Archive for January, 2009

Standout 2008 fund managers staying defensive (AP)

Thursday, January 1st, 2009 | Finance News

BOSTON – Playing it safe paid off in 2008 for Tom Forester and David Ellison, two standout mutual fund managers in a year when winning meant losing less money than the competition.

Forester's eponymous Forester Value Fund (FVALX) focused on stocks that typically do well in recessions to roughly break even for the year, declining just 0.82 percent through Tuesday — easily making it the top-performing large-cap value fund of the year, according to Morningstar Inc. data. The second-place Copley Fund was down nearly 17 percent, which was still well above the average decline in the category of 38 percent.

Ellison's FBR Small Cap Financial Fund (FBRSX) also stood out in 2008, ranking No. 2 among financial sector funds. It shed just 10 percent of its value, easily beating the category's average decline of 45 percent.

If the economy is poised to turn around, Forester and Ellison might do well to heed the contrarian investment maxim that yesterday's winners are likely to be tomorrow's losers.

But the two managers — both of whose funds carry Morningstar's five-star ranking — aren't yet ready to budge from the approaches that served them so well in 2008. Neither sees enough positive economic news to merit shifting from investments that typically do OK in recessions to those more likely to gain when conditions improve.

"I'll probably be in some of the same stocks for the first six months or so of 2009," said Forester, whose recent success has drawn new clients and boosted his fund's assets more than fivefold since the start of 2008, to $55 million. "And then as I see things getting better, I'm going to shift out of the real defensive things, and get more constructive on the more cyclical stocks that can grow quite well as we come out of this period."

The fund's top five holdings as of Sept. 30 included Kraft Foods Inc., Johnson & Johnson and H.J. Heinz Co. — three companies that managed to outperform broader markets for the year, with their shares all losing less than 20 percent. Other 2008 investments included Wal-Mart Stores Inc. and McDonald's Corp., which draw budget-conscious consumers during hard times.

Forester also spent 2008 easing out of financial stocks with heavy exposure to the mortgage meltdown, and unloading energy holdings before skyrocketing oil prices reversed course at midyear.

While Forester used much of his fund's cash holdings to snap up low-priced stocks in the third quarter, Ellison continues to keep plenty of money on the sidelines. About 40 percent of his $179 million fund's assets are in cash, and Ellison said he doesn't plan to use much of it until he sees signs that the slide in home prices and the surge in job cuts are about to end.

The former bank teller has managed his small-banking specialty fund since its inception 12 years ago. While smaller banks generally weren't as exposed to mortgage troubles as much as larger rivals, Ellison took pains to find the small banks with the least risk. Shares of his fund's top holding, Paramus, N.J.-based Hudson City Bancorp., were up about 4 percent for the year through Tuesday.

Now, the key for both Ellison and Forester is figuring out when to adjust their strategies as markets eventually build momentum for an expected rebound.

Forester expects that to happen around mid-2009, when he hopes to move out of defensive stocks and into industrial and technology companies whose business tends to move in tandem with the economy.

He expects his consumer staples and health care picks will continue to beat the broader market through the first half of 2009 or so, followed by what he calls a "tipping point" when more cyclical stocks will come into favor.

Any recovery next year will likely be accompanied by volatility as markets test the staying power of the early indications of a rebound — just as 2008 saw the market go on a bumpy ride searching for a bottom.

"It wasn't necessarily a buy-and-hold year in 2008," Forester said. "And I think that 2009 will be the same."

In an otherwise battered financial sector where big banks have been hit the hardest, Ellison is confident his small bank investment niche will continue to perform relatively well. Smaller players won't face as much uncertainty in 2009, given the likelihood that regulators will rewrite investment and accounting rules to prevent some of the abuses that led to the financial meltdown.

"The little guys didn't do any of that stuff," Ellison said. "So they didn't have all the complicated and aggressive accounting schemes that are going to be regulated away."

