>>> Barrons weekend summary: positive on GS, STT, ANET, GHC, NTRS, BSX; Cautious

Barrons weekend summary: positive on GS, STT, ANET, GHC, NTRS, BSX; Cautious on NFLX, SJM 

Cover story: The mutual fund industry faces increasing pressure to outperform, but as that grows more difficult investors are withdrawing moneya trend the industry calls flowmageddon; Traditional mutual funds still dominate the industry despite the growth of ETFs, but Vanguard is winning with both. 

Tech Trader: Cautious on NFLX: Now that streaming has gone mainstream, founder and CEO Reed Hastings needs a new strategy to maintain the companys momentum and must continue to produce better content than rivals; otherwise, shares could drop by 40% or more. 

Trader: Dennis DeBusschere of Evercore ISI says low yields on the 10-year U.S. Treasury are a money-flow, central-banking issue and not a sign the American economy is in trouble; A number of credit-card stocks fell on earnings news at SYF, but even after last weeks rally their multiples remain low historically and relative to the S&P 500, offering downside protection; A decline in the number of pubs in the U.K. may partly lie with smoking bans and tougher drunk-driving laws. 

Mutual Fund Quarterly: 1) Jeffrey Gundlach of DoubleLine Capital discusses the effect of the Brexit vote on the stock and bond markets; 2) Mutual funds posted gains during the second quarter and ended the period in the black, boosted by gains in categories such as value and precious metals; 3) Positive on GS, STT, BLK, JPM, Franklin Templeton: Among firms that are making a push into the multifactor or smart beta ETF market, which though young is growing increasingly popular with investors; 4) Because of todays extreme currency volatility, funds that hedge back into dollars are the best bet. 

Features: 1) Positive on ANET: Company is gaining market share in high-end network switches at the expense of CSCO, and has entered the router market; shares could climb 20% and Arista has an attractive valuation; 2) Positive on GHC: Television and education company has undergone major changes in the past few years, and under new chief executive Tim OShaughnessy it should start to close the gap between its share price and its estimated asset value; 3) Positive on NTRS: A recent string of deals have given the trust company more market share in a competitive sector, and fees in its wealth-management business are growing. Small Caps: Positive on FLWS: Companys acquisition of Harry & David extended its ability to cross-sell gifts of food and bouquets, which should boost revenue and growth. 

Follow-Up: 1) Positive on BSX: After seeing a 41% gain, shares of the medical device maker still seem reasonably priced, and the company could grow profits at a low double-digit rate for years to come; 2) Cautious on SJM: Any benefits from lower coffee costs arent likely to continue, and with shares stretched valuation investors may want to take money off the table. 

European Trader: A sudden and violent sellof in U.K. property assets following the Brexit vote has created value for long-term investors. 

Asian Trader: An ongoing activist investor battle at China Vanke could ultimately be bad for the companys share price. 

Emerging Markets: Entrepreneurial healthcare, tech, and consumer-discretionary companies have grown in number since 2005, but are not proportionately reflected in the MSCI Emerging Market Index. 

Commodities: Gold is strong of late, but silver is outshining itand the Brexit vote makes both more appealing to investors. 

Streetwise: As with junk, the margin of safety for stocks might not be as big as it appears, and the Brexit will call any surge in corporate profits into question.

FT : US buyer prepares to spend £1bn on cut price UK property

US buyer prepares to spend £1bn on cut price UK property

A US private equity firm is preparing to spend more than £1bn on discounted UK real estate in the next six to 18 months including buildings from a series of property funds that suspended trading this week.
The plan by New York-based Madison International Realty is an early sign of how opportunistic investors might seek to take advantage of any downturn in the market triggered by the UK’s vote to leave the EU.

