 

sector – and the MMA 

restricts government 

interference in pricing 

decisions – it does seem 

inconceivable that the 

government will hand over 

tens of billions of dollars to 

the industry without some 

scrutiny of costs. 

Adkins says the federal 

authorities are unlikely, for 

example, to pay the prices 

needed to support the 

massive sales operations 

that the drug companies 

currently maintain – the 

900 

800 

700 

600 

500 

400 

300 

200 

100 

0 

sector spends twice as much on marketing as it does on 

research and development.“It will define corporate strategy 

[going forwards],”he says.“I think the industry has backed 

itself into a corner." 

While the pricing model for the MMA has yet to be 

determined, Fitch suggests that the pressure for price cuts 

should be offset in part by the greater volumes of drugs 

that will be distributed through the programme. However, 

it concedes that the overall effect on earnings remains 

“uncertain”. 

Meanwhile, product liability claims against drug 

manufacturers continue to rise and the trend shows no 

sign of abating. The litigation industry received a big boost 

from Merck’s decision to withdraw its Vioxx COX-2 

selective inhibitor for arthritis and pain in September 2004, 

after studies showed that the remedy increased risk of 

heart attacks and strokes. The company is now facing more 

than 800 individual law suits over Vioxx, and the number of 

claims could expand exponentially. Allegedly officials at the 

US Food and Drug Administration (FDA) estimate that up 

to 55,000 deaths may be attributable to the drug.Testimony 


The Pharmaceuticals Sector – Surviving the Crisis of Confidence 

Dec-93 

Dec-94 

Dec-95 

Dec-96 

Dec-97 

Dec-98 

Dec-99 

Dec-00 

Johnson & Johnson Pfitzer GlaxoSmithKline 

Novartis (REGD) Sanofi-Aventis 

by the FDA’s deputy director, Dr Sandra Kweder, to a US 

Senate panel on March 2 seems unlikely to help the 

company’s cause. Kweder reportedly indicated that it had 

taken over a year for warnings about the increased risk to 

appear on Vioxx labels because of protracted negotiations 

with the company over the wording. 

Zbinovec at Fitch observes that product liability 

awareness in the industry had already been heightened in 

2004 – by Wyeth’s ongoing litigation of its diet drug, Bayer’s 

continuing liability for Baycol, and Pfizer’s agreement in 

July to pay US$60m to settle a class action for the diabetes 

drug Rezulin (which it inherited when it acquired Warner- 

Lambert in 2000). Further says Zbinovec, the overall level 

of litigation is now at record levels. “I would say it far 

exceeds the norm for the industry.” 

In terms of its financial impact on the sector, however, 

Zbinovec says one encouraging sign is that the drug 

companies are adopting a tougher stance to such claims. 

“Now the industry is fighting these cases tooth and nail.” 

Dec-01 

Dec-02 

Dec-03 

Dec-04 

FTSE Pharmaceuticals Index 

Data as at 31 March 2005. Source: FTSE Group 

Official investigations into 

industry practices are also 

rising sharply. Through 

2003 and 2004 the US 

government secured 

penalties and fines 

totalling US$2.5bn from 

the sector. Elsewhere, it is 

a similar story. In the last 

week of March, for 

example, police in London 

arrested Ajit and Kirti 

Patel, respectively chief 

executive and chief 

executive officer of the 

Goldshields Group. Their 

arrest and release on 

police bail was the latest development in an investigation 

the Serious Fraud Office began in 2002 into suspected price 

fixing of generic medicines by companies supplying the 

National Health Service. 

Zbinovec says the increasing number of investigations 

(the US Attorney’s office is currently looking into claims 

against Pfizer, Schering-Plough, Bristol-Myers Squibb, Eli 

Lilly, Johnson & Johnson and Wyeth) will inevitably raise 

the industry’s exposure to fines. But he adds that the 

impact of an adverse ruling on the companies’credit rating 

would be minimal in most cases. 

The only way the industry can sustain its long-term 

profitability in the face of these internal and external 

pressures is to develop – and secure approval for – new 

patented drugs. However, there has been a marked decline 

in applications and approvals over recent years. The 

number of new molecular entities (NMEs) approved by the 

FDA fell from 35 in 1999 to 21 in 2003, while the total of 

new active substances (NAS) sanctioned by the European 

Agency for the Evaluation of Medicinal Products dropped 

from 27 to 17 over the same period. 

69


70 

The trend led the European Commission last year to 

investigate whether there was a “worldwide crisis” in 

innovation in the pharmaceutical sector. It commissioned a 

study from Charles River Associates, which concluded that 

the downturn was cyclical rather than permanent and that 

the level of authorisations was likely to pick up in 2005. 

However, investors still have reservations about the 

market value of the drugs that companies are currently 

developing. Eijgenhuijsen at ABP Investments worries 

that most are “product-line extensions” that will not 

provide the sort of returns that companies look for. “If I 

look at the potential profitability of the pipeline, that may 

be an issue going forward,” he says. “The industry really 

has to be innovative.” 

Adkins at Lehman Brothers says another problem is that 

the research is now going into new areas, where the failure 

or “redundancy”rate is much higher. He points to genomics 

as an example where it is taking much longer than first 

thought to develop treatments because there are so many 

“blind alleys” for researchers to follow. “Has the lowhanging 

fruit been plucked?”he asks.“Getting a biologically 

valid target for a drug is getting very difficult these days.” 

In the shorter to medium term, the drug companies also 

need to reduce their costs. Part of this will involve 

reducing overheads, and several companies – including 

Merck, Eli Lilly, Bristol-Myers Squibb and Schering- 

Plough – have embarked on restructuring exercises that 

include scaling back the large sales forces in primary care. 

Pfizer announced a big restructuring plan at the 

beginning of April, and Fitch’s Zbinovec says he expects 

more to follow throughout this year. “It’s moving in the 

right direction,” agrees Eijgenhuijsen at ABP. “All the 

others are following as well.” 

The other way for the industry to make meaningful 

savings will be to outsource more of its operations to lowcost, 

but fast-developing pharmaceutical jurisdictions such 

as China, India and Eastern Europe. The huge cost 

differentials have led most of the big companies to set up 

manufacturing operations in these countries – Adkins 

points to the example of a Czech generic drug producer 

that can manufacture products for 20% of the price of a 

German counterpart yet still make a 60% gross margin – 

but there is scope to farm out a lot more. 

Adkins says, for example it would be quite feasible for US 

companies to conduct the Phase I and II clinical trials in 

Asia – and achieve an overall saving of around 3% of 

ultimate sales. “You could still probably do 25% of your 

research and development in India at 20% of the cost.” 

If the short-term horizon looks bleak for the sector, 

however, long-term demographics are certainly in its 

favour as a continually ageing global population should 

ensure a growing demand for a vast range of existing and 

new treatments. 

As Pfizer’s chief McKinnell observes: “Widespread 

chronic conditions such as hypertension, depression, and 

lipid imbalances remain largely undiagnosed and 

untreated. People are beginning to realise that it makes far 

David Schwartz, stock market historian 

more sense to invest in disease prevention and early 

treatment rather than to accept the human misery and high 

cost of events such as heart attacks and strokes.” 

This has led some analysts to take a bullish view of the 

sector in the longer-term.“I think the demographics really 

look good for the pharma companies,” says David 

Schwartz, the independent stock market historian who 

wrote a strong recommendation for the sector on the 

London Stock Exchange’s web site in February. 

“I think these things go in cycles,” Schwartz says. 

“Pharmaceuticals were riding high for a long time and then 

they hit a bad patch, but all the reasons for these 

companies to fly as they did in the 1990s are still with us. I 

think for a long-term player this is a great place to be.” 

For an experienced investor like Eijgenhuijsen, however, 

the key to success in the sector will depend on the 

development on innovative – and more sophisticated – 

treatments that will be able to maintain attractive profit 

margins for a considerable length of time. “If you look at 

specific cancer drugs, if the industry develops a diagnostic 

tool with the drug then I think there will not be price 

pressure on the product.” 

Table 1: Financial Performance of Leading US 

and European Drug Companies in 2004 

Company Turnover Profit 

(US$bn) (US$bn) 

Pfizer 52.5 11.4* 

GlaxoSmithKline 37.2 11.1** 

Merck 22.9 5.8* 

AstraZeneca 21.4 5.1** 

* Net income 

Source: Various News Clips ** Profit before taxation 


A SIMPLE 

QUESTION 

OF 

LIFESTYLE FUNDS 

Times change. Only a few years ago, 401(k) plan 

participants were clamouring for more 

investment choices. As a result, plan sponsors 

added more mutual funds, more asset classes 

(even windows) into self-directed brokerage 

accounts. Soon participants were complaining 

they had so many choices they could not decide 

what to do. Enter the life cycle fund, a product 

designed for those who want to keep it simple. 

Neil A. O’Hara reports from New York on a 

product that is taking the 401(k) world by storm. 

DEFINED CONTRIBUTION PENSIONS and 401(k) 

plans offer one distinct advantage over defined 

benefit plans: participants control the investment 

policy for their own retirement nest egg. Unfortunately, 

most people do a lousy job. “Participants in these plans 

rarely change their asset allocations once initially set,”says 

Michael Porter, senior research analyst at Reuters’ 

subsidiary, Lipper Inc., a provider of fund research and 

Table 1: Asset Allocation for 2030 Funds 


fund intelligence which in March this year acquired two 

specialist hedge fund research houses: Hedgeworld and 

(in a separate deal) TASS Research, the institutional 

quality research house previously owned by Tremont 

Capital Management. “Yet if they don't reallocate their 

assets the system is going to fail. Most participants are not 

on course to achieving the 75% of pre-retirement income 

said to be needed to maintain their lifestyle in retirement,” 

explains Porter. 

Faced with an array of equity mutual funds offering 

growth, value or income in large, medium or small 

capitalisations, bond funds offering short, intermediate or 

long maturities, not to mention high yield bonds, real 

estate or alternative asset choices, many investors choose 

unwisely or throw up their hands. In the mid-1990s, fund 

advisers tried to simplify asset allocation decisions by 

offering lifestyle funds based on static risk profiles, typically 

aggressive, moderate or conservative. Each fund contains a 

different mix of equities, bonds and cash tailored to a 

particular risk tolerance that does not change over time and 

is automatically rebalanced. 

Fund Domestic International Fixed Income Money Market 

Stock Funds Stock Funds Funds Funds 

Fidelity Freedom 2030 69% 13% 19% 0% 

Putnam Retirement Ready 2030 59% 25% 12% 4% 

Wells Fargo Outlook 2030 60% 5% 20% 16% 

Source: Lipper Inc., March 2005 

FUNDS PROFILE 

71

FUNDS PROFILE 

72 

Michael Porter, 

senior research analyst at 

Reuters’ subsidiary, Lipper Inc. 

A small but growing number of plan 

sponsors are using them as the default 

option for participants who do not make 

investment choices when they enrol. 

“It’s happening very gradually,” says 

Lucas, “Most fiduciaries are not as 

comfortable as they need to be to make 

that move.” If automatic enrolment 

takes hold, life cycle funds will grab an 

even larger share of the 401(k) market. 

