Oxford Analytica examines the growing popularity of sovereign wealth funds in this guest post.
Sovereign wealth funds (SWFs) are special purpose vehicles that invest surplus government assets in private financial markets. Typically, they have a mandate to resolve some domestic macroeconomic problem or insure against future crises. Reserve investment corporations, commodity funds, and pension reserve funds (among others) are examples of SWFs that are emerging around the world to manage domestic problems in relation to the global economy
Increasing popularity. SWFs are growing strongly, both in terms of assets under management and sheer numbers:
- Assets under management increased from roughly 1 trillion dollars at the end of the millennium to nearly 4 trillion today. Compared with the pension and mutual fund sectors, SWFs may appear small. However, they are larger than both private equity and hedge fund industries in terms of total assets. Research suggests that SWFs will hold over 6 trillion dollars by 2012.
- The sheer number of SWFs has also increased over the past decade. Indeed, 28 of the 48 SWFs listed by the US Government Accountability Office as of 2008 were set up since 2000. Moreover, 11 new SWFs were at various stages of creation and development in 2009 and four new funds have already been announced in 2010.
Managing uncertainty. New research by the Oxford SWF Project offers insights into what is driving this sudden rise in popularity. In recent decades, national economies became more integrated (’globalisation’) and the share of the financial sector as a proportion of GDP increased in many countries (’financialisation’). These profound structural changes to the global economy have led to overlaps between capitalist institutions and the institutions of state bureaucracies.
The creation of new SWFs will continue unabated, as more governments attempt to manage their precarious role in an increasingly globalised economy.
Maintaining autonomy. In the context of an uncertain global economy, SWFs underwrite the autonomy of the state by acting as an ‘insurer of last resort’ or, in other words, as a ‘buffer’ against the outside world. Whether the fund has a mandate to fill an unfunded pension liability through investments in riskier assets or to smooth volatile commodity prices, it exists in order to minimise the uncertainty and risks associated with integration into the global capitalist system. Policymakers today recognise that SWFs offer a way to maintain popular, domestic institutions that would otherwise contradict the institutions of global capitalism.
Research suggests that countries are not setting up SWFs because they have resource wealth or excess reserves. Rather, they do so because some aspect of their domestic economy depends on — or is vulnerable to — external markets and forces for its wellbeing. For example, resource rich countries may have the commodity funds to minimise market uncertainty, thereby allowing better long-term budget planning. For countries with excess reserves, reserve investment corporations help to minimise the costs of holding such reserves, which the country hoards in order to self-insure against currency crises and capital flight.
Outlook. Policymakers are using SWFs to leverage financial markets in order to maintain popular domestic institutions and policies while limiting the negative impacts of globalisation at the local level. Indeed, the recent economic and financial crisis has unambiguously alerted policymakers to the potential risks associated with future economic recessions.
For more see SWFs offer comfort in a volatile world
The life science sector’s outlook remains stable, though equipment makers are set to outperform contract research organizations (CROs) over the next 12-18 months, Moody’s says in a new Industry Outlook.
- Manufacturers are set to benefit from an economic recovery, with sales of capital equipment benefiting from renewed spending in industrial and applied markets.
- Equipment makers will also get a boost from purchases by academic customers, benefitting in 2010 and 2011 from U.S. government stimulus spending directed at funding research.
- Upcoming patent expirations in the pharmaceutical industry will translate to cost-containment measures, constraining CROs’ growth, which depend heavily on business from pharmaceutical companies. Ongoing strategies to increase the level of outsourcing favors CROs and helps offset this pressure, and should continue over the long term.
- Progress in the integration of the 2009 pharmaceutical mega-mergers should translate into fewer R&D project cancellations and delays, lending stability to the life science sector.
- We expect no meaningful effect on life science companies from healthcare reform through 2011.
We are generally more favorable on the outlook for manufacturers in the sector than for contract research organizations, mainly because the CROs depend far more on the pharmaceutical industry for revenue and profit.
Moody’s holds a negative outlook for the global pharmaceutical sector—the CROs’ biggest customer base—over the next 12-18 months. Among the “big pharma” companies, continued cost pressures will likely result in relatively flat R&D spending through mid-2011—a stark contrast to spending that more than doubled from 2002-2008.