The group has already made contact with property funds that halted redemptions in the wake of the vote.
Seven property funds holding more than £15bn prevented redemptions this week as investors, anticipating a drop in commercial property prices, rushed to withdraw their money.
Property advisers including Knight Frank and Cushman & Wakefield said they were in touch with funds seeking to sell assets to generate cash to pay back to investors.
Other private equity buyers said they were also eyeing the UK market, but did not expect to see widespread distressed debt secured against commercial property, as in the 2008 crisis.
One buyer said, however, that he expected prime London assets to come on to the market at a discount from the suspended funds. “They’re not going to try to sell their trickier assets first,” he said.
Suspended funds own London buildings including 440 Strand, headquarters of the private bank Coutts; Riverside House, an office building on the south bank of the Thames; offices on Soho Square; and retail buildings on Oxford Street.
On Friday the UK’s financial watchdog indicated that some commercial property funds may need to lift suspensions and allow clients to take a haircut on investments. The FCA said it was in close contact with the funds. It has suggested it may look again at the design of these funds, which hold assets that cannot be sold quickly but offer investors same-day redemptions.

There is a risk of contagion in the market as a wide pool of other products invest in the property funds, and so could be forced to block investors from pulling their money. These include two multi-asset products run by M&G and three of Standard Life’s multi-asset products. Another three Standard Life funds have large stakes in Henderson’s suspended property fund.
Madison International Realty sent its senior management team to London on the day of the UK’s referendum on EU membership after seeing that the polls were “neck and neck”, said Ronald Dickerman, its founder.
“We can be a liquidity provider to open-ended funds with queues for the exit,” he said, adding that Madison would buy stakes in buildings from the suspended funds, but would not seek to acquire entire assets.
Madison has raised a $1.39bn equity fund and plans to allocate £200m-£400m of that to the UK. It will use leverage to amplify that to more than £1bn.
“We think the timing is perfect and we are looking to deploy a disproportionate amount of this fund into London,” said Mr Dickerman.
Madison does not buy entire property assets but uses a joint venture model to acquire stakes in buildings and portfolios. It owns 75 per cent of the Houndsditch estate, an office portfolio in the City of London, with the remainder held by TH Real Estate’s Central London Office fund.
Mr Dickerman said he hoped to acquire assets at a 5-15 per cent discount, with a focus on London offices and high street retail sites. He said the company also hoped to step in where deals in progress had collapsed because of Brexit.

>>> Steinhoff to make new Poundland bid within day

Steinhoff to make new Poundland bid within day

Steinhoff International (ETR:SHF), the South Africa-based conglomerate, is to make a revised offer for British retailer Poundland (LON:PLND) within the next few days, The Sunday Telegraph reported. The unsourced report said Steinhoff’s bid will be worth more than GBP 600m (USD 777m) and will come before a bid deadline on Wednesday, 13 July.

Poundland has already turned down a proposal from Steinhoff, which has built up a 23.6% holding in the mono-price retailer, the report said.

Analysts had previously expected Steinhoff would need to increase its offer to between GBP 2.20 and GBP 2.30 per share but in the wake of the UK’s vote to leave the European Union, Poundland’s shares have fallen to around the GBP 1.80 level, the report noted.

WSJ : Deutsche Börse Considers Lowering Tender Threshold to Save LSE Merger

Deutsche Börse Considers Lowering Tender Threshold to Save LSE Merger

Move would be strongest sign yet of commitment to deal amid concerns over Brexit

FRANKFURT—Deutsche Börse AG is considering lowering the approval threshold for its proposed €25 billion ($27.63 billion) merger with London Stock Exchange Group PLC, according to people familiar with the matter.

That unexpected move would be the strongest sign yet of how committed both companies are to their tie-up despite mounting questions following the U.K.’s vote to leave the European Union.

The German exchange group is concerned that the tender offer that has been launched for its shares as part of the deal could fail to secure more than 75% of its stock by the Tuesday deadline, according to the people. Deutsche Börse is therefore considering lowering the minimum threshold to around 60%, they said.

Some large Deutsche Börse shareholders privately said they understood the strategic rationale of the combination but were hesitant to tender because they were uncertain about how Brexit may affect the transaction. As of Friday, around 25% of the shares had been tendered.

The issue is pressing because the deal would fall apart should sufficient shares not be tendered.


A final decision on whether to lower the minimum threshold will be made Monday morning, the people close to the deal said.

