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SEC plan to cut fund disclosures faces almost unanimous opposition

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The US Securities and Exchange Commission has received almost unanimous opposition from companies and investors against plans to allow most hedge funds to obscure their stock holdings.

The change to reporting requirements, proposed this July, would allow money managers with less than $3.5bn of assets to skirt quarterly disclosures of their stock positions, up from the current threshold of $100m.

But strategists at Goldman Sachs said that of the 2,262 letters submitted to the SEC during its consultation period, 99 per cent opposed the new rule, reflecting concerns that the switch could allow activist investors to quietly build up stakes and seek to force companies into new strategies. “No recount necessary,” the bank wrote. “After it reviews all the comments, we expect the SEC will withdraw the proposal.”

Lobby groups such as Business Roundtable and the US Chamber of Commerce, as well as BNY Mellon and Calpers, America’s largest pension fund, were among those that sent or signed letters to the US securities regulator to voice opposition to the plans.

“Under the proposed $3.5bn threshold, companies would be unable to monitor those activist investors who would be exempt from reporting their positions, thus enabling activists to use the increased lack of transparency for their benefit and not that of long-term shareholders,” the Business Roundtable wrote in its letter. 

Under rules in place for more than four decades, investors with $100m or more of assets have to report their holdings in so-called 13F filings. But since that 1975 rule came into force, the market capitalisation of the US equity market has grown from $1tn to $35tn. The SEC has said it is now time to raise the threshold in line with the size of the market.

Chairman Jay Clayton said the reporting requirements placed “unnecessary burdens” on smaller fund managers — a claim met with scepticism by small funds as well as industry bodies, some of which say the cost of filing 13Fs is negligible and the process is now largely automated. The CFA Institute, the association of investment management professionals, said the regulator’s concerns on disclosure costs were not shared by charterholders who worked in the asset management industry. 

“The president of one investment management firm told us most firms with assets under management of more than $100m have portfolio accounting software programs that easily create reports,” the CFA wrote in a letter opposing the proposal. “It is then a simple step to upload the reports to the SEC website for filing purposes.”

Mr Clayton also told investors on a call with investment bank Piper Sandler earlier this month that the information provided in 13F disclosures was being used in ways not anticipated when the rules were first introduced. 

Companies have used the disclosure to “identify who their shareholders are”, he said. “Is 13F the most efficient way to do that? Probably not.”

The SEC did not respond to a request to comment on the letters voicing concern over the proposed switch.

If the plan was approved, only the world’s largest 550 investment managers would have to report their public equity holdings. Most hedge funds and activist investors would be able to keep their portfolios secret, with Allison Herren Lee, the SEC’s lone Democratic commissioner, warning that the proposal would erase the visibility into funds holding a combined $2.3tn. The plans lacked “a sufficient analysis of the costs and benefits”, she said.

She and some other correspondents, including Calpers, also claimed the securities watchdog did not have the authority to change the rules.

Opposition also came from both the New York Stock Exchange and Nasdaq, and hundreds of companies listed on the two stock exchanges such as shipping and logistics giant FedEx, power tool manufacturer Stanley Black & Decker and timeshare operator Marriott Vacations Worldwide.

In its objection, NYSE warned that smaller companies would be particularly hard hit. It estimated that the storage specialist The Container Store Group, for instance, would lose the ability to tell who owned more than two-thirds of its shares. Marriott Vacations’ chief executive Stephen Weisz added that hedge funds were often large owners of small- and medium-sized publicly traded companies, and that they had proliferated from about 140 in number in 1968 to more than 10,000 in 2020.

“We believe that the long-term impact of the amendment proposed by the commission will be detrimental to public markets in the US,” he said.

Additional reporting by Kadhim Shubber in Washington



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European stocks stabilise ahead of US inflation data

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European equities stabilised on Wednesday after a US central banker soothed concerns about inflation and an eventual tightening of monetary policy that had driven global stock markets lower in the previous session.

The Stoxx 600 index gained 0.4 per cent and the UK’s FTSE 100 rose 0.6 per cent. Asian bourses mostly dropped, with Japan’s Nikkei 225 and South Korea’s Kospi 200 each losing more than 1.5 per cent for the second consecutive session.

The yield on the 10-year US Treasury bond, which has dropped in price this year as traders anticipated higher inflation that erodes the returns from the fixed interest securities, added 0.01 percentage points to 1.613 per cent.

Global markets had ended Tuesday in the red as concerns mounted that US inflation data released later on Wednesday could pressure the Federal Reserve to start reducing its $120bn of monthly bond purchases that have boosted asset prices throughout the Covid-19 pandemic.

Analysts expect headline consumer prices in the US to have risen 3.6 per cent in April over the same month last year, which would be the biggest increase since 2011. Core CPI is expected to advance 2.3 per cent. Data on Tuesday also showed Chinese factory gate prices rose at their strongest level in three years last month.

Late on Tuesday, however, Fed governor Lael Brainard stepped in to urge a “patient” approach that looks through price rises as economies emerge from lockdown restrictions.

The world’s most powerful central bank has regularly repeated that it will wait for several months or more of persistent inflation before withdrawing its monetary support programmes, which have been followed by most other major global rate setters since last March. Investors are increasingly speculating about when the Fed will step on the brake pedal.

