Investing in private equity used to be reserved for the wealthy. Only millionaires who were “accredited” or “qualified” to invest the big bucks had money in private equity – essentially, the One Percenters.
Then, some of Wall Street’s biggest private equity firms went public, such as Blackstone Group L.P. (symbol: BX), Fortress (FIG) and Kohlberg Kravis & Roberts (KKR). (Bain Capital L.L.C. remains private, but gained fame when partner Mitt Romney ran as a presidential candidate.)
But their shares often have skimpy dividends. In many cases, private equity firms that went public paid out the largest dividends to their founders, rather than investors in the underlying funds.
There’s another way the rest of us can get into the private equity game – exchange-traded funds, or ETFs. And one nice surprise is that some offer healthy dividend yields.
There are two main private equity vehicles available to the retail public: PowerShares’ Global Listed Private Equity Fund Portfolio (PSP) and ProShares’ Global Listed Private Equity ETF (PEX).
PSP is the more liquid option, with around $500 million in assets and an average daily trading volume of roughly 300,000 shares.
We found someone who recently purchased PSP. He bought it because of the 13 percent yield.
Dan Weiskopf, founder of Access ET Solutions, in New York, said PSP is one of the “best ETFs in this space, where the structure really favors the investor.”
Rapid ratings index
Speaking of exchange-traded funds, James Gellert, chief executive of New York-based Rapid Ratings, says his independent ratings firm competes with the Big Three agencies – S&P, Moody’s, and Fitch.
Much like the Dow Jones or Standard & Poor’s 500 index fund, Rapid Ratings is in discussions to create an investable index and possible ETF, an alternative to the traditional benchmarks.
As of December 2013, Rapid Ratings’ highest-rated sectors included leisure, transportation, and media, while those with a negative bias included forest products, metals and metal fabricators, and oil and gas producers. Stay tuned for more news on this front.
The documents released this week by federal prosecutors do not show it did, and I suspect it did not. JPMorgan was penalized for failing to report “suspicious activity” in Mr. Madoff’s account at the bank — the account that took in money from the Ponzi investors and paid out withdrawals.
What the documents do show, however, is a huge bureaucracy where employees stuck to their own silos and did not communicate well with others. Suspicions were there, but so were profits, and the profits seem to have outweighed any other concerns. Many people simply filled out and filed forms, oblivious to what those forms might, or might not, indicate.
And, in a way, that may be more troubling. If clear crimes had been committed, then people could go to jail and a lesson would be taught. But there is no evidence that anyone acted with impure motives — assuming that we accept that making money is a proper motive. A combination of turf wars and incompetence combined to facilitate the biggest Ponzi scheme ever.
My favorite disclosure in the documents is that JPMorgan had a requirement that a “client relationship manager” certify every year that each client complied with all “legal and regulatory-based policies.” This was no doubt viewed as a tiresome and routine requirement, both by the bankers who did the certifying and by the people in the compliance department who collected the certifications.
“In March 2009,” we are told in a “statement of facts” agreed to by the bank and prosecutors, the Madoff relationship manager “received a form letter from JPMC’s compliance function asking him to certify the client relationship again.”
Evidently, whoever sent out that letter did not read it after a computer generated it. Or perhaps that person had somehow missed the report that Mr. Madoff had been arrested on Dec. 11, 2008. That would not have been easy. In the month after the arrest, The New York Times printed 15 front-page articles on the Madoff fraud, and it received exhaustive coverage everywhere else as well.
Another highlight is that on June 15, 2007, JPMorgan’s chief risk officer refused to increase the bank’s exposure to Mr. Madoff’s fund — more than $100 million at the time — to $1 billion. Mr. Madoff had made it clear that he would not allow JPMorgan to perform due diligence on what he was doing with investors’ money.
“We don’t do $1 bio trust me deals,” the risk officer wrote in an email, using what was apparently his abbreviation for billion.