Acquirers in Germany are free to choose a minimum acceptance hurdle on which a tender offer hinges, but most choose a 75% threshold because it gives wide-ranging control over a target under German law.

People familiar with the matter said Deutsche Börse is optimistic it can win over holders of more than 75% of its shares in the so-called extended offer period, which starts once enough shares have been secured in the initial offer period. Those people added that both Deutsche Börse and LSE are optimistic they can realize the announced synergies of €700 million despite a potentially lower acceptance level on the German side.

The so-far low response rate from Deutsche Börse investors is in stark contrast to the response LSE received from its shareholders. More than 99% of its shareholder base voted in favor of the deal at a special meeting last Monday.

Industry observers have said the drop in the pound and potentially lower trading volumes on the LSE after Brexit have shifted the benefits of the merger toward LSE.

Complicating a successful completion of the tender offer is Deutsche Börse’s investor base. Around 14% of its shares are held by index tracking funds that generally tender their stake only in the two-week extended offer period that starts following a successful initial offer period.

Completion of the offer would get the exchange merger into the next stage, where it needs to get regulatory approval from antitrust authorities, local watchdogs and governments.

Germany’s financial regulator, BaFin, has already said it opposes the current plan, under which London would become headquarters for the holding company of the combined operations. Felix Hufeld, BaFin’s president, said on June 28 that “without doubt...it is hard to imagine that the most important exchange venue in the eurozone would be steered from a headquarters outside the EU.”

Many politicians in the ruling coalition in Hesse, where Frankfurt is located, tend to agree and some have vowed publicly to move the holding company to Frankfurt.

But Germany’s powerful finance minister, Wolfgang Schäuble, last week said “the question of the holding’s headquarters is not the most important question.” He added that it was more important to see which business fields will remain in Frankfurt and which in London. “I believe that it’s indeed important that the responsible authorities have a close look at this,” he said.

One of the largest investors in Deutsche Börse has come out in support of its merger last week, saying the deal shouldn’t be torpedoed because of “political sensibilities” surrounding a U.K. exit from Europe. Alexander Darwall, a fund manager at Jupiter Asset Management, said the deal “succeeds in delivering efficiency and scale so that savings can be passed on to customers.”

NY Post : Pepsi sticks with soda after passing on milk company

Pepsi sticks with soda after passing on milk company - http://nyp.st/29qE0s2

PepsiCo was interested in buying WhiteWave, the parent of organic milk seller Horizon, but passed because of the high cost before French dairy firm Danone last week inked a $12.5 billion deal for the company, Josh Kosman reports.

The move was part of a year-long plan to transform Pepsi away from carbonated sodas.

Indra Nooyi’s company has tracked WhiteWave and knew it was open to a sale, a source close to the situation said.

“Pepsi made it clear to WhiteWave’s bankers [in recent months] at these multiples, forget about it,” the source said. While Pepsi balked at the price, Danone was ready to pay a better than 20 percent premium to the stock price. PepsiCo said last week it was comfortable with its portfolio of brands.

Telegraph : Investor unease about £77bn SABMiller takeover mounts

Investor unease about £77bn SABMiller takeover mounts



major investor in SABMiller has raised concerns about its £77bn purchase by Belgian-Brazilian giant Anheuser-Busch InBev amid frustration the deal increasingly favours the FTSE 100 brewer’s two biggest shareholders.

The top 10 investor told The Sunday Telegraph it was “reviewing options” and planned to meet SAB, after the drop in the pound following the EU vote boosted the value of a stock-and-cash offer made by AB InBev, which many shareholders cannot accept. “We will be talking about their thoughts on how things are going and whether this is still a good deal for all shareholders,” the investor said.

SAB’s chairman, Jan du Plessis, agreed a two-part deal structure with Stella Artois-owner AB InBev, led by boss Carlos Brito, that helps tobacco firm Altria and Colombia’s Santo Domingo family soften the tax hit they would suffer by accepting an all-cash offer. The deal is the biggest takeover in British corporate history. Altria and the Santo Domingos together hold about 40pc of SAB shares, which means it would be hard for other investors to block the takeover.

