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News CVC To Buy iShares … Or Maybe Not Luxembourg-based CVC Capital Partners agreed to buy Barclays Global Investors’ iShares exchange-traded fund unit for $4.4 billion in April. The deal did not include iShares’ share-lending business, an extremely lucrative segment of the iShares operation. Under the terms of the CVC deal, Barclays was to provide the bulk of the financing, providing loans on reasonably favorable terms for $3.1 billion of the $4.4 billion deal. CVC Capital is a private equity firm with diversified interests; the iShares purchase was to be its first foray into the financial sector. But no sooner had the ink dried on the deal documents than rumors of alternate bidders emerged. As part of the deal, Barclays had a 45-day window to look for alternative and superior offers. If it found one, it would have to pay a $175 million breakup fee to CVC Capital. As this issue of the Journal of Indexes goes to press, reports are circulating that firms such as Black Rock Capital may be in the running. Black Rock is said to be entertaining a $10 billion bid that would encompass not just iShares, but the broader BGI business. Also mentioned as potential bidders are private equity firms Apax Partners, Hellman & Friedman and BC Partners. Management at Barclays owns up to 10 percent of iShares, and will be paid a cash dividend based on its stakes in the deal. Barclays CEO Robert Diamond Jr. is expected to earn upward of $6.9 million from the deal; he did not participate in the consideration of the iShares transaction. Dow Jones Rebrands Two Index Families This spring saw the rebranding of two major Dow Jones indexes product lines. Perhaps most importantly, the index provider’s agreement with Wilshire Associates was terminated on March 31. For several years, the two index providers jointly marketed an index family that included the rebranded version of the well-known Wilshire 5000 Index, which represents nearly all the listed stocks in the U.S. Both parties have returned to calculating their own indexes, with the Dow Jones Wilshire index family rebranded as the Dow Jones Total Stock Market index family and Wilshire Associates’ indexes once again marketed under its own brand name. The jointly marketed indexes were identical as of April 1, but will likely diverge going forward as the two different providers interpret rules separately and modify the methodologies over time, a Wilshire respresentative said. More recently, the Dow Jones – AIG Commodity Index changed its name to the Dow Jones – UBS Commodity Index as of May 7, following the acquisition of some of AIG’s assets by UBS. The index’s methodology remains exactly the same, but new suggested ticker symbols reflecting the name change have been generated for the main index and its subindexes. Dow Jones is publishing parallel sets of indexes under the new and old ticker symbols for 30 days before phasing out the old symbols; the index values for both sets of symbols are exactly the same. Grim Results For Active Managers In 2008 More than 70 percent of all actively managed U.S. equity mutual funds trailed their benchmarks for the five years ending 2008, according to the 2008 Standard & Poor’s Index Versus Active Fund Scorecard (SPIVA). The report shows that 71.9 percent of actively managed large-cap funds trailed the S&P 500; 75.9 percent of actively managed mid-cap funds trailed the S&P MidCap 400; and a stunning 85.5 percent of actively managed small-cap funds trailed the S&P SmallCap 600. S&P says the results were consistent with the previous five-year cycle, from 1999 to 2003. Actively managed funds also did poorly over the one-year period: 54 percent of large-cap funds trailed the S&P 500; 75 percent of mid-cap funds trailed the S&P MidCap 400; and 84 percent of small-cap funds trailed the S&P SmallCap 600. The single worst category for active managers in 2008 was small-cap growth, where a dizzying 96 percent of managers trailed their benchmark. The only bright spot was large-cap value funds, which trounced the S&P 500 Value Index in 2008, with 78 percent of actively managed funds beating their benchmark. But the story turns dismal again for active managers of international funds. Sixty-three percent of global funds trailed the S&P Global 1200 on a fiveyear basis; 84 percent of international funds trailed the S&P 700; 59 percent of international small-cap funds trailed the S&P Developed Ex-US Small-Cap; and 90 percent of emerging market funds trailed the S&P/IFCI Composite. Fixed income is no better. Over five years, the percentage of fixed-income funds that outperformed their indexes in all standard domestic categories is less than 10 percent. The only exceptions are in high yield, where 48 percent of funds beat their benchmark; global fixed income, where 21 percent beat their benchmark; and emerging markets debt, where 38 percent beat their benchmark. All results are adjusted for survivorship bias. MacroMarkets Closes Oil Fund, Cancels Housing IPO MacroMarkets LLC has been encountering some problems with its MacroShares exchange-traded products. The firm has a patented meth- 44 July/August 2009