Now pharmaceutical companies are being far more selective about the projects they choose to pursue, which we believe will constrain CRO industry growth over the next 12-18 months.
While pressure on “big pharma” also affects the equipment makers, they should benefit more from an economic recovery, due to their higher exposure to industrial and applied markets, Moody’s said. These companies will also have a tailwind from academic customers, many of whom will receive government stimulus funding directed at research.
For details, see U.S. Life Science Set for Stable Growth, But Pressure on Pharmas Constrains CROs (Premium)
Additional merger and acquisition (M&A) activity could be forthcoming for U.S. packaged food companies as they try to enhance their sales growth, according to Fitch Ratings. The recent large acquisition involving Kraft Foods Inc.’s (KFT) combination with Cadbury plc may be the beginning of heightened M&A activity for the sector.
Fitch says leverage has improved recently for many of the packaged food companies, potentially signaling that they are ready to engage in a more extensive level of acquisitions beyond the bolt-on acquisitions typically factored into ratings. The acquisitions are likely to be in core categories that could lead to expansion or strengthening of geographies, similar to the rationale for the Kraft-Cadbury deal.
Emerging markets are attractive for acquisitions or joint ventures because of their faster growth rates and large areas for expansion. -Judi Rossetti, Director at Fitch.
Fitch says large acquisitions with significant debt financing would likely lead to ratings downgrades upon initially higher debt burdens.
Fitch also evaluated potential leveraged buy-out (LBO) and leveraged recapitalization risk in the sector. Overall conclusions reveal that packaged food companies have already done a substantial amount of the cost-cutting and divestures of non-core assets that a private equity firm would engage in, making these companies less attractive than they would have been several years ago.
Although private equity firms have recently shown interest in small packaged food companies, it would be challenging for a private equity firm to generate its desired return on investment by taking a large packaged food company private.
Strategic transactions between packaged food companies are more economically justifiable, since they could generate cost savings from eliminating duplicate corporate expenses, centralizing procurement of ingredients and packaging materials, generating efficiencies in distribution and logistics, and providing or enhancing access to faster growing markets.
For details, see U.S. Packaged Foods: Acquisition Appetite Grows (Premium)
The Food and Drug Administration approved Genzyme’s Pompe disease treatment, Lumizyme — a first of its kind to receive the green light in the U.S. — after a slew of bad news has generated negative publicity for the company.
The approval came after the FDA fined Genzyme $175 million earlier this week for violations at its Allston, Massachusetts plant. Lumizyme treats a rare genetic disease and is also known as Myozyme, which has been selling in 45 countries.
Although this is good news for the drug firm, Zacks Investment Research still has an “underperform” rating for Genzyme, and noted that the company has been dealing with supply chain issues in the past few months for some of its most important products. ”We believe that the company may have to face additional challenges before it is able to go back to a normal production and supply schedule,” wrote Zacks analysts.
Billionaire investor Carl Ichan, a shareholder of the firm, is also unhappy at the drug maker. In an SEC filing Wednesday, he asked the board to remove CEO Henry Termeer from his position as Chairman because the company has faced “extreme mismanagement” in manufacturing since 2008. (Daily Finance)
Street analysts have a median price target of $60.50 for Genzyme, compared to its current share price of around $50, according to Thomson/First Call.
VERTEX PHARMACEUTICALS (VRTX)
Vertex has announced positive results from a phase III trial of its lead pipeline candidate, Telaprevir. 75% of hepatitis C virus (HCV) infected patients treated achieved sustained viral response (or viral cure) after receiving the medication in combination with current treatment option of pegylated-interferon and ribavirin for 12 weeks.
Cambridge Massachusetts-based Vertex is expected to submit a new drug application to the FDA in the second half of 2010 and plans to launch the drug in the U.S. next year. In collaboration with Johnson & Johnson (JNJ) and Mitsubishi Tanabe Pharma, J&J will be responsible for the commercialization of Telaprevir outside North America and Mitsubishi Pharma will be responsible for Japan and certain markets in Asia. (Zacks)
Cowen and Co. analyst Phil Nadeau is forecasting that peak Telaprevir sales could hit about $3 billion in the U.S. and another $1 billion or so overseas. However, he noted that the estimate assumes Vertex will be able to expand the current HCV market since an estimated 75 percent of the 3.9 million Americans with HCV don’t know they have it. (BioWorld)
The median price target by analysts for Vertex’s stock is at $46.50, compared to its current share price of around $34, according to Thomson/First Call.
