The Markets January 16, 2008

Garden State Pension Plans Takes Citi, Merrill Equity Stakes

Causing a stir among Wall Street pundits, the state of New Jersey’s $80-billion pension plan will take equity positions in both Citigroup and Merrill Lynch&Co. – both suffering mightily from their subprime mortgage holdings.
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According to various news reports, including a New York Times Wall Street blog, the Garden State will invest $400 million in Citigroup and $300 million in Merrill Lynch by buying convertible preferred shares in the two beleaguered financial services firms. The New Jersey Division of Investment also bought a small piece in Merrill’s convertible-stock offering, according to the press accounts.

Many Wall Street firms, battered by billions in subprime mortgage losses, have been scrambling recently to raise cash around the world. Trying to explain the state’s investment move, the reports said the mandatory convertible securities carry a coupon of 7%, although they also have a conversion premium of 20%.

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Not only that, but the reports pointed out that pension officials have been scrambling to pump up returns through hedge funds and private equity investments. So a move like New Jersey’s “could prove profitable enough to take a risk on,” the Times investment blog asserted.

A MarketWatch report also pointed out that the state has a vested interest in keeping Citi running smoothly since so many Garden State residents work for the company and several Wall Street firms have operations in New Jersey cities like Hoboken and Jersey City.

Finally, according to the media reports, Governor Jon S. Corzine is an old Wall Street hand, being the former Goldman Sachs chairman and chief executive officer.

The Markets January 15, 2008

2007 a Year of Records for ETFs

State Street Global Advisors’ (SSgA) US-Listed ETF Industry Review and 2008 Outlook shows 2007 was a record year for exchange-traded fund (ETF) asset growth, trading volume, and product development.
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Through December 31, 2007, ETF assets grew by approximately 45% to $608 billion. ETFs based on international indexes were the largest driver of asset growth for the year – accounting for $59 billion of the $187 billion increase, SSgA data showed. Notable asset growth also occurred in ETFs based on growth, fixed income, and commodity indexes – adding over $17 billion, $14 billion, and $12 billion, respectively.

The average daily volume in December 2007 for all U.S.-listed ETFs averaged over $58 billion. This represents a 141% increase from December 2006, when the average daily dollar volume was $24 billion. The top three U.S. ETFs in terms of dollar volume were the SPDR S&P 500, iShares Russell 2000 Index Fund, and the NASDAQ-100 Index Tracking Stock – the same three leaders as in 2006, SSgA said.

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Currently, there are 92 ETFs with a market capitalization of over $1 billion, compared with 72 as of year-end 2006 and just 10 in 2001. There are 537 ETFs with less than $1 billion in assets – 375 of which have less than $125 million.

Overall, 270 new ETFs were introduced to the market in 2007, which currently represent over $20.6 billion in assets or roughly 3.3% of all ETF assets under management in the U.S. In 2006, 156 new ETFs garnered $12 billion in assets, or roughly 2.8% of all U.S. ETF assets under management.

The most notable area for product introduction was the Specialty-Domestic area, which includes fundamentally weighted index ETFs, as well as inverse or leveraged ETFs. Fixed income saw the introduction of 42 new ETFs, and the international ETF segment, combining developed markets, emerging markets, and specialty, added 72 new funds.

Although product expansion in 2007 focused on the specialty areas of the marketplace, investors expressed a preference for international ETFs, as well as those in the large cap and growth segments, according to the SSgA report. Currency, fixed income, and commodity ETFs also saw sharp increases in demand.

Five new ETF providers emerged in 2007, bringing the industry total to 19, however market share among managers changed minimally. The four largest managers, Barclays, State Street, Bank of New York, and Vanguard continue to hold over 92% of the industry’s assets.

Looking ahead, State Street noted that 2008 may be the year of the first actively managed ETF. At least two providers have filed for ETFs that are not based on an underlying index.

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