But 12 days later, that risk officer approved going up to $250 million in Madoff exposure. In the meantime, Mr. Madoff had agreed to talk with him but not to allow any new due diligence. Joseph Evangelisti, a JPMorgan spokesman, says the risk officer “relied on the current and past due diligence of our markets and credit risk units, as well as our broker-dealer group” in approving the quarter-billion-dollar exposure.
So we have no fewer than three parts of JPMorgan voicing confidence in Mr. Madoff. That does not sound good, but Mr. Madoff fooled a lot of other people, too. At least the risk officer did not approve the full $1 billion.
Soon after his first decision — the one saying the bank did not do billion-dollar “trust me deals” — the risk officer heard from another bank executive that, as he put it in an email message sent afterward to top JPMorgan Chase executives, “there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.” He asked that someone “google the guy” to find a negative article he had been told about.
In response, a lower-level bank employee conducted a search for the article but could not find it.
The article the bank could not find was published by Barron’s in May 2001. The article, “Don’t Ask, Don’t Tell,” by Erin E. Arvedlund, noted Mr. Madoff’s secrecy and said it appeared to be impossible that Mr. Madoff’s stated strategy had produced the reported profits. But she did not raise the possibility that it was a Ponzi scheme. Instead, she speculated that perhaps he was using information garnered about pending stock market trades handled by his brokerage firm to front-run those trades. Mr. Madoff’s denials are included.
Due diligence was crucial in Madoff, other investments; JPMorgan “failed miserably” says DOJ…
ERIN E. ARVEDLUND
Published Wednesday, January 8, 2014, 2:01 AM
Wall Street, it seems, is capable of doing business with criminals – like JPMorgan Chase & Co. did with scam artist Bernie Madoff. So it is critical to do your own due diligence when giving money to a new manager.JPMorgan agreed Tuesday to pay $2.5 billion in fines to Madoff’s victims and regulators for ignoring the red flags related to the $65 billion Ponzi scammer.
Despite warnings, JPMorgan continued to invest in Madoff’s secretive hedge fund up until just a few months before the criminal mastermind’s 2008 arrest. E-mails between top compliance executives reveal worries about “too-good-to-be-true” investment returns by Madoff. But JPMorgan Chase was generating millions of dollars in revenue annually from Madoff’s bank account, so the bankers continued doing business with Madoff.
Jeff Brenner, however, saw it coming. The founder of Maragell L.L.C. in Haddonfield, and an expert forensic investigator, Brenner was asked by a potential investor to look into Madoff.
“We went out to check Madoff’s auditors, Friehling & Horowitz,” Brenner said, referring to a small company in Rockland County, N.Y. “It was a two-man shop in a mall. One of the accountants [David Friehling] spent most of his day at the gym. There was no staff for a $65 billion hedge fund? I told [a prospective Madoff investor] it was stupid to invest.”
The client ended up investing anyway, and losing millions of dollars, Brenner said.
Friehling pleaded guilty in 2009 to fraud charges, and is cooperating with prosecutors. Horowitz had already retired and died shortly after the fraud came to light.
“Our 2006 investigation of Madoff raised numerous red flags,” Brenner explained. “While Madoff’s fraud was enormous, at its heart it was an affinity fraud. People who knew him – or who trusted their advisers, who in turn knew Madoff – invested their money without applying the same level of scrutiny as they did when purchasing other investments.”
No matter the manager, conduct your own due diligence, Brenner advised.
“Start by gathering documents, not just the prospectus, but from third-party sources like financial news outlets, former investors, lawyers, and bankers,” Brenner said. “Call everyone and ask questions.
“If the investment is opaque or it just doesn’t make sense, do background checks into the history of the principals regarding past businesses, investment track record, regulatory enforcement actions. We uncovered a hedge fund manager driving a $200,000 car and traced its ownership to an undisclosed affiliated business. It may be the current investment opportunity is just another in a series of failed strategies, or worse, the lifeline to pay off debts from an earlier scheme.”
Do you care about the bond market and interest rates – that is, where are bond prices going and when will rates start rising? Then it’s time to start shifting bond portfolios. Go defensive, because odds are that rates will rise in 2014.