The brewer’s two largest investors will receive unlisted AB InBev shares, which they must hold for five years, and a small amount of cash. While this offer is open to all SAB shareholders, in practice most fund managers would find it difficult to hold unlisted stock and are expected to accept an all-cash offer worth £44 a share. The stock-and-cash alternative was valued at £39.03 per share when the deal was agreed in October, but because of the pound’s drop is now valued at more than £51, some 16pc higher than the all-cash offer.

The SAB shareholder said: “The share offer was structured to make it pretty much unacceptable for most fund managers. We weren’t realistically given the share offer – it does stick in our throats somewhat.” SAB investors have yet to vote on the deal because regulatory clearance is still being sought.

A spokesman for SAB declined to comment.

FT : Sovereign wealth funds steer clear of direct investment

Sovereign wealth funds have retreated from investing directly in companies over fears about the valuations of private businesses and as state-backed funds come under pressure from low commodity prices.
Direct investments by state-backed funds into areas such as private companies and infrastructure have fallen to their lowest levels in at least six quarters, according to the Sovereign Wealth Fund Institute, a research organisation.

A $3.5bn investment in Uber, the ride-hailing app, by Saudi Arabia’s sovereign fund was not enough to see off a 42 per cent fall in allocations.
State-backed pension and wealth funds, which are used by countries to save for future generations, invested just $73.2bn directly in companies in the first half of 2016. This compares with $126.7bn for the same period in 2015.
In its report, the SWFI said the fall in direct investments could be linked to a shift towards alternative investment funds and concerns about valuations. “There [are] gaps between buyer and seller valuations,” it said.
There are concerns that the valuations for many unlisted start-ups are too high and could lead to the market overheating, leaving investors nursing losses in the process.
The number of unicorns — private start-ups with billion-dollar valuations — has soared in recent years, as investors tried to access fast-growing technology companies.
Amin Rajan, chief executive of Create Research, the consultancy, said: “A combination of monetary easing and media hype has pushed tech valuations into the stratosphere, forcing [sovereign wealth funds] to sit on the sidelines.”
However, state funds are still interested in investing in some tech companies, which is an “endorsement of their belief in disruption to drive returns”, the SWFI said.
Mr Rajan added that low commodity prices have also hit direct investments, because state funds in oil-rich countries have been forced to rein in spending.
“A fair chunk of the reduction [in direct investing] has come from oil-producing countries, where public finances have taken a big hit from the headlong decline in oil prices over the past two years,” he said. “They are now investing at home in infrastructure projects normally funded by their governments.”
The oil price dropped to under $30 a barrel earlier this year, down from $110 in 2014. It is now stands at $45 a barrel.
Sven Behrendt, managing director at Geoeconomica, a consultancy, said there are signs that state funds are “investing less, but not redeeming money [from their investments]” on the back of the oil-price fall. He added that the fall in direct investments is likely to be due to state funds diversifying their holdings.
The SWFI report additionally found that with the exception of Saudi Arabia’s stake in Uber, most state-backed funds have “overwhelmingly pursued smaller average deal sizes” so far this year, partially because of “expanded regulatory scrutiny on large deals”

FT : Alternative investments grow on flight from bonds and equities

Rock-bottom yields from government bonds and destabilising bouts of volatility in equity markets have pushed institutional investors to invest ever more money with alternative investment managers in the quest for higher returns.
According to research from Willis Towers Watson, the pension fund consultancy, total assets managed by the 100 largest alternative investment managers rose to $3.6tn at the start of the year, up 3 per cent on the previous year.