Lori Lucas, director of 

participant research at Hewitt 

“They allow someone to say, ‘How much risk do I need 

to be taking?’” says Gina Sanchez, a portfolio manager at 

American Century,“It assumes they understand that when 

they are younger they can take more risk and when they 

are older they should take less risk.” In practice, many 

investors ducked the question. Almost half the assets in 

American Century’s three Strategic Asset Allocation funds 

are in the moderate portfolio. 

Plan sponsors discovered participants did not 

understand how to use lifestyle funds; some people bought 

all three risk profiles.“We had to do some education,”says 

Sanchez, “These days the majority of people pick one 

fund.” That helps, but investors still have to switch funds 

on their own as their risk tolerance changes. 

The variety of available life cycle funds is growing, with 

attendant diversity in the asset allocation mix, giving 

investors increasing choice. A recent Wall Street Journal 

report analysed lifecycle funds available from fund 

companies such as the Vanguard Group and T. Rowe Price 

as a sample of what is on offer. According to the report, 

the Vanguard fund blends 80% stock funds and 20% bond 

funds for investors who set a retirement target date of 

2030. Not everyone uses the same strategies. For an 

investor who chooses the same 2030 retirement date, for 

example, T. Rowe Price invests 90% of an investor’s 

money in stocks. 

There are also lifecycle funds for people who are already 

retired. In these instances Vanguard puts 20% of the 

investor’s money into stocks, 75% in bonds and 5% into 

money-market funds. But, for the same retiree group, T. 

Rowe Price will put 40% in stocks, 30% in bonds and 30% 

in short-term bonds and money-market funds. Retirees 

can also stay with the lifecycle concept for up to 30 years 

after retirement so that they eventually have 20% of their 

money in short-term bond and money-market funds; 60% 

in other bond funds and 20% in stock funds. 

Sponsors have meanwhile started asking for a complete 

turnkey solution that would build a portfolio, automatically 

rebalance it and lower the risk profile over time. Fund 

advisers responded with target maturity date funds, such as 

American Century’s My Retirement series.“If you’re going 

to retire right around, say, 2045, you don’t even have to 

think about it,”says Sanchez,“We’re going to start you in an 

aggressive portfolio and we're going to end you up in a 

conservative portfolio. We’ll do all the work for you.” In 

effect, these funds provide basic financial planning as well 

as professional investment management. 

Life cycle funds of both kinds have attracted increasing 

interest among plan sponsors and participants. A March 

2005 report by Lipper shows assets under management 

and inflows to these funds have jumped in the past two 

years (please refer to Figure 1: Total Life Cycle Fund Assets 

1999-2004 and Figure 2: Estimated Net Inflows: 1998-2004) 

as more sponsors offer them. 

Back in October 2003 a study by Hewitt Associates, LLC 

found that 55% of 401(k) plans offered static risk lifestyle 

funds and 33% offered target maturity portfolios. On 


average, 37% of participants held life cycle funds in plans 

where they were available, skewed toward younger, shorter 

tenure employees likely to have the least investment 

experience (Please refer to the graph: Percent of Participants 

Holding a Lifestyle Funds – by Age). 

The Hewitt study also revealed that most investors do 

not use life cycle funds as a turnkey solution. “They've 

heard so often that you shouldn’t put all your eggs in one 

basket,” says Lori Lucas, director of participant research 

at Hewitt,“They have a hard time grasping that it’s okay 

in lifestyle funds because they are designed to be a 

complete portfolio.” 

She believes sponsors are trying to get the point across. 

Some advisors direct participants to either life cycle funds or 

to a menu of traditional funds during the sign-up process. 

“It makes it very clear that you take one path or the other 

but it is really not appropriate to combine them,”she says. 

Despite sponsors’ efforts, many participants still mix life 

cycle funds with other funds. “It defeats their intended 

purpose,” says Porter, “They over diversify and screw up 

what their asset allocation should be.” 

Life cycle funds do have some flaws. Most portfolios are 

funds of funds that give shareholders exposure to several 

other funds in the same family. “They’re only as good as 

that family’s lineup,” Porter says. Fund advisers use 

different asset allocation models for the same risk profile or 

target maturity date too (please refer to the table: Asset 

Allocation for 2030 Funds). 

The fees for these funds can be deceptive.“Some of the 

reported expense ratios include the weighted impact of the 

underlying expense ratios and some don’t,”Porter explains. 

The cheapest providers, including American Century, T. 

Rowe Price and Vanguard, simply pass through fees 

associated with the underlying funds, while others add a 

wrap fee at the fund of funds level that ranges from 0.05% 

at Principal to 0.20% at Frank Russell. “A small fee can 

make a significant difference in an investor’s balance by 

retirement age,”says Porter. 

Managers of the underlying funds do not necessarily 

coordinate their investments, which can distort the fund of 

funds' asset allocation.“We do check the overall positions 

to make sure we don’t have a whopper exposure in 

Microsoft, for example, because growth thinks it is growth, 

value thinks it is value and everybody owns it,” says 

Sanchez. For its static risk funds, American Century holds 

quarterly meetings among the managers for each asset 

class. “We make sure that we don’t have conflicting 

strategies within the same fund,”she says. 

Life cycle funds offer a cheap and effective way for 

investors with modest means to diversify their portfolios. A 

small but growing number of plan sponsors are using them 

as the default option for participants who do not make 

investment choices when they enrol. “It’s happening very 

gradually,” says Lucas, “Most fiduciaries are not as 

comfortable as they need to be to make that move.” If 

automatic enrolment takes hold, life cycle funds will grab 

an even larger share of the 401(k) market. 


Total Life Cycle Fund Assets 1999-2004 ($bn) 

$160 

$140 

$120 

$100 

$80 

$60 

$40 

$20 

$0 

$57.9 

$63.3 

$69.2 $68.2 

$101.4 

$139.7 

1999 2000 2001 2002 2003 2004 


Estimated Net Inflows: 1998-2004 ($bn) 

$30 

$25 

$20 

$15 

$10 

$5 

$0 

$6.3 

$4.7 

$5.5 

$6.7 $6.8 

$21.4 

$24.2 

1998 1999 2000 2001 2002 2003 2004 

17.4% 

12.6% 

11.6% 


Percent of Participants Holding a Lifestyle Funds – by Age 

Percent of Participants 

Percent of Participants 

50% 

40% 

30% 

20% 

10% 

0% 

20% 

18% 

16% 

14% 

12% 

10% 

8% 

6% 

4% 

2% 

0% 

40.7% 

5.4 

38.8% 

5.6 

36.6% 

Lifestyle Fund Utilisation – by Age 

5.5 

5.2 

12.8% 

35.0% 

17.3% 

20-29 30-39 40-49 

Age 

50-59 60+ 

33.0% 

20-29 30-39 40-49 

Age 

50-59 60+ 

Percentage of Participants with All Balances in a Lifestyle Fund Average Number of Funds Held 

4.6 

6 

5.5 

5 

4.5 

4 

3.5 

3 

Average Number of Funds 

Source: Hewitt Associates, LLC 

73

ALTERNATIVES 

74 

Alternating 

current 

There are more than 8,700 hedge funds today, 

representing nearly $1trn in global assets, 

with over 5,000 domiciled in the United States 

(US) alone according to Van Hedge Fund 

Advisors International LLC, an advisory firm 

that consults with institutional investors and 

high net worth individuals for hedge fund 

portfolio construction and manager selection. 

That said, small but growing institutional 

investor allocations, proposed Securities and 

Exchange Commission (SEC) regulations and 

new management strategies are subtly 

changing the $480bn US hedge fund industry. 

By Karen Jones 

DAVID FRIEDLAND, PRESIDENT of Magnum US 

Investments Inc., and a director of the Hedge Fund 

Association, says that when Magnum entered the 

hedge fund business in 1994,“it was largely dominated by 

high net worth individuals and private Swiss banks. If you 

spoke to an institutional investor about hedge funds their 

eyes would glaze over, and they would say ‘no, no, we’re 

conservative and don’t like hedge funds’”. Magnum 

manages $250m in assets with both offshore and domestic 

fund of funds, including private label fund of funds and 

sponsors several single manager hedge funds managed by 

third party managers. 

Lacklustre returns in the traditional equity markets have 

pushed some institutional investors into allocating a small 

portion of their portfolios to hedge funds, particularly fund 

of funds. Friedland says it has been a “painstaking process” 

over many years to get the institutional investor 

comfortable with the idea that hedge funds are, in many 

instances, “more conservative than mutual funds from an 

investment performance/risk analysis view-meaning the 

performance of the actual investment, taking aside factors 

such as manager risk, fraud, blowups, etc”. 

He also credits the spectacular “blow up” of Long Term 

Capital Management (LTCM) in 1998 with helping turn the 

tide of perception. “For years the media dismissed hedge 

funds as the exclusive club of the super rich and when 

LTCM blew up they learned that it was not a typical hedge 

fund but a highly speculative overleveraged vehicle that 

really got greedy,”he explains. 

Although the SEC stepped in afterwards, creating a 

major effect on financial markets, Friedland calls the LTCM 

debacle “a positive event for the growth of the hedge fund 

industry because it forced the media, uninformed investors 

and institutional investors to really look at what hedge 

funds are”. With a broad spectrum of investment strategies, 

both aggressive and conservative, he says, “any investor 


could find a piece of their portfolio to 

allocate to a hedge fund”. 

Founded by D. Dixon Boardman in 

1988 as a response to the US stock 

market crash of 1987, Optima Fund 

Management (Optima) is a SECregistered 

$3.8bn investment advisor. 

The firm has a strong institutional 

focus with an experienced team of 

approximately 50 employees. Robert 

Picard, managing director, chief 

investment officer and director of 

research says that most US corporate 

and public pension funds “have to 

seek out the best active management 

in the world. And it is our view that 

the best active managers, by 

definition, are those with the most 

tools available to make money and 

generate alpha.” 

He adds that since hedge fund 

managers have the ability to enter 

any number of strategies precluded 

by the traditional long only equity 

and fixed income investing, they are a 

“natural fit” for institutional 

investors. The incentive fee offered 

many hedge fund managers on top of 

their management fee also tends to 

help attract “the best and the 

brightest in this space.” 

Picard predicts that increased 

allocation to alternatives will 

continue for the next four to five 

years regardless of what the market 

does.“I think the pain endured from 

2000-2002 was so severe that many 

state and or corporate pension funds 

are realising it would be very shortsighted 

to disqualify investment.” 

David Anderson, managing 

director of GAM, one of the world's 

largest managers of fund of funds, 

says that historically GAM has been 

more focused on the private side and 

not active in the institutional space. 

However, they see it as a growth trend which they will now 

be a part of. "The US institutional market is the world's 

largest. Clearly there is an appetite for alternatives and we 

hope to be able to capitalise on it." GAM has $37.2bn 

under management and of that $19.3bn is in fund of funds. 

He also notes a distinct shift over the last few years in the 

consultant community.“Three or four years ago many did 

not know hedge funds and were not equipped to 

recommend them to clients. That has all changed. Now all 

the major firms have either a dedicated resource or are 

much better at analysing and recommending.” 


David Friedland, president of Magnum US 

Investments Inc. 