Repligen, focused on the development of novel therapeutics for neurological disorders, announced that the FDA and the European Medicines Agency (EMA) have approved the company’s proposal to re-analyze images from its Phase III study of RG1068, a synthetic human secretin, in improving magnetic resonance imaging (MRI) of the pancreas.
A successful re-read of Phase III data may support registration of RG1068 for MRI imaging of the pancreas and the company notes that a detailed visual assessment of the pancreatic ducts is important in the diagnosis and treatment of diseases such as acute and chronic pancreatitis.
“We anticipate completing the Phase III re-read by the end of the year,” said Walter C. Herlihy, President and CEO of Repligen. (BioSpace)
This post was based on an Advanced Search of Alacra Pulse:
Industry: pharmaceuticals, biotech
Street Pulse: include any analyst comment
Keywords: FDA OR pipeline (select Boolean)
Date: past 7 days
FBR Capital analyst Heath Terry this week upped his 12-month price target for Netflix (NFLX) from $100 to $130, well above the median of $92 of analysts tracked by Thomson/FirstCall and giving him the current highest price target. His $750 price target for Google (GOOG) is also above the $695 median and close to the top of the $544 to $755 range.
So is Terry as bullish on other tech stocks he follows? Apparently not, based on a search of Alacra Pulse for his recent comments. Most of his price targets are at or below the median of other analysts.
His price target for eBay (EBAY) is right at the median of $30, while his $160 for Amazon (AMZN) is very close to the $164.50 median.
He’s below the median on Microsoft (MSFT) at $32 vs $36 and Yahoo! (YHOO) at $16 vs $20.
Hence, Terry’s Netflix and Google calls stand out on the bullish side.
Explaining his rationale for the increase, Terry said the success of Netflix’s Apple iPad app and the coming addition of apps for the iPhone and iPod Touch, “should drive meaningful incremental subscriber growth, lower churn, and lower subscriber acquisition costs.”
“With growth accelerating in the quarters ahead and consensus expectations still within management’s typically conservative guidance, we believe that the potential for upside to consensus expectations far outweighs the risk to the down side.”
In maintaining his $750 target and Outperform rating on Google, Terry wrote on April 16 “Google is best positioned to benefit from the recovery in ad spending and overall growth in Internet usage.” However, a month earlier he had an $810 target.
This post was based on an Advanced Search of Alacra Pulse:
Street Pulse: Analyst Name: Heath Terry
Keywords: price target (select Boolean)
Date: past 90 days
Managed accounts have experienced extraordinary growth in the aftermath of the financial crisis and the reasons for this trend are examined in a new report from Moody’s Investors Service. The report takes an in-depth look at this type of structure and the inherent risks involved, and assesses the future impact it may have on the hedge fund sector as a whole.
In a managed account structure, a hedge fund manager is an investment advisor who is granted the authority to trade on the account, while the account holder has ownership and control of the assets. This arrangement provides investors with more transparency and can also, depending on the type of managed account, generally insulate them from the knock-on effects of other investors pulling out of the fund.
During the tumultuous period that characterised 2007- 2008, the market upheaval resulted in several casualties, amongst them many hedge funds. As they suffered and investors sought liquidity, many hedge funds limited redemptions by utilising gates or suspension mechanisms. This fuelled investors’ frustration at not being able to access their capital and liquidity became a key concern. The fraud permeated by Madoff which came to light in December 2008, also resulted in a significant push towards the need for increased transparency and better due diligence on hedge funds. In this environment, managed accounts (“MACs”) surged in popularity.
Estimates suggest that managed accounts through the top ten platforms have reached approximately $41bn or 2% of the total hedge fund industry assets.
Moody’s says the objective of the report is to enhance the understanding of managed accounts and their key benefits and challenges, to discuss the impact of MACs on the hedge fund landscape and to ascertain the kind of operational risks associated with MAC programs.
