Managers Cheer Inflation-Proof Bond News
The Treasury Department’s recent announcement that it will issue inflation-proof bonds next year is stirring excitement among a normally staid cast of characters: managers of bond mutual funds.
Already, some mutual funds hold foreign IOUs whose returns are adjusted with the level of consumer prices in those countries. With the Treasury joining the bandwagon, the inflation-indexed concept will get a big boost, possibly spilling over into the corporate and municipal debt sectors.
“We see this as a new asset class,” says John Brynjolfsson, a portfolio manager for the Pimco fund group in Newport Beach.
James Benham, vice chairman of the Twentieth Century/Benham family, calls it the biggest thing to hit the fixed-income market since zero-coupon bonds premiered in 1985.
The inflation bonds, which will be sold in January in 10-year maturities, are expected to pay annual interest of just 3% to 4%. But the bonds’ principal will grow to match any rise in consumer inflation each year, thus protecting investors against a loss of purchasing power--a major risk with traditional fixed-rate bonds--and guaranteeing a positive real return.
Could a mutual fund be created to own just these bonds? “There will need to be a deep, liquid market of inflation-indexed Treasuries of various maturities,” says John Hollyer, a manager of short-term bond funds for the Vanguard Group in Valley Forge, Pa. That isn’t expected to happen overnight.
Brokerage Agreements: A plaintiff lawyers group says the Securities and Exchange Commission should step in to make sure customer agreements with brokerage firms are worded properly.
The Public Investors Arbitration Bar Assn. said many firms are violating fair-practice rules by continuing to use agreements that limit investors’ rights in customer agreements. Such agreements often include a clause dictating that any dispute be resolved using New York state law, the Atlanta-based group said.
The NASD notified its members last year that New York choice-of-law clauses used in customer agreements in an attempt to restrict arbitrators’ abilities to make awards were against its rules.
“The securities firms continue to use these unfair agreements,” said Jerome Stanley.
New York law, unlike many other state securities laws, doesn’t let investors recover attorneys’ fees, even if they win their claims in arbitration, unless the customer agreement specifically provides for reimbursement of the fees. In most cases, they don’t.
In addition, New York law doesn’t let arbitrators award punitive damages.
Quick Action: Discount brokerage Quick & Reilly Inc. is negotiating to acquire a mutual fund company, said Thomas Quick, the firm’s president.
“We are actively looking at a company right now,” he said. “We signed a letter of confidentiality.”
Quick said the talks are in “the preliminary stage.” He declined to name the target or give details about it. He said his company wants to buy a fund company that has at least $1 billion in customer assets under management and operates both equity and fixed-income funds.
The company’s goal is “diversification” of revenue, Quick said. Quick & Reilly operates a large discount brokerage business and is a major specialist broker on the floor of the New York Stock Exchange.
“I see what’s taking place with the transition of wealth from one generation to another,” said Quick, explaining why his firm wants to acquire a fund company at this time.
Quick & Reilly may encounter some obstacles in its quest. Because the fund business is regarded as being a mature industry, it’s possible the firm may have to pay more money than it would like to for a prominent company.
It’s no secret that Quick & Reilly wants to make a splash in the mutual fund business. Last month, it said it planned to offer customers a variety of no-load funds from different money managers by year-end.
Foreign Exchange: The Pacific Stock Exchange announced this week that it will become the first securities exchange to offer options on an index of Taiwanese equities this January.
The Dow Jones Taiwan Stock Index is a capitalization-weighted index of 113 Taiwanese stocks, representing more than 80% of Taiwan’s market capitalization.
The Taiwan stock market has been one of the world’s leaders this year, with the Dow Jones Taiwan stock index rising more than 36% through Oct. 15. “Trading this index fits well with our strategy to make the Pacific the financial gateway between the U.S. and Asia/Pacific region,” said exchange Chairman Robert M. Greber. Dow Jones officials said a large number of Asian American investors have expressed strong desire to trade this contract.
The Chicago Mercantile Exchange plans to trade futures and futures-options on the index.
Topping Out?: Markman Capital Management is warning that the current bull market for stock prices has entered the “ninth inning.” The Edina, Minn., firm, which runs a series of mutual funds that invest in other funds, thinks a top is near for four reasons:
* Investor sentiment has turned excessively positive, with “thoughtless speculation” replacing prudence.
* Corporate profits are likely to slow in the continuing low-inflation environment.
* Recent returns for the stock market are “statistically unsustainable” and well above their historic averages.
* The favorable part of the presidential election cycle is ending, with the first year following an election historically weak.
Markman says it has taken such defensive moves as increasing the foreign holdings of its mutual funds and loading up on “value” stocks, which presumably would decline less than growth companies in a rout.
Contributing to this column were Bloomberg Business News, Reuters and Russ Wiles, a financial columnist for the Arizona Republic.