Robert Picard, managing director, 

Optima Fund Management 

David Anderson, managing director of GAM 

Meanwhile, industry attitudes 

regarding proposed SEC regulations 

depend on the current size of the 

hedge fund organisation, the 

strategies they utilise and whether or 

not they are currently registered (as 

approximately 50% are). Since GAM 

is SEC registered, Anderson calls the 

proposed regulation that hedge fund 

advisors managing over $25m in 

assets will be required to register by 

February 2006, a “non-issue”for GAM. 

He adds however, that certain US 

hedge funds might “go with the twoyear 

lockup route or not except any 

US investors to avoid registration.” 

Friedland says that though the 

proposed regulation is forcing the 

manager to be a registered 

investment advisor, “there is still no 

regulation of the industry. No one is 

telling the manager how often he 

needs to report his numbers to 

investors, what portfolio information 

he needs to disclose and how much 

leverage he should use.”He does not 

think the SEC will ever “go down this 

path” and if they did, it would be 

“dangerous”for the industry. 

What is clear about SEC 

regulations and chasing institutional 

investor allocations is that the ability 

to run a business will be as essential 

as performance. This is not 

necessarily the case with high net 

worth individuals who know they 

may invest in an occasional “blow 

up” over time and do not have a 

board of directors to answer to or 

media headlines to contend with. 

That said, consolidation of smaller 

hedge funds into fund of funds or 

multi-manager firms that offer an 

operational business umbrella of 

legal, marketing, accounting, 

compliance and other services for a 

stake in each individual fund may become more prevalent. 

“In 2002 it became more difficult for new startups to 

manage overhead and generate the types of returns 

needed to survive from a business perspective,”says Picard. 

“Many of these groups have naturally polarised and 

formed loose associations so they can rationalise their 

accounting, legal and marketing and receptionist fees.” 

James Bianco, president of Bianco Research LLC, an 

independent research organisation, feels that regulation 

will “do what all government agencies do, hurt 

entrepreneurship”. He adds that it will be “harder for three 

75

ALTERNATIVES 

76 

guys to raise $50m and set 

up shop. It protects the 

interests of the $5bn, 300person 

shop because it is 

easy for those guys to hire 

an attorney and spread 

their costs over 300 people 

to register.” 

He says the way the 

hedge fund industry is 

structured innovation has 

traditionally grown out of 

small shops. “A lot of the 

hottest funds are the guys 

that just opened their 

doors because they are 

going to have hands on 

experience with the fund 

and the ability to convince 

investors they know what 

they are doing and give 

them the ability to get in 

on the ground floor.” 

The FTSE Hedge Index Series 

160 

140 

120 

100 

Regulation will “stifle creativity”for the startups and Bianco 

thinks that bigger firms will profit from that.“A lot of hedge 

fund managers come from bigger firms so they have a more 

difficult time holding onto their best talent who leave and 

start their own funds. Now with regulations putting up 

hurdles, it is easier to stay where you are.” 

Bianco’s definition of the quintessential ‘alpha’ hedge 

fund manager is one whose returns “have nothing to do 

with whether the market is having a good year. A lot of 

‘alphas’will try to return 7-8% in every environment so that 

is why they go off into exotic land with bonds, 

commodities, emerging markets, credit defaults, 

convertible arbitrage and more.”Though alpha managers 

are “not supposed to chase the latest hot market trends like 

the public did in the 1990s,” he sees a small migration in 

the hedge fund industry towards what he defines as a 

traditional “beta” type of manager, typical of the mutual 

fund manager, which is tied to the equity markets. 

Picard also notes a subtle shift in hedge fund strategies, 

which he believes will continue in 2005. “We will see the 

distinctions between private equity, hedge funds and 

mutual funds slowly changing. Hedge funds are starting to 

drift into mutual fund land with long-only management. It 

is a very interesting trend.” He adds that as some private 

equity firms have started hedge fund like products and 

some hedge funds have introduced private equity-like 

features such as three to 5 year lockups. 

As large amounts of capital flow into hedge funds in 

general, says Picard, traditional hedge fund strategies such as 

fixed income arbitrage, convertible arbitrage or merger 

arbitrage are “becoming more difficult areas to generate 

returns.” He feels the best active managers are seeking out 

new areas and opportunities to make money. One of these is 

in the emerging markets and Optima has a dedicated fund of 

80 

60 

40 

Mar-00 

Sep-00 

Mar-01 

Sep-01 

Mar-02 

Sep-02 

Mar-03 

Sep-03 

Mar-04 

Sep-04 

FTSE Hedge Index FTSE Hedge Directional Index 

FTSE Hedge Non-Directional Index FTSE All-World Index 

FTSE Hedge Event Driven Index 

Mar-05 


Alpha managers are “not supposed to 

chase the latest hot market trends like 

the public did in the 1990s”. 

funds “to capture that.” 

However, he cautions that 

they are “extremely 

conscious of the liquidity or 

illiquidity of the underlying 

countries,” and that if an 

investor is looking for an 

allocation to emerging 

markets, “rather than 

investing in long only, they 

should be doing emerging 

markets in a hedged 

fashion with a very limited 

amount of their portfolio.” 

Bianco cautions that to 

avoid capacity in “certain 

strategies devised over the 

last years”, hedge fund 

managers should not get 

caught in a “group think”. 

He states that according 

to a recent Greenwich 

Associates’ study, 82% of 

all distressed securities and about 33% of futures are now 

traded by hedge funds.“If you have too many guys in credit 

default, convertible arbitrage, distressed securities, the over 

concentration of ideas can become horribly mispriced. 

Whole sectors of strategies could wind up killing everybody 

when they stop working because we don’t have the proper 

mix of retail investors, beta-only institutional investors and 

hedge funds playing off each other.”He adds that he does 

not think this is a concern for long/short equity because 

“the universe you are dealing with is so much larger.” 

As far as the outlook for 2005, Friedman feels volatility of 

the markets will dictate much of what happens. If they go 

up and down for the right reasons, as opposed to a 

cataclysmic event such as a terrorist attack, hedge fund 

managers can profit. “Last year was a pretty difficult year 

for hedge funds in general, part of that is too much money 

in the industry today and some of the strategies are almost 

maxed out. If we have increased volatility, it will have a 

positive impact on many different strategies. If we continue 

to have low volatility, many of the relative value, arbitrage 

and spread strategies will find it quite difficult.” 

Meanwhile Anderson says GAM’s viewpoint is that 

hedge funds are “the ballast in a portfolio, not the high 

octane,” and that is particularly true of fund of funds.“Its 

idea is to diversify and lower risk by not trying to provide 

80% returns and then crash and burn next year. I think that 

with a single manager hedge fund, you take a lot of risk. In 

general, I think fund of funds are a lower risk option if done 

right and managed professionally.” 

He adds that the world is changing in recognising “you 

simply can’t be in long in stocks or bonds through all 

economic cycles. Hedge funds provide the opportunity to 

not only provide absolute returns, which most say they are 

trying to do, but also lower the correlation in portfolios.” 


The regulatory landscape is now beginning to have an impact on global business and capital 

markets – including the Operating and Financial Review (OFR) in the UK; the Tabaksblat Code in 

The Netherlands and the Sarbanes-Oxley Act (SOX) in the United States, which relates to all SEC 

registered companies. Companies are now asking a vital question: what is the return on investment 

of corporate governance? In simple terms, the answer for fund managers buying stock in listed 

companies is increased confidence. Research shows there is a correlation between poor corporate 

governance practices and higher investment risk. Stanley Dubiel, director of international research, 

Institutional Shareholder Services explains. 

GLOBAL PENSIONS: 

RISKY BUSINESS OR 

RISKING BUSINESS? 

REGULATORS AND GOVERNANCE advocates argue 

that the stock price collapse of such former corporate 

stalwarts as Adelphia, Enron, Parmalat, Tyco, and 

WorldCom was due in part to poor governance. These 

corporate scandals, along with other factors such as 

directors’remuneration, have combined to turn the spotlight 

on the way publicly-listed companies are run, and their 

impact on pension funds. While the public’s interest is 

driven by concerns about the final levels of their pensions, 

there is broader concern surrounding the important role 

pension funds’ play in the stability of the economy. 

According to figures published by UBS Global Management, 

around 25% of UK pension funds’ assets were invested in 

overseas equities in 2001, compared with just 10% in 1981. 

The global nature of the pensions industry means poor 

corporate governance in the US, and other countries, 

matters to the UK pensions market because, at some point 

it will affect that market and indeed affect the individual 

pensions of many UK citizens. Furthermore investors are 

increasingly recognising the fact that ownership 

responsibilities do not end at national borders, especially in 

light of Parmalat, Ahold and others. 

Poor corporate governance, through a lack of checks and 

balances on the board, or inadequate reporting by auditors, 

can ultimately wipe out the assets within a given pension 

fund. The anxiety surrounding UK’s so called ‘pensions 

crisis’ has led pension holders to demand assurances that 

their assets are invested in a low risk manner. The 

recommendation is to avoid investing in companies that 

have poor governance standards, structures and practices. 

Fund managers need to have complete confidence that 

the companies they invest in are run in accordance with 

good corporate governance standards. By adopting 

practices such as having at least two-thirds of independent 

directors on the board, establishing an independent 

nominating committee, making the compensation 


committee fully independent, companies can take 

significant steps towards giving confidence to wary 

institutional investors who manage their portfolios in the 

interests of pension holders. 

So, the implications for the UK economy, as a whole, are 

clear. Good corporate governance will lead to more 

sustainable economic growth, because the economy is less 

CORPORATE GOVERNANCE 

77

CORPORATE GOVERNANCE 

78 

vulnerable to a systemic risk. However, ultimately, it is the 

question “does poor governance put investments at higher 

risk?” that will make pension fund managers sit up, take 

notice, and invest in companies that do not carry the 

baggage of a bad governance structure. 

In the first academic study of its kind, research 

undertaken by Lawrence Brown, Ph.D. and Marcus Caylor 

of Georgia State University clearly demonstrated the 

impact that board composition and practices can have on 

company performance. The study revealed that 

companies with weaker corporate governance perform 

more poorly, are less profitable and have higher volatility 

than firms with stronger corporate governance structures. 

The study showed a correlation between corporate 

governance and stock price volatility; with issuers in the 

bottom decile of industry-adjusted Corporate Governance 

Quotient (CGQ), a database and ratings service used by 

institutional investors as a governance-based risk tool, 

having share price volatility that is 6.20% above their 

industry-adjusted average.The research found that those in 

the top decile of industry-adjusted CGQ have share price 

volatility that is 5.63% below their industry-adjusted 

average – a risk difference of 11.83%. 

The examination of profitability, risk and dividend 

payouts showed that return on investment (ROI) and 

return on equity (ROE) in the top decile of CGQ rated 

companies outperformed the bottom decile companies by 

18.7 % and 23.8%, while dividends payouts of companies 

in the top decile outperformed bottom decile companies by 

more than 10.4%. This 

research clearly 

demonstrated the financial 130 130 

impact bad boards can 125 125 

have on shareholder value. 120 120 

When we examine the 115 115 

issue of shareholder 

110 110 

rights, companies that 

105 105 

diminish shareholder 

rights by, for example, 

protecting directors from 

the need to seek reelection 

or the issuing of 

100 100 

95 

90 

shares with restricted 

voting rights, are generally 

worse investments than 

those with stronger 

120 

- One Month 

shareholder rights. 