So says Guy LeBas, Janney Montgomery Scott’s chief fixed-income strategist. He predicted that with the Federal Reserve changing gears, “rates will continue to rise. But it’s not just whether rates rise that matters, but how fast and how far they go.”
The Fed wants the rise to be gradual to avoid shocking the economy, although rate moves are not fully under the central bank’s control. The Fed also is one of the Treasury market’s biggest bondholders, owning 18 percent of the $11 trillion Treasuries, LeBas added.
Janney recommends sticking with five-year Treasury bonds, which are yielding 1.73 percent. Interest rates have to rise by 0.50 percent for an investor to lose money on a five-year Treasury, LeBas estimates.
There are “speed limits” on potential economic growth, including U.S. demographics, low household formation, and a lack of investment in real-economy innovation, he added. Monetarily, the next several years will be defined by the Fed’s attempts to accelerate growth through these speed limits.
“The end of [quantitative easing] doesn’t mean the Fed gives up stimulation,” LeBas said. “Under [new Chairwoman Janet] Yellen, we expect alternative ways they will communicate expectations of what they’re going to do in the future.”
Fiscally, investment is being stymied by long-term uncertainty on tax policy.
So, interest rates are headed up, but probably not as high or as fast as Wall Street predicts, LeBas added. Janney’s “highest case” for 10-year Treasury yields over the next few years, given levels of inflation, is just 4 to 4.5 percent.
Your Money: Fed’s bond tapering good news for investors
ERIN E. ARVEDLUND Inquirer.com Monday, December 30, 2013, 2:01 AM
Investors should celebrate that the Federal Reserve is finally getting out of the investment business. Why? Because it provides some certainty.”The announcement of tapering turned an uncertainty into a certainty. That is always good news for equity investors,” said James M. Meyer, who writes the note to clients for the Boenning & Scattergood investment firm in West Conshohocken.
“When investors are unsure what to expect, they tend to expect the worst,” said Ed Kohlhepp of Kohlhepp Advisors in Doylestown. “Investors are right to cheer now as the biggest, clumsiest bond buyer in history starts cautiously easing away from the auction table.”
Starting in January, the Fed will taper its bond buying to $35 billion in mortgage-backed securities each month (versus $40 billion previously) and $40 billion in Treasuries (versus $45 billion), citing better job markets and the economy as the reason. At the same time, the Fed will leave key interest rates unchanged until after unemployment falls below 6.5 percent and inflation rises to 2 percent.
But for bond investors, the central bank’s decision to taper is more complicated.
Federal Reserve Board economists believe the U.S. recovery is self-sustaining, and the central bank has managed to separate tapering from interest-rate change in the minds of investors. So where are rates going?
“Almost everyone I talk to is wondering about interest rates,” said J.R. Rieger, vice president of fixed-income indices at the S&P Dow Jones Index. “Even my taxi driver told me not to buy bonds!”
Why? Because as interest rates rise, bond prices fall, making them less attractive.
Big mutual-fund firms are complicating the bond markets because they are forced sellers, due to retail investors’ cashing out.
“The flight from bonds has forced mutual funds to sell. That means when Fidelity sells, it has to sell its bonds, and Vanguard is not able to buy because they have to sell bonds as well,” said David Kotok of Cumberland Advisors in Vineland.
That creates bargains in the bond space.
“We resist this notion that the bond market is headed for an absolute debacle in 2014. We particularly favor the tax-free municipal bond,” Kotok said. “When a high-grade, long-term, tax-free yield of 5 percent is obtainable in a very low-inflation environment, investors who run from bonds and liquidate will look back, regret the opportunities they missed, and wonder why they did it.”
Michael Olorunnisola (right) is an entrepreneur seeking to build an education start-up. Raymond Tran is helping him with the project.
Have you ever wanted to invest in a young person – invest in him or her as you would a stock or a bond? Basically, investing in the person’s future value?
