FT : Calpers admits ignoring private equity boom cost up to $18bn of gains

Calpers admits ignoring private equity boom cost up to $18bn of gains
Biggest US public pension plan missed out on almost a decade of returns by being too conservative

Calpers, the biggest public pension plan in the US, admitted a decision to put its private equity programme on hold for 10 years had cost it up to $18bn of returns as it announced an overhaul of its governance.

In a frank assessment of past failings at the $440bn retirement system, chief investment officer Nicole Musicco said the scheme serving 2mn Californians had suffered from “frequent changes” to its strategy that had “detracted” from its return profile.

“Our returns have been frankly lower than expectations,” said Musicco, who was appointed in February last year. “We constructed a portfolio to limit downside and missed out on a big chunk of growth . . . a 10-year era of growth.”

Musicco said the scheme’s returns had suffered from several missteps in 10-12 investment areas but zeroed in on the fact it had not deployed enough capital to private markets at a time when they were booming.

“Taking a sharper look at the scheme’s private equity programme, the period between 2009 and 2018 was a period of time when we really stopped committing . . . the programme was put on hold,” she said.

“The impact of us not deploying capital during that period of time is estimated anywhere to $11bn to $18bn.”

Musicco was addressing the fund’s investment committee following a “deep dive” into the system’s performance over the past decade that was launched soon after her appointment. Calpers announced a 6.1 per cent loss in the year to June 30, a performance that lagged behind its peers.

Calpers also needed to “reflect” on its decision to favour global markets from 2008, said Musicco, rather than capitalising on domestic opportunities in the US.

“Our decision to go global for growth, rather than having a home bias . . . didn’t work as hoped,” she said.

Unveiling plans to turn the scheme round, Musicco announced an overhaul of its governance and pledged “more frequent and dynamic” reviews of its asset allocation strategy.

“We really need to develop a robust governance framework to make sure we are really benefiting from agile decision-making,” she said.

“Over the past 10 years, we have seen our returns being lower than expected, we’ve underperformed peers, we’ve had inconsistent pacing with our private market programmes,” she said.

“We really need to make sure we have a culture that holds folks accountable for active risk-taking,” she added.

>>> US Close Dow+0,64% S&P +0,69% Nasdaq +0,76% Russell VIXX25,76

Closing Stock Market Summary

Follow-through selling interest sent the stock market sliding at the open before the S&P 500 flirted with Friday's low (3,837) and found support there. The main indices danced around the unchanged mark for most of the afternoon before catching a bid in the final hour of trade, helped primarily by an uptick in the mega cap stocks and other issues. The S&P 500 broke out of a narrow trading range but found resistance at the 3,900 level, closing a whisker shy of that important level.

There was some hesitation in play ahead of the September 20-21 FOMC meeting and subsequent rate hike decision. In addition, rising Treasury yields were a focal point that pressured stocks early. However, stocks rebounded as Treasury yields fell back from their highest levels of the morning.

The 2-yr and 10-yr note yields reached their highest levels since 2007 and 2011, respectively. The 2-yr note yield reached 3.97% before settling at 3.94% and the 10-yr note yield reached 3.51% before settling at 3.49%.

The major averages squeezed out decent gains by the close, but market breadth still painted a mixed picture. Decliners outpaced advancers by a 4-to-3 margin at the Nasdaq while advancers led decliners by a roughly 3-to-2 margin at the NYSE. 

Only two S&P 500 sectors closed with a loss, health care (-0.5%) and real estate (-0.2%). The gainers were led by materials (+1.6%) and consumer discretionary (+1.3%).

Consumer discretionary was boosted by its homebuilder components after KeyBanc upgraded a number of individual names today.  The SPDR S&P Homebuilder ETF (XHB) closed up 1.8% and the iShares U.S. Home Construction ETF (ITB) closed up 2.3%. This came as participants awaited the August Housing Starts and Building Permits report tomorrow at 8:30 a.m. ET, and followed the NAHB Housing Market Index release today. 

Energy complex futures settled in a mixed fashion with WTI crude oil futures falling 0.5% to $84.96/bbl while natural gas futures rose 0.1% to $7.81/mmbtu.

Today's economic data was limited to the September NAHB Housing Market Index, which came in at 46 (consensus 48) after the prior reading of 49. A number below 50 for this report is indicative of declining confidence.

Looking ahead to Tuesday, market participants will receive the August Housing Starts (consensus 1.448 million; prior 1.446 million) and Building Permits report (consensus 1.610 million; prior 1.674 million) at 8:30 a.m. ET.