Gompers, Ishii, and 

100 

Metrick (2001) found that 80 

firms with strong 

shareholders' rights in 60 

relation to provisions for 

defending against 40 

WorldCom 

Enron Corp 

86% 

99% 

takeovers perform better 

Tyco 65% 

and have a higher market 

valuation. Bertrand and 

20 

Parmalat 96% 

Mullainathan (2003) 

0 

0 

FTSE ISS Corporate Governance Index Series 

Oct-03 

Dec-03 

Feb-04 

Apr-04 

found that the presence of state takeover laws decreases 

plant-level efficiency in terms of total factor productivity or 

return on capital. They showed that this result is, at least 

partly, due to increased agency costs evidenced by 

increased compensation for CEOs and employees. 

Further research also demonstrates that board size does 

matter. A fairly clear negative relationship appears to exist 

between board size and firm value by market capitalisation 

(Eisenberg, Sundgren, and Wells 1998; Yermack 1996). Too 

big a board is likely to be less effective in substantive 

discussion of major issues (Jensen 1993; Lipton and Lorsch 

1992) and to suffer from free-rider problems among 

directors in their supervision of management (Hermalin 

and Weisbach 2001). 

When examining the composition of boards, a lack of 

independence, with boards dominated by insiders, suggests 

that they are not expected to play their role as effective 

monitors and supervisors of management. This is 

particularly the case when the board chairperson is also the 

firm’s chief executive officer (CEO). Put simply, two jobs into 

one ‘does not go’. In addition, outside directors provide firms 

with windows or links to the outside world, thereby helping 

to secure critical resources and expand networking. That 

outside viewpoint or perspective is fundamental in ensuring 

a better approach to adopting good corporate governance 

practices because those individuals are bringing more varied 

experience and insights to the corporate table. Also research 

by Core, Holthausen and Larcker (1999) suggests that CEO 

compensation is lower when the CEO and board chair 

positions are separate. 

At the end of the day, 

how can you guarantee 

that corporate governance 

is providing a system or 

structure which ensures 

the creation of a safe pair 

of hands or the creation of 

a safety net for a given 

company? Currently, the 

level of corporate 

governance expertise 

FTSE ISS Euro CGI (USD) required of fund managers 

FTSE ISS Japan CGI (USD) is simply to carry out their 

duties as if they owned 

the assets themselves. 

They must set out their 

investment policy in a 

Statement of Investment 

Principles (SIP), which 

includes a section on 

corporate governance. 

However, a typical UK 

equity portfolio contains 

shares in 100 different 

companies and it can be 

difficult therefore for a 

fund manager to make 

Jun-04 

FTSE ISS Developed CGI (USD) FTSE ISS Europe CGI (USD) 

FTSE ISS US CGI (USD) FTSE ISS UK CGI (USD) 

Aug-04 

- Two Months One Month Two Months Three Months Four Months 

-40 -30 -20 -10 10 20 30 40 50 60 70 80 

Trading Days 

Oct-04 



informed decisions about a single company’s corporate 

governance practices. This problem is starting to be 

resolved however as governments begin to set standards 

for corporate governance. It cannot just be the markets that 

impose a solution, lawmakers and regulators also have 

their part to play in this debate. 

Currently best practice principles for UK corporations are 

set out in the Financial Services Authority’s (FSA’s) 

Combined Code on Corporate Governance. The Code provides 

a framework that is intended to minimise risks to 

shareholders created by poor company organisation and 

management. This is considered prudent for the 

achievement of long-term growth in shareholder value 

sought by pension funds and indeed all investors. 

The code deals with the management’s role in structuring 

and remunerating the board, and also institutional 

investors’ role with regard to the company. The ‘comply or 

explain’approach of the Code recognises that circumstances 

will vary from company-to-company and situations may 

make it difficult or inappropriate to implement all of the 

Code’s recommendations. While a minority of companies 

appear to consider the Combined Code to be of little 

importance and do not give the Code’s corporate 

governance recommendations priority, it has certainly gone 

some way in ensuring long term shareholder value. 

Additionally this year the largest 1,000 UK companies will 

be required to publish an operating and financial review as 

part of their annual report that will include a section on 

corporate governance. These regulations allow fund 

managers to factor in information about a company’s 

corporate governance in their investment choices. Again, this 

particular requirement demonstrates the growing demand 

for companies to paint a fuller picture of what they do, how 

they operate within a given environment and how their 

business impacts on other stakeholders. Nowadays 

companies are not solely being judged by their balance sheet. 

However, outside the UK, the situation for pension fund 

managers has been complicated by standards of corporate 

governance that vary according to a country’s legal, 

regulatory and tax regime. For instance, while most of the 

boards and board committees in the US and UK are 

composed of a majority of independent directors, the 

boards of utilities in continental Europe and Japan most 

often are not. 

Corporate governance in the US came in for sharp 

criticism following a series of high profile corporate 

failures. The response came in the form of the Sarbanes- 

Oxley Act. The act tightened public companies’ reporting 

obligations and accountability standards for their directors, 

executives and auditors considerably. In Europe, the EU has 

indicated that it is keen for Europe’s big investors to be 

more active in defending shareholder rights, and has 

embarked on a strategy of harmonising standards among 

member states.The European Commission’s plan has three 

main cornerstones: strengthening the role of nonexecutive 

directors, increasing the transparency of 

directors’ remuneration, and ensuring the collective 

responsibility of board members for financial statements 


BOX 1: WHAT CORPORATE GOVERNANCE 

ISSUES SHOULD BE MONITORED? 

Here are some areas that trustees and fund 

managers should be aware of regarding the 

management of companies in their portfolios: 

• Independent nominating committees and boards 

of directors 

• Distinction and separation between chief executive 

officers and board chairmen 

• Accountability of executive managers to boards of 

directors 

• The appropriateness of executive remuneration 

and dividend policy 

• The extent to which auditors are truly independent 

• Openness to take-overs and buyouts (against 

poison pill defences) 

and key non-financial information. Either way, you can see 

that there is a growing trend for the convergence of many 

of these new requirement or disciplines. 

Gradually, opinion on good corporate governance is 

beginning to converge as well. Beyond localised standards, 

the interests of pension fund managers, and the wider 

institutional investment community, in transparent, 

comparable and consistent international standards may 

well force large firms to converge upon a common 

framework. The Anglo-American model of corporate 

governance depending, as it does, on global financial 

markets may well become the reference standard for all 

firms whatever their national origins. 

As corporate governance issues continue to rise in 

prominence, pension fund managers will increasingly have 

to adopt a new low risk approach to investment 

management. By taking corporate governance into account 

when making investment choices, fund managers can 

protect pension holders from the unnecessary risks 

associated with poor executive structures. 

79

REITS 

80 

Christopher Laxton, 

chairman of APUT and 

specialist real estate 

investment fund manager 

at Morley Fund 

Growing 

Management. 

REITs 

Growing 

The 

World of 

In mid-March the United Kingdom government 

published a second discussion paper for the 

introduction of REITs, in the lead up to the 2006 

Finance Bill. The paper has been very warmly 

received, with many of the property industry’s wish 

list seemingly taken on board by the Treasury and 

it is a timely move as other European countries are 

also preparing to introduce REITs enabling 

legislation. In parallel, however, the rise of offshore 

pooled property vehicles is offering investors a 

broader range of tax efficient investment vehicles. 

Is the European real estate party about to heat up? 

Francesca Carnevale reports. 

REAL ESTATE INVESTMENT trusts (REITs) 

legislation will likely be a recurring theme in the 

European real-estate landscape for the rest of this 

year. After three years of steadily declining office rental 

values, European office markets are beginning to stabilise. 

Improved economic growth figures and corporate profits 

through 2004 have once more encouraged increased 

investment in the sector. At the top end of the market rental 

decline has been countered by an up-tick in demand in the 

UK, France and Central Europe says a recent CB Richard 

Ellis data release. However, in some cities, such as Brussels, 

Lisbon and (even) the City of London, investors continue to 

be dogged by oversupply as growth in city-related 

employment and new construction starts remain low. 

Even so, European real estate has seen more than €50bn 

of new investment dollars over the last five years, according 

to recent DTZ Research. In particular, investors are 

targeting new locations – particularly in the higher yielding 

EU accession states, such as the Baltic countries, Hungary 

and the Czech Republic – evidenced by a 23% increase in 

cross-border activity, mostly acquisitions by US and Middle 

Eastern investors. Around 70% of the European real estate 


market is owned by 

governments and 

3000 

corporations. Privatisation 

of land assets will be a 2500 

notable feature of the 

2000 

European market over the 

coming decade, says 1500 

Fraser Hughes, research 

director at the European 1000 

Public Real Estate 

500 

Association (EPRA), the 

not for profit trade 

association, established in 

1999 and based in 

Amsterdam. EPRA’s 

members include the 

majority of the leading real estate companies and 

investment institutions in Europe. The French government, 

for example, intends to dispose of €1.5bn of its real estate 

assets over the next three to four years. 

Investments by Europeans are also on the rise, propelled 

by the growing diversity of available property investment 

vehicles. Capital-raising is also likely to increase in 2005 as 

the rise in real estate equity prices through 2004 means the 

sector is trading on a much narrower discount to net asset 

value (NAV). For some years, most companies have relied 

heavily on debt as a source of new capital and a number of 

those companies currently trading at premiums close to 

NAV may now want to rebalance their capital structure. 

However,“direct investment still dominates the European 

landscape,”explains Judy Hill, chief executive officer (CEO) 

at the European Association for Investors in Non-listed 

Real Estate Vehicles (INREV). Launched only in May 2003, 

INREV now has over 150 members, principally major 

institutional investors, fund managers and advisers across 

Europe and concentrates on the unlisted market. 

Investors have lobbied consistently for REITs-enabling 

legislation in Europe, as they are considered an optimal 

vehicle to introduce more liquidity and tax efficiency into 

the marketplace. Publicly traded REITs also open up the 

commercial real estate sector to smaller, retail investors. 

However, INREV’s Hill points out that, “REITs do not 

necessarily have the best correlations with the property 

market, but are better correlated with the equity market.” 

Hill maintains that “if REITs are genuinely tax efficient 

structures, they will sit alongside other non-listed vehicles 

very well.”She sees opportunities for the REITs market to 

become an important exit route for “limited partnerships, 

say with a finite life, seven years for example. It may make 

sense for them to convert to a REIT rather than liquidate.” 

For the time being the European REITs market remains 

small compared with that of the United States where, in 

2004, they carried a total market value of approximately 

$290bn (although in the context of the total US $4.5trn 

property investment market, it too remains a relative 

minnow, accounting for around 3% of total real estate 

market capitalisation). In contrast the entire European 

Dec-99 


The FTSE EPRA/NAREIT Global Real Estate Index Series 

Dec-00 

Dec-01 

market in listed REITs was 

estimated by Morgan 

Stanley to be worth 

around $70bn last year, 

although they are 

increasingly popular as an 

investment asset. The 

Asian REITs market, 

centred in Singapore, 

South Korea, Japan, Hong 

Kong, New Zealand and 

Australia is similarly 

valued. Compare that with 

Australia, which on a 

standalone basis accounts 

for 10% of the global 

market and which,“proportionally has the largest and most 

sophisticated market,”according to Hughes. 