odology for dueling exchange-traded trusts that shift assets (in the form of Treasuries) back and forth between each other according to the positive or negative movements of the underlying commodity price or index. The flagship products—the Macro- Shares Oil Up trust and the MacroShares Oil Down trust—ran into trouble last year when the price of oil skyrocketed, sucking all the assets out of the “Down” fund and forcing the closure of both products. MacroMarkets tried again a few months later with another set of oiltracking products that had a little more flexibility—the MacroShares $100 Oil Up Trust (NYSE Arca: UOY) and the MacroShares $100 Oil Down Trust (NYSE Arca: DOY). However, those products never gained much popularity, and it was announced in mid-May that the firm was invoking a rule that allowed it to terminate the funds if one or both of them fell below $50 million in assets; UOY and DOY, which had about $20 million in combined assets at the time of the announcement, are set to stop trading on June 25. Just days later, the firm announced that its unprecedented initial public offering for its pending products tracking the S&P/Case-Shiller Home Price Composite 10 Index had failed, and it would be using a traditional, market-maker-driven process to launch the Major Metro Housing Up (NYSE Arca: UMM) and the Major Metro Housing Down (DMM) trusts. Apparently, demand for the Up and Down funds from IPO bidders was too lopsided; additionally, investors seemed to be put off by the extra commission costs that came with purchasing a traditional IPO. The home price trusts were expected to launch with $5 million in seed money from a market maker shortly after the failure of the IPO was announced. INDEXING DEVELOPMENTS Home Price Indexes Slow Their Descent The S&P/Case-Shiller Home Price indexes, while grim, showed some mildly positive signs for February. For the first time in 16 months, the benchmarks’ fall didn’t set new records for year-over-year losses, according to the monthly results released in late April. In fact, 16 of the 20 metro areas saw smaller losses in February than in January, although all 20 metro areas covered by the indexing series produced a monthly decline in February. All in all, average U.S. home prices are at similar levels to where they were in the third quarter of 2003. From the peak in mid-2006, the 10-City Composite Index was down 31.6 percent and the 20-City Composite was down 30.7 percent through February 2009. On an annualized basis, three metro areas fared the best: Dallas dropped 4.5 percent and turned in the best performance, while Denver fell some 5.7 percent and Boston lost 7.2 percent. The three worst-performing cities continue to be from the Sun Belt: Phoenix was down 35.2 percent, with Las Vegas and San Francisco down 31.7 percent and 31 percent, respectively. CDR Rolls Out Government Risk Index In late March, Credit Derivatives Research LLC launched a new index designed to track the creditworthiness of leading sovereign debtors. The Government Risk Index tracks credit default swap spreads for the United States, the United Kingdom, Germany, France, Italy, Spain and Japan. Sovereign CDS essentially insure a buyer against a credit event, like a default, related to the issuing country’s debt. With governments taking actions like buying up toxic assets in the wake of the credit crisis, thereby increasing risk levels, CDS costs have also increased. Pull Quote Pull Quote Pull Quote Pull Quote Pull Quote Pull Quote Pull Quote Pull Quote Pull Quote Sovereign CDS essentially insure a buyer against a credit event, like a default, related to the issuing country’s debt. www.journalofindexes.com July/August 2009 45
Page 1 and 2: How to Kill a Black Swan Remy Brian
Page 3 and 4: www.journalofindexes.com Vol. 12 No
Page 6 and 7: FREE subscRiption oFFER! The Journa
Page 8 and 9: David Smith Publisher dsmith@fa-mag
Page 10 and 11: Editor’s Note Got Risk? Jim Wiand
Page 12 and 13: How To Kill A Black Swan Risk and a
Page 14 and 15: Figure 2 Comparison Of Asset Return
Page 16 and 17: Figure 5 Historical Real Returns Fo
Page 18 and 19: Figure 8 Subset Of A Multi-Asset Cl
Page 20 and 21: Benchmarking Policy Portfolios How
Page 22 and 23: investor has decided to benchmark 8
Page 24 and 25: An Interview With Susan Mangiero By
Page 26 and 27: How To Minimize Your Cost Of Tradin
Page 28 and 29: Figure 2 Offer NAV Proxy Bid Using
Page 30 and 31: ETF Trading Volume Is Huge, Growing
Page 32 and 33: Figure 5 Hypothetical ETF Limit Ord
Page 34 and 35: Gastineau continued from page 31 th
Page 36 and 37: Portable alpha approaches—which e
Page 38 and 39: to write the book “Portable Alpha
Page 40 and 41: sitated more routine adjustment in
Page 42 and 43: Bogle’s Corner The Fiduciary Prin
Page 44 and 45: at the direct expense of the invest
Page 46 and 47: Talking Indexes Managing The Risks
Page 50 and 51: S&P Introduces Risk-Controlled Inde
Page 52 and 53: News New SPDR Offers Twist On Mortg
Page 54 and 55: Global Index Data Selected Major In
Page 56 and 57: Morningstar U.S. Style Overview: U.
Page 58 and 59: Exchange-Traded Funds Corner Larges
Page 60: “For a strong foundation in my cl

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