Dow Jones Industrial Average: -14.6% YTD
S&P 400: -15.2% YTD
S&P 500: -18.2% YTD
Russell 2000: -19.3% YTD
Nasdaq Composite: -26.3% YTD

>>> US After Hours Summary: F -4.8% on higher-than-expected supplier costs; CGNX

After Hours Summary: F -4.8% on higher-than-expected supplier costs; CGNX +6.2% on raised guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: CGNX +6.2%

Companies trading higher in after hours in reaction to news: LICY +1.6% (U.S. Senator visits one of its hubs), COIN +0.1% (announces new fee structures)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: F -4.8% (reaffirms FY22 EBIT but inflation-related supplier costs to run $1 bln higher than expected)

Companies trading lower in after hours in reaction to news: ROIV -2.1% (files $1 bln mixed securities shelf offering), VTR -0.6% (stock offering), SOUN -0.3% (stock offering by selling shareholders), ZEN -0.1% (shareholders approve merger), SKT -0.1% (appoints new CFO and CIO)

WWD : Queen Elizabeth II’s Final Portrait and the Passing of Her Favorite Neckla

Queen Elizabeth II’s Final Portrait and the Passing of Her Favorite Necklace to Catherine, Princess of Wales
The image was taken at Windsor Castle before the late monarch's Platinum Jubilee celebrations in June.

Queen Elizabeth II's signature pearl necklace in an unseen photograph released by Buckingham Palace and Catherine, Princess of Wales earlier this week wearing the late monarch's favorite piece of jewelry.

LONDON — Buckingham Palace released an unseen portrait of Queen Elizabeth II on the eve of her state funeral at Westminster Abbey.
The image was taken at Windsor Castle before the queen’s Platinum Jubilee celebrations. She’s wearing a light powder blue dress with an aquamarine and diamond clip brooches, which was a present from her father King George VI for her 18th birthday in 1944.
“Blue has always been one of [the queen’s] favorite colors throughout her reign from when she was very young. It’s probably her most worn color,” said Bethan Holt, author of “The Queen: 70 Years of Majestic Style” and “The Duchess of Cambridge: A Decade of Modern Royal Style.”

She previously wore the brooches for television speeches — in 2012 for her Diamond Jubilee and in 2020 for the 75th anniversary of VE Day.
In the sitdown picture, the queen is wearing her signature three-strand pearl necklace.
Earlier this week, Catherine, Princess of Wales wore the queen’s favorite pearl necklace at a luncheon held for the Commonwealth nations at Buckingham Palace along with the queen’s diamond and pearl earrings.
Kate Middleton has been subtly nodding to the queen through her jewelry, an old mourning custom first introduced in the age of Queen Victoria.
Kate Middleton has been subtly nodding to the queen through her jewelry, an old mourning custom first introduced in the age of Queen Victoria. She wore them with her all-black outfits following the death of her husband, Prince Albert. Pearls are thought to represent purity, but also tears.
Photographer Ranald Mackechnie, who captured the queen, smiling also shot her for her Platinum Jubilee portrait.
Camilla, Queen Consort paid tribute to the queen in an ITV broadcast, recalling her “wonderful blue eyes, that when she smiles they light up her whole face. I will always remember her smile. That smile is unforgettable.”
The queen’s granddaughters, Princess Beatrice and Eugenie, the daughters of the Duke and Duchess of York, released a statement remembering the late monarch.
“We’ve not been able to put much into words since you left us all. We, like many, thought you’d be here forever. And we all miss you terribly. You were our matriarch, our guide, our loving hand on our backs leading us through this world. You taught us so much and we will cherish those lessons and memories for ever,” their statement said.

FT : UK financial watchdog issues warning against crypto exchange FTX

UK financial watchdog issues warning against crypto exchange FTX
FCA says group led by Sam Bankman-Fried is ‘targeting’ consumers without authorisation

The UK’s financial regulator has warned consumers against dealing with FTX, the cryptocurrency exchange run by billionaire Sam Bankman-Fried, in the latest clash between British authorities and offshore digital asset companies.

The Financial Conduct Authority said the Bahamas-based exchange appeared to be offering products and services in the UK without its authorisation, according to a statement on the regulator’s website.

“This firm is not authorised by us and is targeting people in the UK,” the statement said.

The move against FTX, one of the largest digital asset exchanges, comes after a bruising battle between the FCA and Binance as the UK steps up efforts to control the often-unregulated world of cryptocurrencies.

The FCA intervened against Binance last year, saying its “complex and high-risk financial products” posed “a significant risk to consumers” and that the world’s largest crypto exchange had “failed” to respond to some of its basic queries, making it impossible to oversee the sprawling group.

Binance, one of FTX’s chief rivals, has pledged to become fully compliant with regulation and to reapply for supervision in the UK.

A spokesperson for FTX said they believed the regulator intended to warn consumers about a scam impersonating the exchange because some of the phone numbers the regulator listed had been reported as linked to scams.

However, the spokesperson acknowledged the website identified by the FCA — ftx.com — is the real website of the company. “We’re looking into it and communicating with regulators,” said FTX. The FCA did not respond to repeated requests to address FTX’s claims.

Crypto exchange and wallet providers have to register with the FCA for anti-money laundering supervision if their digital asset activity is “carried on by way of business in the UK”, according to an FCA guide.

The FCA and other financial regulators around the world have faced a challenge trying to protect consumers and impose standards in crypto markets, where many of the largest groups are based in offshore jurisdictions. Both FTX and Cayman Island-registered Binance have set up American affiliates to appease US authorities, but offer services in other countries from their international base.