A REIT is a company that buys, develops, manages and 

sells real estate assets. REITs – unlike traditional real estate 

companies – do not pay tax as long as they pass their 

profits on to investors in the form of dividends. In general, 

they are restricted to generating property rental income. 

REITs enjoy some important benefits however. They are 

more liquid than traditional private real estate ownership 

as their shares are usually traded on stock exchanges. 

Other advantages, such as high dividends and 

transparency, have only added to their appeal. 

For the time being interest is squarely focused on the 

UK, where, in his March budget, chancellor Gordon Brown 

took a positive step towards the introduction of REITs. To 

be precise, Mr Brown has not given an unqualified 

assurance that a UK REIT will be introduced. Instead the 

Exchequer indicated that if a workable solution to 

"challenging issues" referred to in the March 2005 

discussion paper on UK Real Estate Investment Trusts, a 

discussion paper, issued jointly by the Treasury and the 

Inland Revenue can be resolved without additional loss of 

tax revenue, it aims to legislate for REITs in the upcoming 

Finance Bill 2006. 

The discussion paper is the result of over nine months of 

consultation with the market, which ended in July last year. 

A leading role was played by the Association of Property 

Unit Trusts (APUT), giving valuable input on the 

establishment of tax efficient listed vehicles. Market makers 

had expected the government to have accepted REITs by 

now, but the paper was warmly received. “What it boils 

down to now is a further period of consultation,” says 

Christopher Laxton, chairman of APUT and specialist real 

estate investment fund manager at Morley Fund 

Management. Originally, the Exchequer was known to 

favour calling the vehicles Property Investment Funds 

(PIFs) but now appears to have swung around popular 

thinking that the UK should adopt the internationally 

recognised REITs moniker. As well, says Laxton, the 

government is also reviewing the rules governing collective 

property investment schemes as part of a broader market 

Dec-02 

Dec-03 

Dec-04 

FTSE EPRA/NAREIT North America Index FTSE EPRA/NAREIT Europe Index 

FTSE EPRA/NAREIT Asia Index FTSE EPRA/NAREIT Global Index 


REITS 

81

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eview exercise.“Two kinds of scheme are under review,”he 

explains, “retail and qualified investment schemes. The 

revision of both these vehicles could be very successful, as 

at the moment neither is very tax efficient.” 

The issue is pressing. While much of the UK real estate 

market is publicly listed, the rise of offshore real-estate 

holdings, particularly in the Channel Islands, continues 

Laxton has “affected the Inland Revenue’s intake.”Property 

unit trusts (PUTs) and in particular, the UK offshore realestate 

market, have become popular, having grown in value 

from £1bn back in 1998 to around £20bn today. In part this 

is a result of changes to stamp duty tax.Tax received in 1998 

from the UK listed property sector was about £350m, which 

fell to about £200m in 2003, largely the result of property 

investment firms moving assets offshore. Interest in 

offshore vehicles was prompted by an increase in 

government stamp duty payable by UK property funds 

“from 0% to 4%” says Laxton, particularly as transfers of 

UK-situated land to and from partnerships offshore were 

expressly excluded from this tax. The result “was a 

stampede to set up pooled vehicles offshore,”he says. Any 

delay by the government will further spur the growth of 

pooled vehicles and also raises the probability that the 

market will develop other products that offer investors a 

proxy for UK REITs.“The Channel Island regimes are very 

tax efficient,” says INREV’s Hill, “If eventual legislation is 

positive for REITs and there are no penalties on conversion, 

there may be an incentive to change. If not, then things will 

remain as they are.” 

Hill notes that a tremendous momentum has built up, 

“We noted rapid market growth in 2004 with a record 

number of vehicles.” Already, the launch of UK-listed, 

Channel Island-registered structures that are typically 

FTSE EPRA/NAREIT: A WORKING RELATIONSHIP 


Judy Hill, 

chief executive officer 

(CEO) at the European 

Association for Investors 

in Non-listed Real 

Estate Vehicles (INREV). 

closed-end, modestly geared, accessible to retail investors 

and have tax characteristics similar to those envisaged 

under the proposed REIT structure are already opening up 

new investment avenues. More pertinently perhaps for the 

Exchequer, it may have inadvertently prompted the 

development of an unregulated offshore real estate 

investment market and the introduction of REITs could 

slow the trend. 

A PUT is a collective investment scheme where the 

underlying properties (mainly direct property investments, 

though indirect investments can also be undertaken) are 

held on trust for participants. There are two types of PUTs, 

E arly in the year, FTSE Group assumed responsibility for the calculation of the EPRA/NAREIT Global Real Estate Index Series. New 

index rules and data enhancements presaged the launch of a new FTSE EPRA/NAREIT Global Real Estate Index Series, which is 

structured in so that it can be considered to represent general trends in all eligible real estate stocks worldwide. A key feature of the 

index series is that it is calculated on a real time basis. The index series is broken down into three index families and 37 separate 

indices is designed to reflect the stock performance of companies engaged in specific aspects of the North American, European and 

Asian real estate markets. Some 274 property companies, REITs and property development companies form the basis of the index 

series. The companies spread across three regions (Asia, Europe and North America) and some 28 countries. 

Prior to FTSE taking over the calculation of the index series, it had been undertaken by Euronext. According to EPRA’s research director 

Fraser Hughes, the move to FTSE provisions of global real time calculations for the indices was “a natural evolution of the success of the 

series.” In May 2000, the EPRA-Europe index was launched, in conjunction with the Amsterdam Stock Exchange. The original 

EPRA/NAREIT Global Real Estate Index was then launched in 2001 and very quickly became the recognised benchmark for dedicated 

global real estate investors. 

The move comes at a significant time in the market, as transparency in the European real estate market is increasing. This has 

been driven, in part, by the widespread introduction of performance benchmarks, which provide investors with a long-term analytical 

framework for portfolio appraisal. It has also has increased the credibility of real estate as an institutional asset class and reduced 

the risk premium it commands. Over the medium term, the opportunities opened up by the new indices are immense, says 

Hughes. “Last year we began work on the development of a derivatives market and more latterly at the end of 2004, we launched 

the AXA Eurozone ETF, which is listed on Euronext in Paris. This vehicle ensured that investors with real estate capability could buy 

exposure to the whole of the European market through the ETF.” The next stage, continues Hughes, is the development of a suite 

of ETFs as a step towards the development of a fully-fledged derivatives market in European real estate. 

83

REITS 

84 

authorised and unauthorised. Authorised PUTs are 

regulated by the Financial Services Authority (FSA) and are 

primarily designed for private investors, who pay 

corporation tax on income, but not capital gains tax. 

Unauthorised PUTs are available to both exempt and nonexempt 

investors and income and capital gains are subject 

to tax at the basic rate of income tax. Exempt investors are 

able to reclaim the tax suffered by the trust. Non-exempt 

investors are subject to tax on the gross amount of the 

distributions they receive. Unauthorised PUTs can be sited 

onshore or offshore. Offshore PUTs are resident outside 

the UK, commonly Jersey, Guernsey and Ireland, are 

managed locally and not liable for UK tax and are normally 

structured to be tax transparent. 

It is difficult to make a direct comparison between PUTs 

and listed property stocks.“The valuation of PUTs is based 

on net asset value,” says the APUT website, whereas 

property stocks are affected by a number of other factors, 

such as gearing and stock market fluctuations. APUT is the 

collective voice of the UK property unit trust sector. It 

currently has 31 member funds, with current combined total 

assets of around £10bn. Pooled property trusts are high on 

its agenda, rather than REITs at present, though Laxton, 

wearing his Morley hat, “welcomes the development of 

other property investment vehicles as they are likely to 

encourage wider investment in property as a whole”. 

APUT and INREV last year announced their intention to 

collaborate closely to drive forward best practice and 

transparency amongst pooled property vehicles across 

Europe. INREV’s Hill explains “APUT and INREV share 

many common objectives, such as encouraging 

transparency among pooled property funds. Together we 

form a much stronger voice.” Among the initiatives 

pursued by the associations is the linking of the 

APUT/HSBC/IPD Pooled Property Index with the soon to 

be launched INREV Index for European non-listed 

vehicles and to develop the APUT Code of Practice to 

encompass a far broader range of funds, such as UK 

Limited Partnerships. 

For the time being the continental European REITs 

market has coalesced around supporting legislation in the 

Netherlands, Belgium and France. And irrespective of what 

is happening in the UK, other European countries, namely 

Italy, Finland, Sweden and Spain, are expected to adopt 

REITs enabling legislation some time this year or next. 

REITs have been particularly strong performers over the 

past few years – although with higher volatility than 

privately held real estate. In the United States, for 

example, REITs as a whole traded consistently at a 

significant premium to the underlying net asset values of 

their holdings between 2000 and 2003, with the NAREIT 

Equity Index earning an annualised total return of 19.7% 

during this period. Last year was not as good however 

and in general, US REITs suffered some volatility 

beginning in April 2004. As a whole though the sector 

managed to stay within a more equitable price range; 

trading on or near net asset value. 

WHAT’S LIKELY IN THE ANTICIPATED UK 

REITS STRUCTURE? 

What’s likely? 

• Most likely investments will not be confined to UK 

property; all property types (commercial or industrial for 

example) and property located anywhere in the world will 

be eligible. The REIT may be externally or internally 

managed—the government thinks this is something that 

should be decided by the market. 

• The new vehicle will be named UK-REIT and will be 

structured as a corporation, business trust, or similar 

association, managed by a board of directors or trustees. 

There had been talk that it would be referred to as a private 

investment fund (with the unfortunate acronym PIF), but 

that was abandoned so as not to isolate investor choice in 

an increasingly global market place by differentiating the UK 

REIT vehicle in this way. It is unlikely however that a single 

property vehicle will qualify for REIT status. 

• The activities of the UK REIT will either be classified as 

non-taxable ("ring-fenced property letting business") or 

taxable ("non-ring-fenced business"). At least 75% of 

the total gross income (and at least 75% of the gross 

value of the assets) must relate to the ring-fenced 

property letting business. The precise demarcation of 

activities into ring-fenced and non ring-fenced business 

is still open to discussion however. Limited development 

activity within the 75% tests will be allowed, but will 

attract corporation tax. Have no more than 20% of its 

assets consist of stocks in taxable REIT subsidiaries. 

• At least 95% of the REITs net ring-fenced income after 

appropriate deductions and capital allowances will have 

to be distributed. There will not be a minimum holding 

period set for assets held in a REITs structure. 

• No more than 50 percent of the shares can be held by 

five or fewer individuals during the last half of each 

taxable year and shares need to be fully transferable. 

“There is a growing perception that the European market 

with REIT developments still in their infancy is becoming even 

more attractive than the American one,”says EPRA’s Hughes. 