“Markets are intensely focused on inflation because if it really does accelerate into this time near year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.

Stubbs added that investors should look more closely at the month-by-month inflation figure instead of the comparison with April last year, which was “distorted” by pandemic effects such as the price of international oil benchmark Brent crude falling briefly below zero. Brent on Wednesday gained 0.5 per cent to $69.06 a barrel.

“If you get two or three back-to-back inflation reports that are very high and above expectations” that would show “we are later into the economic recovery cycle,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.

He added that the pandemic had sped up deflationary forces that would moderate cost pressures over time, such as the growth of online shopping that economists believe constrains retailers’ abilities to raise prices. Widespread working from home would also encourage more parents and carers into full-time work, he said, “increasing the labour supply” and keeping a lid on wage growth.

In currency markets on Wednesday, sterling was flat against the dollar, purchasing $1.141. The euro was also steady at $1.214. The dollar index, which measures the greenback against a group of trading partners’ currencies, dipped 0.1 per cent to stay around its lowest since late February.



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Potash/grains: prices out of sync with fundamentals

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The rising tide of commodity prices is lifting the ricketiest of boats. High prices for fertiliser mean that heavily indebted potash producer K+S was able to report an unusually strong first quarter on Tuesday. Some €60m has been added to the German group’s full year ebitda expectations to reach €600m. Its share price has gone back above pre-pandemic levels.

Demand for agricultural commodities has pushed prices for corn and soyabeans from decade lows to near decade highs in less than a year. Chinese grain consumption is at a record as the country rebuilds its pork herd. Meanwhile, the slowest Brazilian soyabean harvest in a decade, according to S&P Global, has led to supply disruptions. Fertiliser prices have risen sharply as a result.

But commodity traders have positioned themselves for the rally to continue for some time to come. Record speculative positions in agricultural commodities appear out of sync even with a bullish supply and demand outlook. US commodity traders have not held so much corn since at least 1994. There are $48bn worth of net speculative long positions in agricultural commodities, according to Saxo Bank.

Agricultural suppliers may continue to benefit in the short term but fundamentals for fertiliser producers suggest high product prices cannot last long. The debt overhang at K+S, almost eight times forward ebitda, has swelled in recent years after hefty capacity additions in 2017. Meanwhile, utilisation rates for potash producers are expected to fall towards 75 per cent over the next five years as new supply arrives, partly from Russia. 

Yet K+S’s debt swollen enterprise value is still nine times the most bullish analyst’s ebitda estimate, and 12 times consensus, this year. Both are a substantial premium to its North American rivals Mosaic and Nutrien, and OCI of the Netherlands, even after their own share prices have rallied.

Any further price rises in agricultural commodities will depend on the success of harvests being planted in the US and Europe. Beyond restocking there is little that supports sustained demand.

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Amazon sets records in $18.5bn bond issue

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Amazon set a record in the corporate bond market on Monday, getting closer to the level of interest paid by the US government than any US company has previously managed in a fundraising. 

The ecommerce group raised $18.5bn of debt across bonds of eight different maturities, ranging from two to 40 years, according to people familiar with the deal. On its $1bn two-year bond, it paid just 0.1 percentage points more than the yield on equivalent US Treasury debt, a record according to data from Refinitiv.

The additional yield above Treasuries paid by companies, or spread, is an indication of investors’ perception of the risk of lending to a company versus the supposedly risk-free rate on US government debt.

Amazon, one of the pandemic’s runaway winners, last week posted its second consecutive quarter of $100bn-plus revenue and said its net income tripled in the first quarter from the same period a year ago, to $8.1bn.

The company had $33.8bn in cash and cash equivalents on hand at the end of March, according to a recent filing, a high for the period.

“They don’t need the cash but money is cheap,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.

Spreads have fallen dramatically since the Federal Reserve stepped in to shore up the corporate bond market in the face of a severe sell-off caused by the pandemic, and now average levels below those from before coronavirus struck.

That means it is a very attractive time for companies to borrow cash from investors, even if they do not have an urgent need to.

Amazon also set a record for the lowest spread on a 20-year corporate bond, 0.7 percentage points, breaking through Alphabet’s borrowing cost record from last year, according to Refinitiv data. It also matched the 0.2 percentage point spread first paid by Apple for a three-year bond in 2013 and fell just shy of the 0.47 percentage points paid by Procter & Gamble for a 10-year bond last year.

Investor orders for Amazon’s fundraising fell just short of $50bn, according to the people, in a sign of the rampant demand from investors for US corporate debt, even as rising interest rates have eroded the value of higher-quality fixed-rate bonds.

Highly rated US corporate bonds still offer interest rates above much of the rest of the world.

Amazon’s two-year bond also carried a sustainability label that has become increasingly attractive to investors. The company said the money would be used to fund projects in five areas, including renewable energy, clean transport and sustainable housing. 

It listed a number of other potential uses for the rest of the debt including buying back stock, acquisitions and capital expenditure. 

In a recent investor call, Brian Olsavsky, chief financial officer, said the company would be “investing heavily” in the “middle mile” of delivery, which includes air cargo and road haulage, on top of expanding its “last mile” network of vans and home delivery drivers.



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