- MACs through the major platforms now make up approximately $41billion or 2% of the hedge fund industry;
- Growth in assets under management is being driven by the larger established platforms and primarily in the less liquid strategies, which shrank the most during the crisis;
- We expect sizeable growth in the short term, but as risk appetite returns, barring a market shock, investor focus should shift back onto performance net of costs and hence growth in MACs in medium term will likely be subdued;
- We expect some fee pressure on the MAC platforms as competition intensifies;
- Although many of the platform providers are based in Europe, MACs are global in nature;
- MACs offer various advantages such as control and ownership of assets but also present challenges given the costs involved and monitoring requirements;
- The MAC structure reduces certain elements of operational risk but does not eliminate all the risks.
For details, see Hedge Funds: Investing Through Managed Accounts (Premium)
Standard & Poor’s Ratings Services says it has improved its credit and profit outlook for the banking industry based on the Federal Deposit Insurance Corp.’s (FDIC) recently released industry financial performance data as of first-quarter. The FDIC pointed out that most of the earnings improvement was among the larger banks, and 52% of financial institutions posted earnings growth.
Selected excerpts from The Outlook For U.S. Banks Improves Based On FDIC First-Quarter 2010 Performance Data (Premium)
Slightly more than half of our ratings on U.S. banks have negative outlooks despite signs that credit trends are nearing an inflection point. The trend, however, is toward increasing the number of stable outlooks among rated financial institutions.
Stronger first-quarter 2010 earnings results for rated U.S. banks showed that the upturn in credit quality is firming up.
Although our outlook for the sector is moderately more positive, we do not see a return to a pretax profit margin in the low-to-mid 20% area until 2012, equivalent to that posted in 1992. This is because we expect credit losses to peak sometime between the end of 2010 and early 2011. Losses recognized since 2008 indicate that we are about half way through the credit cycle.
Our revised profit outlook incorporates a less-negative view of credit losses for the industry. Still, we expect financial fundamentals to remain generally weak, with less profitability in 2010 than in 2009 and historically. Although we believe loan-loss provisions will remain elevated, we expect less of a reserve build, with loan-loss provisions more closely matching net losses. A continued steep yield curve, indicative of a recovery, should support a high net interest margin, like that posted in the first quarter. Rising rates and a flattening yield curve could dampen net interest income growth.
In our opinion, credit-quality trends indicate that profitability may be on a rebound, even with the potential negative impact of pending financial regulatory reform legislation, a return of recessionary pressures, and the possible contagion from European weakness. Whether these positive trends will last remains an open question for now. But we believe credit losses will continue to grow, albeit more slowly. Commercial and industrial (C&I) credit losses were the sole exception this quarter, declining for the first time since first-quarter 2006.
(see also U.S. Large Regional Banks’ First-Quarter 2010 Performance Improved, As Credit Deterioration Slowed published May 20.)
During the first quarter of 2010, aggregate volume for the U.S. prescription market increased 5.7% over the same period last year, with Pharmacy Benefit Managers (PBMs) demonstrating stronger dispensing trends than retail drug stores, according Fitch Ratings.
A significant portion of the PBMs’ prescription growth was attributable to Express Scripts’ (ESRX) acquisition of Next Rx in December 2009 and new client wins by MedcoHealth Solutions (MHS).
Between CVS Caremark (CVS) and Walgreen (WAG), total prescriptions dispensed increased roughly 3.4% during the first quarter to 395 million prescriptions. More than 80% of the growth, however, was attributable to WAG as total adjusted prescriptions dispensed grew more than 6%, while CVS’ volume grew 1% over the same period. CVS’ 1% increase primarily reflects the volume pressure on mail-order prescriptions given contract losses at its PBM division in 2010.
Retail prescriptions dispensed grew 3.4%, with CVS’ volume growing at an estimated 2.8% and Walgreen’s growing at 4.2%.
Generic utilization increased during the quarter both sequentially and year over year, owing to patent expiries, increased formulary compliance, and only a relatively moderate number of branded drug introductions during the latest 12 months (relative to patent expiries).