In 2004, says Hughes, European REITs outperformed their US 

counterparts. The European benchmark, the EPRA index, 

generated a total return of 41.73% in 2004, measured in euros, 

while the US benchmark, the EPRA/National Association of 

Real Estate Investment Trusts (NAREIT) index, returned 

24.19%, also in euro terms. On average, the gross dividend 

yield for European REITs is expected to rise to 4.7% in 2006 

from 4.5% this year, according to a UBS research report. The 

average gross dividend yield for US REITs, in contrast, is 

expected to fall to 4.0% in 2006 from 4.7% this year. 

So far, interest in European REITs has come mostly from 

banks and institutional investors, but says Hughes, a 

notable trend is increasing interest from overseas investors. 

The explanation is clear; European REITs are still cheaper 

than those in the US and Asia. 


FTSE Global Markets Company Directory 

Company Name Page Company Name Page Company Name Page Company Name Page 

Abbott Laboratories 68 

ABN AMRO 47 

ABN Amro Asset Management 52 

Adelphia 77 

Ahold 

Algemeen Burgerlijk 

77 

Pensioenfonds 67 

Allied Irish Bank 47 

America Movil 24 

American Century 72 

Apple 36 

Apple Computer 

Asia Pacific Central Securities 

37 

Depository Group 47 

AstraZeneca 68 

Athens Stock Exchange 17 

AXA Investment Management 62 

AXA Investment Managers 52 

Bank Leu 47 

Bank of Ireland 9 

Bank of New York 6 

Barclays Global Investors 8 

Bertrand and Mullainathan 78 

Biaxin 68 

Bimbo 24 

BNP Paribas 46 

Bristol-Myers Squibb 68 

Cedel 44 

Celent Communications 52 

Cemex 24 

Charles River Associates 70 

Citadel Investment Group 18 

Citigroup 

Citigroup Global Transaction 

6 

Services 47 

Citywire 21 

Clearstream 44 

CNBC 16 

Creative 39 

Credit Agricole 32 

Credit Suisse First Boston 6 

CRESTCo 42 

CVC Capital Partners 14 

Dell 

Depository Trust & Clearing 

39 

Corporation 52 

Deutsche Bank 8 

Deutsche Börse 44 

Deutsche Börse Clearing 44 

Dexia 63 

Dow Jones Indexes 16 


DPM Mellon 13 

Dresdner Kleinwort Wasserstein 55 

Driehaus Emerging Markets 26 

DuPont Capital 28 

DWS Investments 32 

Ecanal 22 

Ecrossnet 8 

ECSDA 43 

Eli Lilly 69 

EM Applications 11 

Enron 77 

eSecAuction 64 

eSecLending 64 

Euroclear 7 

Euroclear Bank 42 

Euroclear France 42 

Euroclear Nederland 42 

Euromoney 6 

Euronext 

European Agency for the 

17 

Evaluation of Medicinal Products 69 

European Commission 70 

European Community 43 

Fair & Clear 49 

Federal Reserve 22 

Fidelity Investments 57 

Fitch 68 

Frank Russell 16 

Frank Russell Securities, Inc. 6 

FTSE Group 16 

GAM 75 

GlaxoSmithKline 68 

Goldman Sachs 8 

Goldshields Group 69 

Gompers 78 

Greenwich Associates 76 

Grupo Mexico 24 

Hang Seng 16 

Harvard Business School 18 

Hedge Fund Association 74 

Hewitt Associates, LLC 72 

HSBC 16 

HSBC Securities Services 51 

Inalytics 8 

ING Bank 47 

ING Barings 16 

ING Investment Management 52 

Instinet 6 

Institutional Shareholder Services 77 

International Monetary Fund 28 

Investec 52 

IOSCO 43 

iRiver 39 

Ishii 78 

ISSA 43 

ITG 6 

Johannesburg Stock Exchange 17 

Johnson & Johnson’s Duragesic 68 

JP Morgan 6 

JPMorgan Investor Services 46 

Jupiter Research 39 

Land Securities 14 

Lehman Brothers 6 

Lipper Inc. 71 

Lloyds TSB Capital Markets 12 

London Stock Exchange 17 

Long Term Capital Management 74 

Magnum US Investments Inc. 74 

Mellon 6 

Mercer Investment Consulting 6 

Merck 68 

Metrick 78 

Microsoft 38 

MiFD 43 

MLIM 

Morgan Stanley Capital 

8 

International 17 

Morley Fund Management 52 

Napster 36 

NASD 15 

NASDAQ 

National Association of 

20 

Pension Funds 10 

National Health Service 69 

New York Life 15 

New York Stock Exchange 

Nicholas Applegate Capital 

17 

Management 16 

NOREX 

North American Free Trade 

17 

Agreement 16 

Northeastern University 37 

Northern Trust 

Ohio Public Employees Retirement 

6 

System 67 

Old Mutual 28 

Omgeo 52 

Optima Fund Management 75 

Parmalat 77 

Permira Europe 14 

Pfizer 68 

Pharma Futures 67 

Piper Jaffray 39 

Principal 73 

Prudential Annuities 15 

Prudential Financial, Inc. 15 

Reuters 16 

Riverfield 32 

Roxio 38 

RWE 12 

Salzburger Sparkasse 32 

Samsung 39 

SAPPI 30 

SASOL 30 

Schroders 

Securities and Exchange 

52 

Commission 18 

Securities Industry Association 51 

Serious Fraud Office 

SG Corporate & Investment 

69 

Banking 52 

SmartMoney Magazine 16 

Standard & Poor’s 17 

State Street 6 

STOXX Ltd 16 

Sungard Business Integration 51 

SWIFT 43 

Swiss Exchange 17 

T. Rowe Price 51 

Taiwan Greater China Fund 25 

Taiwan Stock Exchange 25 

TASS Research 71 

Telkom 30 

Telmex 24 

The Bank of New York 47 

The Financial Times 16 

The Wall Street Journal 16 

Thomson Corporation 16 

Thomson Financial 16 

Tremont Capital Management 71 

Tyco 77 

UBS 52 

UBS Global Management 77 

US Food and Drug Administration 69 

Vanguard Group 72 

Veolia 12 

Vera Research 22 

Veritas SG Investment Trust 32 

WestLB 22 

Wharton Business School 

Wilmer Cutler Pickering 

18 

Hale & Dorr 18 

COMPANIES IN THIS ISSUE 

85

MARKET REPORTS BY FTSE RESEARCH 

86 

FTSE Global Equity Index Series – Global Q1 2005 

31st December 2004 - 31st March 2005 

FTSE Regional Indices Performance (USD) 

120 

115 

110 

105 

100 

95 

90 

31-Dec-04 

31-Jan-05 

28-Feb-05 

FTSE Regional Indices Capital Returns (USD) 

% 

4 

2 

0 

-2 

-4 

-6 

FTSE Global AC 

FTSE All-World Index 

FTSE Large Cap 

FTSE Mid Cap 

FTSE Small Cap 

FTSE Developed AC 

FTSE Adv Emerging AC 

FTSE Emerging AC 

FTSE All-Emerging AC 

FTSE Latin America AC 

FTSE Middle East & Africa 

FTSE North America AC 

FTSE Developed Country Indices Capital Returns 

% 

12 

10 

8 

6 

4 

2 

0 

-2 

-4 

-6 

-8 

-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 Emerging Europe AC 

FTSE Asia Pacific ex Japan AC 


FTSE Dev Europe AC 

31-Mar-05 

FTSE New Zealand AC 

FTSE Norway AC 

FTSE Portugal AC 

FTSE Singapore AC 

FTSE Spain AC 

FTSE Sweden AC 

FTSE Swizerland AC 

FTSE United Kingdom AC 

FTSE USA AC 


FTSE Developed Europe 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 


FTSE All-Emerging Country Indices Capital Returns 

% 

60 

50 

40 

30 

20 

10 

0 

-10 

FTSE Global All Cap Sector Indices Capital Returns (USD) 

% 

15 

10 

5 

0 

-5 

-10 

Stock Performance 

Best Performing FTSE All-World Index Stocks (USD) Worst Performing FTSE All-World Index Stocks (USD) 

Hyundai Hysco 78.9% Elan Corporation -88.3% 

Orascom Construction 72.4% LG Card -66.2% 

Orascom Telecom Holdings 71.7% Mosenergo -58.6% 

NET Servicos de Comunicacao PN 65.5% Doral Financial -55.6% 

Oriental Weavers 64.2% Delphi Corporation -50.3% 

Overall Index Return No. of Value 1 M 3 M Actual 

Consts Div Yld 

FTSE Global AC 7,843 301.87 0.8% -1.3% 2.05% 

FTSE Global LC 1,103 295.80 0.5% -1.9% 2.20% 

FTSE Global MC 1,877 395.19 2.2% 0.4% 1.73% 

FTSE Global SC 4,863 356.98 0.8% -0.8% 1.65% 

FTSE All-World 2,980 180.61 0.8% -1.3% 2.10% 

FTSE Asia Pacific AC ex Japan 1,877 346.66 0.6% 0.8% 2.95% 

FTSE Latin America AC 174 473.91 2.7% 0.8% 3.56% 

FTSE All Emerging Europe AC 84 442.94 1.7% 3.7% 1.73% 

FTSE Developed Europe AC 1,525 326.19 1.9% 0.1% 2.76% 

FTSE Middle East & Africa AC 173 401.04 -1.6% -5.2% 2.72% 

FTSE North Americas AC 2,680 280.76 0.4% -2.3% 1.68% 

FTSE Japan AC 1,330 311.68 0.0% -1.5% 0.98% 


Dollar Value 

Local Currency Value 

Capital 

FTSE Argentina AC 

FTSE Brazil AC 

FTSE Chile AC 

FTSE China AC 

FTSE Columbia 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 

Mining 

FTSE Pakistan AC 

Oil & Gas 

Chemicals 

FTSE Peru AC 

Construction & Building Materials 

FTSE Philippines AC 

Forestry & Paper 

Steel & Other Metals 

FTSE Poland AC 

Aerospace & Defence 

FTSE Russia AC 

Diversified Industrials 

Electronic & Electrical Equipment 

FTSE South Africa AC 

Engineering & Machinery 

FTSE Taiwan AC 

Automobiles & Parts 

Household Goods & Textiles 

FTSE Thailand AC 

Beverages 

FTSE Turkey AC 

Food Producers & Processors 

Health 

Personal Care & Household Products 

Pharmaceuticals & Biotechnology 

Tobacco 

General Retailers 

Leisure & Hotels 

Media & Entertainment 

Support Services 

Transport 

Food & Drug Retailers 

Telecommunication Services 

Electricity 

Utilities - Other 

Banks 

Insurance 

Life Assurance 

Investment Companies 

Real Estate 

Speciality & Other Finance 

Information Technology Hardware 

Software & Computer Services 

Total Return 


87


88 

FTSE Global Equity Index Series – Developed ex US Q1 2005 


FTSE Developed Regional Indices Performance (USD) 

115 

110 

105 

100 

95 

31-Dec-04 

% 

31-Jan-05 

28-Feb-05 

FTSE Developed Regional Indices Capital Returns (USD) 