Now you can, via a website called Upstart.
Dave Girouard, Upstart’s cofounder and CEO, was formerly president of Google Enterprise, and dreamed up the idea of backing young people financially.
Rather than invest in a company, Upstart backers invest in young people, like University of Pennsylvania 2012 graduate Michael Olorunnisola.
Olorunnisola and other students raise capital they need from individual backers to retire their student debt and get their start-up companies off the ground. In exchange, the new graduates share a small percentage of their personal income over five to 10 years with their backers.
Olorunnisola, for his part, is an entrepreneur seeking to build an education start-up that “aggregates the free resources of online education to streamline access for students and professors alike,” he explained. “I plan on testing the product over the course of summer 2014, and launch in September 2014, for the next school year. I’m still working on the development, and plan to undergo testing in the spring and summer.”
Student debt can be a career-limiting obstacle – especially for would-be entrepreneurs. For many, debt and day-to-day living expenses hold them back from pursuing their dreams.
Upstart investments works like this: Potential backers browse young people by school, area of study, or career interest, and read about their unique goals and backgrounds. To be funded, each Upstart must raise a minimum of $10,000.
Olorunnisola tapped Upstart to raise $10,500 to fund his education start-up, with long-term hopes of bringing those resources back to Nigeria, his homeland. He worked with student computer developers at Penn, and they fleshed out the initial stage of his website.
Other students and graduates of local colleges are involved with Upstart. Information about them can be found at: www.upstart.com.
If you want to invest for a real return, know where and how your money is being spent, and would feel good doing so, check out Upstart.
Your Money: Dispute with your broker? Brace yourself
ERIN E. ARVEDLUND
Inquirer.com Friday, December 20, 2013, 2:01 AM
If you invest, you might have a run-in, a complaint, or a dispute with your broker. If you decide to fight them, here’s a cautionary tale – and it’s not pretty.Mark Mensack, independent fiduciary consultant and founder of Prudent Champion, went into a years-long arbitration with his former employer Morgan Stanley after blowing the whistle on hidden fees he thought customers shouldn’t pay.
Most customer-broker disputes don’t go through a civil court. Your only option is arbitration through FINRA (Financial Industry Regulatory Authority). In the last round, the FINRA arbitration panel lost hours of Mensack’s testimony in his hearing. FINRA ruled against him and he lost.
“Go to arbitration in hope, but don’t expect to win. It’s not a fair process,” says Mensack, who now runs a Cherry Hill-based 401(k) consulting firm helping companies pick the right plan without getting ripped off by hidden fees.
FINRA is a self-regulatory organization with the power and responsibility to supervise broker-dealers and brokers, according to Stuart Berkowitz, a securities lawyer representing customers.
“What do the public arbitrators look like? Many of them are lawyers who either are employed by firms that represent brokerages, want to represent brokerages, or do primarily defense work. Nonlawyers are predominately from the corporate world, conservative and often retired,” he notes.
“What are the results? Less than 50 percent of customers receive anything and if there is any award there is usually just a few cents on a dollar,” he adds.
In Mensack’s case against Morgan Stanley, the insult of losing against the Wall Street firm was added to the injury of FINRA case administrator Arthur Baumgartner’s claiming he lost a good portion of the audio recording. Turned out, it wasn’t his first time misplacing evidence.
“Only after filing a FINRA ombudsman complaint did he tell me on the phone that the missing eight hours was never recorded due to human or mechanical error,” Mensack says. It turned out that this same case administrator, Baumgartner, worked on a Massachusetts case initiated in 2008 in which records also went missing, according to the Massachusetts Lawyers Weekly.
So, be wary of fighting your broker, and prepare yourself; you may end up in kangaroo court.
Two retired Philadelphia professors – Barbara Fleisher and Thelma Reese – are riding the growing wave of women over 60, one of the fastest-growing demographics in America. Not only are 10,000 baby boomers retiring every day, but many female boomers outlive their husbands, as do women in general.