Fitch says despite the expectation of a continued weak employment environment, mid-single-digit prescription volume increases and relatively stable margins should help pharmacy services operations drive good cash flow generation. As such, Fitch believes recent and expected near-term positive prescription trends are supportive to the credit ratings of the group.
Goldman Sachs on May 12 raised its price targets on Express Scripts and MedcoHealth Solutions in light of the firm’s upgrade of the Supply Chain sector to Attractive from Neutral. The firm raised its target on Express Scripts from $115 to $124 and MedcoHealth from $65 to $67. ESRX closed Wednesday at $99.41 and MHS at $56.14. Goldman rates Express Scripts at Buy and MedcoHealth at Neutral.
Citigroup on May 26 reiterated its buy rating on CVS Caremark with a price target of $40. CVS closed Wedensday at $33.77. Credit Suisse analyst Edward Kelly on May 20 downgraded Walgreen from Outperform to Neutral with a $36 price target. WAG closed Wednesday at $31.92.
For details, see U.S. Quarterly Prescription Tracker – First Quarter 2010 (Premium)
Audit Integrity has provided more detail on the methodology behind its list of ten companies that failed its “due diligence test” and whose valuations are based on a degree of investor trust that AI says may not be justified. The list includes big names such as Caterpillar (CAT), which was featured in a subsequent Pulse Check post.
Audit Integrity has provided the example below (based on Caterpillar) of the proprietary accounting and governance metrics compiled in creating its Accounting & Governance Risk (AGR®) ratings. Companies are flagged for negative outliers (relative to their industry peers and to the company’s own history) which have been statistically correlated with manipulation or fraud. Click on the image to enlarge.
Waiting for a Verizon iPhone is getting to be a lot like Waiting for Godot. While many thought it was a sure bet long before now, you could be forgiven for wondering if it will ever arrive. But even without Verizon, an expected round of iPhone upgrades and strong iPad sales are reflected in the rising price targets for the company included in our Alacra Pulse Prognosis.
After “confirming” with suppliers in January that Verizon (VZW) would be offering Apple Inc.’s (AAPL) iPhones this summer, analyst Ashok Kumar with Rodman & Renshaw now says 2011 is more likely. Kumar also incorrectly predicted in January that Verizon would be the launch partner for the iPad.
Still, other analysts seems to agree with him on the 2011 timetable. According to ZD Net, Ben Reitzes at Barclays Capital says AT&T (T) is likely to keep its exclusivity through 2010. Piper Jaffray’s Gene Munster does not anticipate any announcement regarding a Verizon iPhone at Apple’s developers’ conference on June 7. He does expect a new version of the iPhone with multitasking and videoconferencing capabilities will drive a major round of upgrading by users of the first generation iPhone. Similarly, JPMorgan analyst Rod Hall writes, ‘I consider it much more likely that news will come sometime in third quarter.’”
Morgan Stanley’s Katy Huberty earlier this week boosted her price target to $310 in part on strong iPhone sales, even without Verizon.
Business Insider’s Dan Frommer lists the reasons Apple “MUST sell the iPhone at Verizon,” most likely early next year.
Sterne, Agee & Leach analyst Vijay Rakesh said his checks with memory-chip makers indicate that Apple could boost iPad production from 15 million a month to more than 2.5 million of them each month to support the device’s international launch this Friday and back-to-school shopping.
Evidence continues to emerge from Forrester Research and Retrevo, that iPad sales are indeed having an impact on netbook sales. Still, Forrester expects strong netbook sales this year with tablet devices taking a larger share in the longer term.
As for the new Dell Inc. (DELL) 5-inch tablet computer running on the Google Inc. (GOOG) Android operating system, Business Insider’s Dan Frommer said the Streak is “no iPad killer.” He said the two products are not even in the same category and added that the one Apple product it could possibly affect would likely be the iPod Touch.
Roger Kay of Endpoint Technologies Associates said the Streak seems targeted for a “slightly different audience” than the iPad and analyst Avi Greengart, with Current Analysis, said he finds the Streak’s size to be unusual: “(5-inches) is a bit odd, as it’s awfully big for a phone but not big enough to offer a dramatically different user experience.”
Also see, Alacra Pulse Prognosis: Apple, Inc Price Targets