14 

12 

10 

8 

6 

4 

2 

0 

-2 

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 Developed ex US Indices Sector Capital Returns (USD) 

10 

8 

6 

4 

2 

0 

-2 

-4 

-6 

-8 

FTSE US 

FTSE Developed AC ex US 

FTSE Developed LC ex US 

FTSE Developed MC ex US 

FTSE Developed SC ex US 

31-Mar-05 

Mining 

Oil & Gas 

Chemicals 










Beverages 


Health 



Tobacco 





Transport 



Electricity 


Banks 

Insurance 



Real Estate 




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) 


ex Japan (LC/MC) 

Capital 

Total Return 




Best Performing FTSE Developed ex US Index Stocks (USD) Worst Performing FTSE Developed ex US Index Stocks (USD) 

ISS A/S 45.9% Elan Corporation -88.3% 

Chiyoda Corp 42.9% Net One -38.3% 

Kingboard Chemical Holdings 41.2% Creative Technology -35.5% 

Caltex Australia 40.8% Abitibi-Consolidated -32.9% 

Sembcorp Marine 40.5% Fisher & Paykel Appliances Holdings -31.8% 

Overall Index Return No. of Value 1 M 3 M Actual 


FTSE Developed ex US (LC/MC) 1,365 195.53 1.6% -0.5% 2.45% 

FTSE USA (LC/MC) 743 484.10 0.1% -2.3% 1.73% 

FTSE Developed (LC/MC) 2,108 177.54 0.8% -1.5% 2.07% 

FTSE All-Emerging (LC/MC) 872 264.53 1.0% 0.5% 2.70% 

FTSE Developed Europe (LC/MC) 511 196.80 1.8% -0.2% 2.82% 

FTSE Developed Asia Pacific (LC/MC) 779 179.96 -0.3% -1.9% 1.74% 

FTSE Developed Asia Pacific ex Japan (LC/MC) 300 290.74 0.1% -0.5% 3.45% 

FTSE Developed All-Cap ex US (LC/MC) 3,733 328.53 1.6% -0.1% 2.40% 

FTSE Developed LC ex US 527 308.28 1.4% -1.1% 2.55% 

FTSE Developed MC ex US 1,877 376.88 2.4% 2.0% 1.73% 

FTSE Developed SC ex US 4,863 409.66 2.3% 3.8% 1.65% 

FTSE Global Equity Index Series – Asia Pacific Q1 2005 


FTSE Asia Pacific Regional Indices Performance (USD) 

110 

105 

100 

95 

31-Dec-04 

31-Jan-05 


28-Feb-05 

31-Mar-05 



Asia Pacific (LC/MC) 



FTSE Asia Pacific (LC/MC) 


Asia Pacific AC 

FTSE Japan (LC/MC) 


89


90 

FTSE Asia Pacific Regional Indices Capital Returns (USD) 

% 

FTSE Asia Pacific All Cap Sector Indices Capital Returns (USD) 

15 

10 

5 

0 

-5 

-10 

6 

4 

2 

0 

-2 

-4 

FTSE Asia Pacific AC 

% 


Mining 

Oil & Gas 

Chemicals 









Best Performing FTSE Asia Pacific Index Stocks (USD) Worst Performing FTSE Asia Pacific Index Stocks (USD) 

Hyundai Hysco 78.9% LG Card -66.2% 

China Intl Marine Containers (B) 62.7% Macronix International -39.9% 

Pakistan Telecom 59.0% Net One -38.3% 

Lotte Midopa 56.2% Polaris Software Lab -36.9% 

Dacom Corporation 55.7% Creative Technology -35.5% 

Overall Index Return 


Asia Pacific (LC/MC) 

Developed Asia Pacific 






FTSE Japan Index (LC/MC) 

FTSE Asia Pacific (LC/MC) 

FTSE Asia Pacific MC 

FTSE Asia Pacific SC 

FTSE Asia Pacific LC 



Beverages 


Health 



Tobacco 





Transport 



Electricity 


Banks 

Insurance 



Real Estate 




Capital 

Total Return 

No. of Value 1 M 3 M Actual 


FTSE Global AC 7843 301.87 0.8% -1.3% 2.05% 

FTSE Asia Pacific AC 3207 326.08 0.3% -0.5% 1.89% 

FTSE Asia Pacific (LC/MC) 1339 184.34 0.0% -1.1% 1.91% 

FTSE Asia Pacific LC 498 311.14 -0.2% -1.7% 1.97% 

FTSE Asia Pacific MC 841 362.01 0.8% 1.2% 1.67% 

FTSE Asia Pacific SC 1868 383.51 2.7% 5.4% 1.71% 

FTSE Developed Asia Pacific ex Japan (LC/MC) 300 290.74 0.1% -0.5% 3.45% 

FTSE Developed Asia Pacific Index (LC/MC) 779 179.96 -0.3% -1.9% 1.74% 

FTSE All-Emerging Asia-Pacific 560 203.63 1.0% 1.7% 2.52% 

FTSE Japan Index (LC/MC) 479 115.46 -0.4% -2.5% 0.98% 



% 

% 

FTSE Global Equity Index Series – Europe Q1 2005 


FTSE European Regional Indices Performance (EUR) 

108 FTSE Global AC (EUR) 

106 

104 

102 

100 

98 

31-Dec-04 

31-Jan-05 

FTSE European Regional Indices Capital Return (EUR) 

10 

8 

6 

4 

2 

0 


FTSE Europe AC 

FTSE Europe LC 

FTSE Europe MC 

FTSE Europe SC 

FTSE Developed Europe AC 

FTSE Developed Europe Sector Indices Capital Returns (EUR) 

16 

14 

12 

10 

8 

6 

4 

2 

0 

-2 

-4 


FTSE All-Emerging Europe AC 

FTSE Eurozone AC 

28-Feb-05 


ex UK AC 

FTSE Eurofirst 300 

FTSEurofirst 80 

FTSEurofirst 100 

31-Mar-05 

Mining 

Oil & Gas 

Chemicals 










Beverages 


Health 



Tobacco 





Transport 



Electricity 


Banks 

Insurance 



Real Estate 





ex UK LC/MC (EUR) 

FTSEurofirst 300 (EUR) 

FTSE Developed Europe AC (EUR) 


FTSE Eurozone LC/MC (EUR) 


Capital 

Total Return 


91


92 


Best Performing FTSE Developed Europe Index Stocks (EUR) Worst Performing FTSE Developed Europe Index Stocks (EUR) 

ISS A/S 52.6% Elan Corporation -87.8% 

Deutsche Boerse 31.0% Benetton -23.5% 

Fresenius AG (PFD) 29.0% MLP Ord -23.2% 

Banca Antonventa 28.9% Unibail -21.0% 

Continental 28.0% T-Online Ag -18.3% 

Overall Index Return (EUR) 

No. of Value 1 M 3 M Actual 


FTSE Global AC 7843 267.45 -0.4% 3.2% 2.05% 

FTSE Europe AC 1609 290.18 2.2% 4.8% 2.75% 

FTSE Europe LC 210 323.89 2.0% 3.8% 2.89% 

FTSE Europe MC 358 351.43 2.9% 6.7% 2.43% 

FTSE Europe SC 1041 365.35 2.2% 8.4% 2.27% 

FTSE Developed Europe AC 1525 289.00 2.2% 4.7% 2.76% 

FTSE All-Emerging Europe AC 84 392.43 2.0% 8.5% 1.73% 

FTSE Eurobloc AC 748 301.25 2.4% 4.6% 2.66% 

FTSE Developed Europe ex UK AC 1035 301.27 2.7% 4.7% 2.57% 

FTSEurofirst 300 300 1085.34 2.2% 4.2% 2.86% 



FTSE UK Index Series – Q1 2005 


FTSE UK Index Series Performance (GBP) 

120 

115 

110 

105 

100 

95 

31-Dec-04 

31-Jan-05 

28-Feb-05 

FTSE All-Share Sector Indices Capital Returns (GBP) 

% 

15 

10 

5 

0 

-5 

-10 

31-Mar-05 

Mining 

Oil & Gas 

Chemicals 









Beverages 


Health 



Tobacco 





Transport 



Electricity 


Banks 

Insurance 



Real Estate 




FTSE 100 



FTSE SmallCap 

FTSE All-Share 

FTSE AIM 

FTSE techMARK 

Capital 

Total Return 




Best Performing FTSE All-Share Index Stocks (GBP) Worst Performing FTSE All-Share Index Stocks (GBP) 

Elementis 73.9% Nord Anglia Education -57.6% 

Game Group 46.5% Danka Business Systems -48.0% 

RAC 46.1% Phytopharm -46.9% 

Xaar 45.1% Jessops -37.6% 

Axon Group 

Overall Index Return 

41.6% Plasmon -34.1% 

No. of Value 1 M 3 M Actual Net P/E 

Consts Div Yld Cover Ratio 

FTSE 100 100 4894.37 0.9% 1.7% 3.22% 2.15 14.48 

FTSE 250 250 7130.51 -0.5% 2.8% 2.64% 1.96 19.36 

FTSE 350 350 2498.72 0.7% 1.8% 3.13% 2.12 15.02 

FTSE SmallCap 355 2907.27 1.0% 5.4% 1.99% 0.28 176.89 

FTSE All-Share 705 2457.73 0.7% 1.9% 3.09% 2.08 15.54 

FTSE Fledgling 350 3381.41 2.8% 7.3% 2.22% -1.86 0.00 

FTSE AIM 1057 1088.75 1.2% 8.3% 0.41% -0.17 0.00 

FTSE techMARK 100 100 1134.26 -8.3% -5.2% 1.47% - - 

FTSE Xinhua Index Series 


FTSE Xinhua Index Series Performance (RMB/HKD) - Q1 2005 

130 

125 

120 

115 

110 

105 

100 

95 

90 

31-Dec-04 

31-Jan-05 

FTSE Xinhua Index Series 

Actual 

Index Name Consts Value 1 M 3 M Div Yld 

FTSE/Xinhua China 25 (HK$) 25 8254.83 1.2% -0.5% 3.03% 

FTSE/Xinhua China A50 (RMB) 50 4088.34 -0.2% -2.3% 1.67% 

FTSE Xinhua All-Share (RMB) 997 2259.88 -1.9% -7.6% 1.45% 

FTSE Xinhua 600 (RMB) 600 2435.58 -1.3% -6.8% 1.56% 

FTSE Xinhua Small Cap (RMB) 397 1624.64 -5.0% -12.4% 0.80% 

FTSE Xinhua China Government Bond Total Return Index (RMB) 27 92.13 2.8% 4.6% 3.99% 


28-Feb-05 

31-Mar-05 

FTSE/Xinhua China 25 (HK$) 

FTSE Xinhua All-Share (RMB) 

FTSE Xinhua Small Cap (RMB) 

FTSE/Xinhua China A50 (RMB) 

FTSE Xinhua 600 (RMB) 

FTSE Xinhua China Government 

Bond Total Return Index (RMB) 



93


94 

FTSE Hedge Index Series 

FTSE Hedge Management Styles (USD) - 5-Year Performance 

160 

140 

120 

100 

80 

60 

40 

Mar-00 

Sep-00 

Mar-01 

Sep-01 

*March 05 figures are indicative. 