But Ellison doesn't believe big profits are just around the corner for small banks. There are too many uncertainties in the economy, and currently low borrowing rates for everything from mortgages to auto loans will pressure all banks' bottom lines. So for now, Ellison hopes to keep plenty of cash on the sidelines.

"I think unaffordable mortgages are still going to chew on the economy for a while," he said.


Bank of America, Wells close mergers as banking transforms (Reuters)

Thursday, January 1st, 2009 | Finance News

NEW YORK (Reuters) –
Bank of America Corp (BAC.N) completed its purchase of Merrill Lynch & Co and Wells Fargo & Co (WFC.N) finished buying Wachovia Corp, the latest sea changes in a transformed banking industry facing dire economic times ahead.

The Merrill takeover was completed on Thursday, ending more than 94 years of independence for the Wall Street investment bank and brokerage. The Wachovia merger closed on Wednesday, marking the denouement for a lender that started in 1879 with what it deemed a "very adequate" $100,000 of capital.

Bank of America has said it would issue about 1.71 billion common shares to buy Merrill, equal to about $24.1 billion, plus 359,100 preferred shares. The Wachovia merger valued that bank at roughly $12.7 billion.

By adding Merrill, Bank of America vaulted over JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N) to become the largest U.S. bank by assets, with about $2.7 trillion. Wells Fargo ranks fourth, with about $1.4 trillion. Bank of America and Wells Fargo are also the largest U.S. mortgage providers.

The mergers follow a year that saw several major U.S. financial providers find buyers, fail, or adopt new business structures amid the biggest financial crisis in decades, prompting the U.S. Treasury Department to craft the $700 billion Troubled Asset Relief Program to bail out the industry.

A year-long U.S. recession has caused banks' credit problems to soar. Economists believe the U.S. economy shrank as much as 6 percent in the fourth quarter and could decline at least through June, and expect the unemployment rate to soar well above 8 percent in 2009, up from November's 6.7 percent.

Merrill and Wachovia together suffered more than $48 billion of losses from January to September, largely because of writedowns tied to mortgages and other troubled debt.

Another big lender hurt by mortgage losses, Cleveland's National City Corp, was acquired Wednesday by Pittsburgh-based PNC Financial Services Group Inc (PNC.N) for about $3.9 billion, based on reported common shares.


Kenneth Lewis, chief executive of Charlotte, North Carolina-based Bank of America, had already spent some $110 billion on major acquisitions before buying Merrill, but his latest purchase may pose his greatest challenge yet.

He must stem defections from Merrill's "thundering herd" of 17,000 brokers and its investment bank, as he prepares to shed at least 30,000 jobs overall to help save $7 billion a year.

This follows a year when Bank of America shares fell 65.9 percent amid declining profitability, big exposure to the housing market and rising credit card delinquencies.

Adding Merrill makes the bank's brokerage, credit card, investment banking, mortgage and wealth management operations, plus its deposit base, the nation's largest or close to it.

"We are now uniquely positioned to win market share and expand our leadership position in markets around the world," Lewis said in a statement on Thursday.

While Bank of America and Merrill raised $25 billion of capital from the Treasury program, many analysts have said they may need more. Bank of America in October halved its dividend, and some analysts have said another cut may be needed.

John Thain, who was Merrill's chief executive, agreed to run Bank of America's global banking, securities and wealth management businesses.


In buying Wachovia, Wells Fargo trumped a lower bid by Citigroup, and more than doubled its size. Wells Fargo now has the nation's largest branch network, with more than 6,600 offices, and one of its largest deposit bases and brokerages.

Chief Executive John Stumpf is betting that San Francisco-based Wells Fargo properly assessed the risks in Wachovia's $482.4 billion loan portfolio, including a troubled $118.7 billion book of "option" adjustable-rate mortgages.

"We're being very thoughtful and deliberate in our three-year merger integration," Stumpf said in a statement.

On December 10, Wells Fargo said it expected to write down $71.4 billion of Wachovia's overall loan portfolio. The same day, Stumpf said at a conference that the housing slump was not over but that there were "early signs" a bottom might be near.