The annual Willis Towers Watson/FTfm Global Alternatives Survey shows that property, private equity, hedge funds and infrastructure have become more embedded in the portfolios of institutional investors.
“The shift away from equities and bonds into alternatives has gained momentum among most institutional investors around the world,” says Luba Nikulina, global head of manager research at Willis Towers Watson.
Allocations to alternative investment managers will grow further, she says, while government bonds deliver only miserly yields and returns from equities are forecast to be substantially weaker than those achieved historically.
Despite the rise in allocations, however, managers of alternative investments are under greater scrutiny than ever from pension funds and sovereign wealth funds, which are demanding clear evidence that their interests are being served.
“Investors have become more mindful of value for money,” says Ms Nikulina, adding that investors want alternative investment managers to carry a greater share of the downside risks if a strategy goes wrong.
Last year the OECD, the Paris-based group of rich nations, warned that pension fund managers and life insurance companies were increasing their chances of going bust if they moved aggressively into alternative assets to meet their promises to savers.
The OECD also called on regulators and policymakers to remain vigilant in assessing the exposure of pension funds and insurance companies to riskier alternative investments.
The global alternatives survey, which has been extended to cover 10 asset classes and seven investor types, shows that total alternative assets under management globally stood at $6.2tn at the start of the year, spread across 602 managers.
Pension funds remain the largest allocator to alternatives, accounting for 41 per cent ($1.5tn) of the total assets managed by the top 100 alternative managers.
“Alternatives managers continue to be remarkably reliant on pension fund money,” says Ms Nikulina, adding that if alternative investment managers lowered their fees they would attract greater inflows from insurers and sovereign wealth funds.
Top managers of alternative investments for pension funds
JPMorgan was the world’s largest manager of alternative assets on behalf of pension funds, helped by a strong performance by its real estate and infrastructure arms. Its pension assets rose 10.7 per cent to $75.6bn in 2015.
Anton Pil, global co-head of alternatives at JPMorgan Asset Management, says: “Alternative strategies take time to play out but it makes sense for long-term investors to take advantage of the illiquidity premiums offered by alternatives.”
Last year’s winner, Blackstone, did not disclose a breakdown for several asset classes and so dropped to 16th place in the list. However, Blackstone’s total assets increased 30 per cent, suggesting it might have retained its position as the biggest alternative asset manager for pension funds if it had reported its data fully.
The study also shows that money has continued to pour into real estate, which remains the most popular asset class for institutional investors. It accounts for just over a third ($1,242bn) of the assets managed by the top 100 managers.
Los Angeles-based CBRE retained the top spot as the largest property manager, with assets managed on behalf of pension funds rising 2.9 per cent to $45bn. CBRE’s lead has narrowed over New York-based TIAA and JPMorgan, which both saw an increase of 15 per cent in real estate assets managed for pension funds, to $45bn and $43bn respectively.
Fundraising also remained strong for private equity managers, which are now sitting on a record amount of unallocated capital known as “dry power”. This has fuelled concerns that private equity managers will overpay to carry out deals and may damage future returns.
Ms Nikulina says “meticulous selectivity” will be required to identify private equity managers with the right skills to navigate the next phase of the business cycle.
Hedge fund managers, meanwhile, attracted relatively modest inflows in 2015 amid widespread concerns about high fees and poor returns. Almost half (45 per cent) of hedge funds posted losses in 2015 and the industry overall delivered a -0.85 per cent return last year, according to HFR, the data provider.
In January last year Europe’s second-largest public pension fund, PFZW, withdrew all of its €4.2bn investment in hedge funds because of concerns about the investment performance, costs and complexity of the holdings.
Ms Nikulina says that competitive pressures are growing for hedge fund managers from providers of low-cost smart beta strategies, a halfway house between active and passive management.
Size has also become an issue, not just for hedge funds but for all alternative asset managers. Amin Rajan, chief executive of Create, the fund management consultancy, says: “Asset inflows are a double-edged sword for alternatives managers as their strategies are not scaleable as investments in equities and bonds.”
He warns that “the wall of new money is diluting returns from alternatives”, adding that downward pressure on fees, particularly on funds that have mediocre performance, is “intense”.
But Mr Rajan expects to see more money flowing into alternatives from institutional investors, which are deeply worried about the end of the 35-year bull market in bonds and the risks in equity markets.
“The two main asset classes [equities and bonds] carry huge risks that could be absolutely crippling, particularly for pension funds where growing numbers are being forced to eat into their capital to pay retirement benefits,” he says.
Rob Mellor, a partner with PwC, the professional services provider, agrees. “Negative interest rates will drive a shift out of bond markets and the place to go is alternatives managers,” he says.