FTX’s European division this month announced that Cyprus’s financial regulator had granted it an investment firm licence, as the crypto firm pushes to expand across the continent. Bankman-Fried, FTX’s chief executive, said at the time: “Securing this licence in the European Union is an important step in achieving our goal of becoming one of the most regulated exchanges in the world.”

The FCA said UK clients dealing with FTX would not have access to UK consumer protections such as the Financial Ombudsman or Financial Services Compensation Scheme and would be “unlikely to get [their] money back if things go wrong”.

FT : Dufry/Autogrill: shareholders have long waited for take-off

Dufry/Autogrill: shareholders have long waited for take-off
An economic downturn could mean pay-off from push into ‘experience’ shopping for travellers is delayed

Swiss duty-free travel shop operator Dufry this week announced its new purpose, making travellers “happier”. Its investors could do with a lift too. Despite airports bursting with passengers, Dufry’s share price has recovered only modestly. It wallows closer to its March 2020 lows than pre-pandemic peaks.

This route to happiness begins with Dufry’s “smart” airport stores. Creating what Dufry grandly calls its “travel experience revolution” will involve extra capital expenditure amounting to 50 basis points of sales. Overall capital spending will be 4.5 per cent of sales in the medium term. That is more than double what it was last year, and more than some investors expected.

That spending will constrain equity free cash flow conversion (from operating cash flow) to 20 per cent over the next two years. That is at least a quarter less than the pre-pandemic years. But it expects conversion to rise above 30 per cent in the following two years.

Diversification is another strand of Dufry’s strategy. Expanding its footprint in the US and Asia-Pacific is meant to offer protection against a European downturn. Dufry also wants to increase the average amount of time customers spend in its shops. Its acquisition of food and beverage provider Autogrill, announced in July, should encourage customers to linger. This deal valued the Italian caterer’s equity at between €2bn and€2.2bn.

Dufry has high hopes for operational improvements as well. In the next two years, ebitda margins are expected to rise by between 75bp and 100bp from the first half’s 7.1 per cent.

But enhancing the pre-flight airport encounter hardly protects Dufry from any impending weakness in the world travel sector. Its valuation hints at that. Dufry at present trades on a forward EV-to-ebitda multiple of just under six, compared with an average of almost 10 over the past decade.

An economic downturn could mean the pay-off from Dufry’s push into “experience” shopping for travellers is delayed.

FT : TalkTalk pushes UK government to promote superfast broadband

TalkTalk pushes UK government to promote superfast broadband
Target to cover 99% of homes needs a campaign to encourage switching, provider says

One quarter of people in the UK are projected to still be on slower internet connections on legacy copper networks by 2030 because of reluctance to switch providers, according to new research.

Consumers are hesitant about switching to new ultrafast fibre optic broadband because the perceived benefit is negligible, they fear it could cause them internet problems in the short term and they do not want to pay more, according to the research for UK broadband provider TalkTalk.

“The whole dialogue needs to move to consumer take-up,” said Tristia Harrison, chief executive of TalkTalk, which has 4mn customers in the UK.

After years of slow progress on updating infrastructure, the UK’s incumbent telecoms provider Openreach has accelerated its fibre rollout in recent years, incentivised in part by competition from new entrants.

The government has now set a target of delivering superfast fully fibre optic broadband to 99 per cent of homes by 2030 and has started providing subsidies to companies to help them connect more remote areas.

But the question of whether customers will actually switch to the new networks needs to be addressed, Harrison said

“The near-term economics and health of the sector are under threat. Unless there’s take-up, there isn’t the revenue that underpins network operators’ build and that’s bad news for . . . the economy and for the country.”

Around 28 per cent of UK premises are covered by fully fibre optic broadband, but only one quarter of these have opted for it, according to Ofcom data.

Superfast broadband is available to more than 80 per cent of homes in Spain and Portugal, though over 20 per cent of those that could migrate over have not done so, according to data collected by Frontier Economics, which did the research for TalkTalk.

The consultancy estimates that in the UK, although 99 per cent of premises are set to have the option of superfast broadband by 2030, only 75 per cent will migrate over.

For their business model to be viable, network companies need to win around 40 per cent market share in the locations where they operate, according to industry estimates, either by selling broadband contracts to consumers directly or wholesaling to internet service providers such as Vodafone, TalkTalk and Sky.

The TalkTalk-commissioned report concluded that there is now a “strong case” for the government to focus on encouraging customers to sign up for superfast broadband to boost productivity and increase digital inclusion.

The report calls on the government to run an information and awareness campaign about the benefits of full fibre broadband, introduce a full fibre employee subsidy scheme and create a right to the technology for social housing tenants.

WSJ : Ecuador Reaches Deal With China to Restructure Debt

Ecuador Reaches Deal With China to Restructure Debt
Ecuadorian President Guillermo Lasso says restructuring $4.4 billion of outstanding debt will save the country $1 billion from 2022 to 2025

NEW YORK—Ecuadorian President Guillermo Lasso said Monday that his country had reached a deal to restructure $4.4 billion of outstanding debt with China, in a deal that will save the Ecuador $1 billion from 2022 to 2025.

“This is a great development for Ecuador,” President Lasso told The Wall Street Journal.

The president was in New York for meetings during the United Nations General Assembly.