Wells Fargo is the nation's second-largest mortgage lender. It remained profitable by avoiding many of the risky loans that plagued Wachovia and caused Washington Mutual Inc (WAMUQ.PK) to fail. Wells Fargo shares fell just 2.4 percent in 2008.

Merrill's common shareholders received 0.8595 of a Bank of America share for each of their shares. Wachovia shareholders got 0.1991 of a Wells Fargo share for each of their shares.

(Editing by James Dalgleish)


Bank of America completes Merrill Lynch purchase (Reuters)

Thursday, January 1st, 2009 | Finance News

NEW YORK (Reuters) –
Bank of America Corp (BAC.N) completed its purchase of Merrill Lynch & Co on Thursday, creating the largest U.S. bank and perhaps one of the biggest challenges yet for longtime Chief Executive Kenneth Lewis.

The closing allows Bank of America to bypass JPMorgan Chase & Co (JPM.N) and Citigroup Inc (C.N) in size, giving it about $2.7 trillion of assets.

Bank of America had said it expected to issue 1.71 billion common shares, equal to $24.1 billion, plus 359,100 preferred shares in the merger. Merrill shareholders received 0.8595 of a Bank of America common share for each of their common shares.

The transaction, originally valued at $50 billion, came to fruition in the early morning of September 15, about an hour before Lehman Brothers Holdings Inc (LEHMQ.PK) went bankrupt, and may have saved Merrill from a similar fate.

It ends more than 94 years of independence for Merrill, after a year when the five top Wall Street banks were bought, went bankrupt, or changed their business structures.

Lewis is swallowing Merrill's "thundering herd" of 17,000 brokers, which he has called the "crown jewel" of the acquisition. He is also absorbing Merrill's big investment bank, which by volume ranked fifth in debt and equity underwriting and third in merger advice in 2008, Thomson Reuters data show.

The combined company's brokerage, credit card, investment banking, mortgage and wealth management operations, plus its deposit base, will make it the nation's largest or close to it.

Bank of America also takes over Merrill's nearly 50 percent stake in the powerful money manager BlackRock Inc (BLK.N).

"We are now uniquely positioned to win market share and expand our leadership position in markets around the world," Lewis said in a statement on Thursday.

The Charlotte, North Carolina-based bank did not immediately return calls seeking further comment.


The transaction creates new challenges for Bank of America, whose shares fell 66 percent last year as the worsening economy led to soaring loan losses, including from Countrywide Financial Corp, which Bank of America bought in July.

Lewis must stem defections even as he prepares to cut at least 30,000 jobs overall to help save $7 billion a year by 2012.

And while Bank of America and Merrill together raised $25 billion of capital from the U.S. Treasury Department's $700 billion Troubled Asset Relief Program, many analysts have said they may need more. Bank of America in October halved its dividend, and some analysts said another cut might be needed.

Lewis faces a radically changed banking landscape that also includes Wells Fargo & Co's (WFC.N) $12.7 billion acquisition on Wednesday of Charlotte-based rival Wachovia Corp.

John Thain, who became Merrill's chief executive after losses in mortgage-related investments led to the October 2007 ouster of Stanley O'Neal, agreed to run the merged company's global banking, securities and wealth management businesses.

If he stays, Thain will be a prime candidate to eventually replace Lewis, who is 61 and became chief executive in 2001.

Other potential candidates include Barbara Desoer, who runs the mortgage operations including the former Countrywide, and Brian Moynihan, whom Thain displaced as head of investment banking but was named general counsel, reporting to Lewis.

Before buying Merrill, Lewis had spent close to $110 billion to buy FleetBoston Financial Corp, credit card issuer MBNA Corp, LaSalle Bank Corp, the U.S. Trust wealth business, and Countrywide.

And despite the industry turmoil, the bank has so far survived, and is widely considered to be too large to be allowed to fail. Lewis was last month named Banker of the Year for the second time by the trade newspaper American Banker.

(Reporting by Jonathan Stempel; editing by Mohammad Zargham)