“If you are part of this growing group of women over 60, what can we do about using this time well? There aren’t any role models. My mother lived to be just short of 97, but she never wore slacks. She lived in a different world,” Reese, now in her 80s, said in an interview.
“Younger women in their 60s are turning out to be our audience. We talk about our lack of role models” for boomer women, added Fleisher.
On their blog, ElderChicks.com, they tell real-life stories of women who have dealt with the challenges of living a full life after 60, and offer some answers to increasingly familiar questions about money and investing: How to learn about your finances if your spouse was the one handling all your assets. How to avoid high-fee financial products and stick with fee-only advisers.
“Women look forward to this time as a fork in the road, a time of transition. They need preparation. They have told us they find our blog helpful with many approaches to their lives,” Reese said.
“They’re also concerned about how to keep the family together. The relationships between our children and us have changed; children live together before marriage, they live around the world, or in blended families,” Fleisher explained. “And boomers themselves are more mobile. Families scatter. Notions of family solidarity are challenged. I have friends who talk with grandchildren on Skype every day.”
In addition to ElderChicks.com, the two women just wrote and published The New Senior Woman: Reinventing the Years Beyond Mid-Life (Rowman & Littlefield, 2013). Reese and Fleisher share insights and guidance from a wide range of women over 60.
Reese will speak and sign books next Thursday at “The Best Day of My Life (So Far)” event at the Senior Center at Broad and Lombard Streets. She is also scheduled to speak Feb. 25, 2014, at the Cosmopolitan Club in Philadelphia.
Your Money: 5 years after, the lessons from Madoff
ERIN E. ARVEDLUND
Published in the Philadelphia Inquirer (Inquirer.com paywall) December 11, 2013, 2:01 AM
Wednesday marks a five-year anniversary in the biggest financial fraud in American history – the day Bernie Madoff, a Wall Street icon who cowed regulators and investors alike, was arrested for stealing $65 billion.Madoff, now serving a 150-year prison term, maintains he perpetrated the decades-long fraud by himself. However, he’s a pathological liar and what I like to call a “financial serial killer,” who was still defrauding investors just days before his arrest.
For the last month, Madoff’s former right-hand man Frank DiPascali has been testifying in a federal trial against colleagues who worked for Madoff, unraveling how they enriched themselves by creating false financial statements dating back to the 1970s.
When the Securities and Exchange Commission did come calling in 2005, Madoff panicked, and even searched through one of the government investigator’s briefcases when he wasn’t around. And, according to the New York Post’s coverage of DiPascali’s testimony, Madoff “freaked out after discovering a copy of a Barron’s article( Don’t Ask, Don’t Tell_ Bernie Madoff Attracts Skeptics in 2001” questioning how the billion-dollar fund made money.
I wrote that 2001 Barron’s article, which quoted skeptics about Madoff’s secretive investment advisory business, which on Dec. 11, 2008, was revealed as an epic $65 billion fraud. Madoff turned himself in then only because the financial crisis had hit, and his investors were rushing to redeem at the same time. The truth was, Madoff never invested a single dollar in the market – the assets were all languishing in a checking account at JPMorgan Chase.
I didn’t expose Madoff fully – I wish I had – but his hedge fund was allegedly returning 10 percent or 11 percent a year consistently even when the stock market was crashing in the 2001 dot.com bust. Red flag!
What are the lessons for investors? Ask yourself:
Does an investment sound too good to be true? Are the returns too high or too consistent? If so, don’t invest.
When you ask questions do you get answers? When clients queried Madoff about his returns, holdings, and investment style, he refused to answer. Red flag! Don’t invest.
Do you have all your money at one firm? Many victims maintained most of their liquid net worth with Madoff. Diversify; don’t invest all assets in one place.
Does the money manager custody assets with a third party? If not, don’t invest. Madoff “self-custodied,” meaning he had his hands on client money.
Does your financial adviser use a major accounting firm to audit results, or a family member or close friend? If the latter, they could be persuaded to doctor the statements. Don’t invest.