Mar-02 

Sep-02 

Mar-03 

Sep-03 

FTSE Hedge 

FTSE All-World 

Directional 

Event Driven 

Non-Directional 

FTSE Hedge – Management Styles & Strategies (NAV Terms) 

Index Ann Return Volatility 

Level* 1 mth 3 mth (5-Year) (3-Year) 

Directional 3021.75 -0.6% -0.1% 8.0% 4.8% 

Equity Hedge 2064.91 -0.7% 1.4% 7.1% 4.3% 

Commodity Trading Association (CTA) / Managed Futures 2038.71 0.1% -3.3% 11.5% 15.8% 

Global Macro 1888.85 -0.4% -1.1% 7.3% 6.1% 

Event Driven 3059.01 -1.3% -0.6% 3.7% 4.6% 

Merger Arbitrage 1992.08 -0.4% -0.5% 2.1% 1.8% 

Distressed & Opportunities 2080.55 -2.1% -0.6% 5.1% 7.6% 

Non-directional 2969.57 -0.1% 0.3% 4.7% 1.7% 

Convertible Arbitrage 1945.21 -1.4% -2.7% 8.4% 5.0% 

Equity Arbitrage 1979.41 0.5% 1.7% 5.8% 2.9% 

Fixed Income Relative Value 1990.20 0.0% 0.9% 2.2% 1.4% 

FTSE EPRA/NAREIT Global Real Estate Index Series 

FTSE EPRA/NAREIT Global Real Estate Index Series Performance (Total Return) - Q1 2005 

110 

105 

100 

95 

90 

Dec-04 

Jan-05 

Feb-05 

Mar-04 

Sep-04 


Mar-05 

Mar-05 

FTSE EPRA/NAREIT Global 

Total Return Index ($) 

FTSE EPRA/NAREIT North America 


FTSE EPRA/NAREIT Europe 

Total Return Index (€) 

FTSE EPRA/NAREIT Euro Zone 

Total Return Index (€) 

FTSE EPRA/NAREIT Asia 



FTSE EPRA/NAREIT Global Real Estate Indices (Total Return) 

Actual 

Index Name Consts Value 1 M 3 M Div Yld 

FTSE EPRA/NAREIT Global ($) 275 1618.83 -0.4% -4.9% 4.12% 

FTSE EPRA/NAREIT North America ($) 135 1849.07 1.4% -6.5% 4.97% 

FTSE EPRA/NAREIT Europe (€) 78 1704.31 -0.8% 1.4% 3.34% 

FTSE EPRA/NAREIT Euro Zone (€) 30 1711.75 0.8% 4.9% 4.41% 

FTSE EPRA/NAREIT Asia ($) 62 1256.01 -3.0% -3.3% 3.12% 

FTSE Bond Indices 

FTSE Bond Indices Performance (Total Return) - Q1 2005 

103 

102 

101 

100 

99 

98 

97 

Dec-04 

Jan-05 

FTSE Bond Indices (Total Return) 

Index Name Consts Value 1 M 3 M 

Actual 

Div Yld 

FTSE Eurozone Government Bond Index (€) 251 149.12 0.0% 1.2% 3.60% 

FTSE Pfandbrief (€) 311 172.26 0.3% 1.0% 3.33% 

FTSE Euro Emerging Markets Bond Index (€) 44 194.88 -0.8% -0.1% 4.91% 

FTSE Euro Corporate Bond Index (€) 343 139.57 -0.3% 0.7% 3.91% 

FTSE Gilts Index Linked All Stocks (£) 9 1843.63 0.1% -0.1% 1.85%* 

FTSE Gilts Fixed All-Stocks (£) 29 1791.85 0.1% -0.1% 4.63% 

FTSE US Government Bond Index ($) 111 142.34 -1.1% -0.4% 4.56% 

FTSE Japan Government Bond Index (Y) 

* Based on 0% inflation 

220 110.44 0.2% 0.7% 1.01% 

FTSE Research Team contact details 


Feb-05 

Mar-05 

FTSE Eurozone Government 

Bond Index (€) 

FTSE Euro Corporate 


FTSE US Goverment 

Bond Index ($) 

FTSE Pfandbrief Index (€) 

FTSE Gilts Index Linked 

All Stocks (£) 

FTSE Japan Government 

Bond Index (¥) 

FTSE Euro Emerging Markets 


FTSE Gilts Fixed All-Stocks (£) 

Carl Beckley Bin Wu Gareth Parker 

Director, Research Senior Index Design Executive Head of Index Design 

& Development bin.wu@ftse.com gareth.parker@ftse.com 

carl.beckley@ftse.com +44 20 7448 8986 +44 20 7448 1805 

+44 20 7448 1820 

Oliver Whittle Jamie Perrett Andreas Elia 

Index Analyst Senior Index Design Executive Research Analyst 

oliver.whittle@ftse.com jamie.perrett@ftse.com andreas.elia@ftse.com 

+44 20 7448 1887 +44 20 7448 1817 +44 20 7448 8013 


95

CALENDAR 

96 

Index Reviews May-Sept 2005 

Date Index Series Review Type Effective Data Cut-off 

(Close of business) 

13-May Hang Seng Quarterly review 6-Jun 31-Mar 

17-May MSCI Annual review 31-May 

May/Jun NZSX 10 Quarterly review June 

Early Jun Russell US Indices Annual review 24-Jun 31-May 

Early Jun ATX Quarterly review 30-Jun 

Early Jun KOSPI 200 Annual review 9-Jun End of May 

Early Jun IBEX 35 Semi-annual review 1-Jul 

1-Jun KFX Semi-annual review 17-Jun 

3-Jun OBX Semi-annual review 17-Jun 31-May 

3-Jun DAX Quarterly review 

3-Jun OMX S30 Semi-annual review 1-Jul 30-May 

8-Jun FTSE UK Quarterly review 17-Jun 7-Jun 

10-Jun FTSE All-World Annual review - Emgng Eur, ME, Africa, Latin America 17-Jun 31-Mar 

10-Jun FTSE techMARK 100 Quarterly review 17-Jun 31-May 

10-Jun FTSEurofirst 300 Quarterly review 17-Jun 3-Jun 

10-Jun FTSE eTX Quarterly review 17-Jun 3-Jun 

10-Jun NASDAQ 100 Quarterly review / Shares adjustment 17-Jun 

14-Jun S&P MIB Quarterly review - shares only 20-Jun 

15-Jun S&P/ ASX 200 Quarterly review 17-Jun 

15-Jun S&P US Indices Quarterly review 17-Jun 

15-Jun S&P Europe 350/ S&P Euro Quarterly review 17-Jun 

15-Jun S&P 500 Quarterly review 17-Jun 

15-Jun DJ Global Titans 50 Annual review 17-Jun 15-Jun 

15-Jun S&P Midcap 400 Quarterly review 17-Jun 

15-Jun PSI 20 Semi-annual review 1-Jul 31-May 

15-Jun STOXX Quarterly share adjustment 17-Jun 1-Jun 

16-Jun S&P/ TSX Quarterly review 17-Jun 31-May 

1-Jul TOPIX New Index Series Semi-annual review 28-Jul 17-Jun 

7-Jul TSEC Taiwan 50 Quarterly & annual review 15-Jul 30-Jun 

25-Jul OMX H25 Quarterly review 29-Jul 30-Jun 

1-Aug CAC 40 Quarterly review 1-Sep End of Jun 

12-Aug Hang Seng Quarterly review 9-Sep 30-Jun 

17-Aug MSCI Quarterly review 31-Aug 

31-Aug FTSE All-World Annual Review / Japan 16-Sep 30-Jun 

Aug/Sep NZSX 10 Quarterly review Sep 

Early Sep ATX Quarterly review 30-Sep 31-Aug 

Early Sep S&P US Indices Phase 2 float adjustment 16-Sep 

1-Sep SMI Index Family Semi-annual review 30-Sep 31-Jul 

2-5-Sep S&P MIB Semi-annual constiuent review 19-Sep 

5-Sep DAX Quarterly review/ Ordinary adjustment 16-Sep 31-Aug 

7-Sep FTSE/ Hang Seng Asiatop Semi-annual review 16-Sep 31-Aug 

7-Sep FTSE UK Quarterly review 16-Sep 6-Sep 

8-Sep FTSE All-World Annual review/ Developed Europe 16-Sep 30-Jun 

9-Sep FTSE techMARK 100 Quarterly review 16-Sep 31-Aug 

9-Sep FTSEurofirst 300 Quarterly review 16-Sep 2-Sep 

9-Sep FTSE eTX Quarterly review 16-Sep 2-Sep 

9-Sep FTSE Multinational Annual review 16-Sep 30-Jun 

9-Sep FTSE TMT Annual review 16-Sep 6-Sep 

13-Sep S&P MIB Quarterly review - shares & IWF 19-Sep 

14-Sep STOXX Quarterly review 16-Sep 1-Sep 

14-Sep STOXX Blue Chips Annual review 16-Sep 1-Sep 

14-Sep DJ Global Titans 50 Quarterly review 16-Sep 14-Sep 

14-Sep S&P US Indices Quarterly review 16-Sep 

14-Sep S&P Europe 350/ S&P Euro Quarterly review 16-Sep 

14-Sep S&P 500 Quarterly review 16-Sep 

14-Sep S&P Midcap 400 Quarterly review 16-Sep 

14-Sep S&P/ ASX 200 Quarterly review 16-Sep 

14-Sep S&P TSX Quarterly review 16-Sep 31-Aug 

15-Sep Russell US Indices Quarterly review 30-Sep 31-Aug 

Sep/Oct CAC 40 Quarterly review Oct/Nov 

Sources: Berlinguer, FTSE, JP Morgan, Standard & Poors, STOXX 


The children of Darfur in 

Sudan are caught up in a 

horrific conflict which is 

having a devastating 

effect on their lives. 

Over 1 million people 

have fled their homes and 

entire villages have been 

destroyed and hundreds 

of lives have been lost. 

Children’s lives are at 

great risk of disease and 

malnutrition. Water and 

shelter are in short supply. 

Right now, children are 

depending on UNICEF 

to stay alive. 

To find out more about how you 

and your company can help UNICEF 

when an emergency occurs, please 

contact victorial@unicef.org.uk 

or visit: 

www.unicef.org.uk/emergencyrelief 

if you are in the UK 

or 

www.supportunicef.org 

if you´re outside of the UK 

Thank you for your support 

With a presence in over 190 countries, UNICEF (the 

United Nations Children’s Fund) is uniquely positioned 

to react quickly to emergency situations such as the 

one in Sudan. We have been working tirelessly since 

the emergency began, providing medical supplies and 

access to safe water and sanitation. To carry out our 

emergency work, we desperately need the help of 

individuals and companies. 

FTSE already support UNICEF (over £900,000 donated 

through FTSE4Good so far). In doing so, they help us 

to alleviate the distress and hardship caused to 

children who find themselves suffering because of 

emergency situations like the one in Darfur. 

UNICEF/ HQ04-0292/Christine Nesbitt

Section 2 - FTSE

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